Beige Book Report: Kansas City
December 15, 1976
The sluggish pace of economic growth is reflected in the soft markets for basic materials used by major manufacturers in the Tenth District. Purchasing managers expect only modest price increases on continued plentiful supplies in the months ahead. In keeping with these expectations and the general mood of caution, they are holding their inventories at low levels. Winter wheat is off to a fairly good start, but the size of the harvest next year is still in doubt because of the deficiency in subsoil moisture. Meanwhile, expecting price increases, farmers are borrowing to finance carryovers of inventories of cattle and grain. With this exception, loan demand is weak, although within the business loan category, petroleum companies are a bright spot. The slow pace of lending is putting downward pressure on interest rates paid and charged by banks, but most bankers expect rates to rise in a few months.
Purchasing managers for major manufacturers in the district report a buyer's market. There are no shortages of materials. Agents expect this softness to persist well into next year. On balance, manufacturers are holding their inventories of materials at levels near last year's. They consider these levels to be low but justifiably so, citing better control and the favorable materials supply and price outlook. More specifically with regard to prices, most buyers do not foresee any acceleration in the rate of increase experienced this year. Opinion is about evenly divided as to whether or not the steel price increase will stick. Discounts on steel currently are common, but not on other materials used by the manufacturers surveyed.
The district's winter wheat crop is rapidly moving into dormancy for the winter months. This is the period when reports begin circulating about impending disasters in the wheat belt because of late plantings, no rain, wind erosion, and the like. The condition of this year's crop can be best described as hanging delicately in the balance. The planting process was conducted under generally favorable conditions; the seed germinated well and the wheat got off to a good start. However, very little moisture has been received since then, so new growth has been limited. Oklahoma is about the only area with wheat pasture available for livestock grazing. Elsewhere, the plants are too small.
The chief concerns at the moment focus on moisture and protection from the winter elements. Root development through fall was retarded by the lack of moisture, thus increasing the susceptibility of the wheat to wind erosion and winterkill unless a protective blanket of snow is present. At the moment, this snow cover does not exist. Furthermore, subsoil moisture is in very short supply throughout the district, and without this backup reserve, the new crop will have to rely on rains next spring and summer for growth and development. In summary, next year's wheat harvest has the potential to be very large if weather conditions are favorable from this point forward. But if the adverse conditions of 1975-76 are repeated, production may be affected more significantly than a year ago because the subsoil moisture reserve has been largely depleted.
Loan demand continues to languish in most areas of the Tenth District. Bankers are particularly disappointed in the weakness of construction and commercial loans. There is some speculation that business customers are delaying capital spending decisions in hopes that the investment tax credit will be increased. Bankers from agricultural regions doubt if construction activity will pick up much until agricultural prices rebound. Bankers in Colorado and Kansas are pleased about increases in loans to the petroleum industry to finance capital expenditures. Otherwise, apart from the seasonal increase in consumer credit, the only major area of strength is their correspondent's loans to finance inventories of cattle and grain. These inventories are being held on the bet that prices will rise after the first of the year.
In the face of slack loan demand and the downward trend of interest rates nationally, bankers here are thinking of reducing their prime lending rate. They are reluctant to do so, however, because of the high cost of deposit funds. While many bankers want to lower rates paid on savings accounts and consumer CD's, all seem unwilling to initiate such a move, fearing deposit losses that they may not be able to recapture. Then, too, most believe that the current decline in interest rates will be reversed by the spring or summer of 1977 with the anticipated rejuvenation of the economic recovery. If the present imbalance between market rates and time deposit rates and the attendant influx of deposit funds continue, however, some bankers doubt if they will be able to maintain rates paid on business savings accounts and CD's.