Beige Book Report: Kansas City
April 12, 1977
Tenth District directors report that area businessmen are optimistic about the economy. Recent rains have provided a psychological boost, retail sales are good, and the energy situation should, on the whole, benefit the region. Although farm prices rose in March for the fourth consecutive month, the continued rise in farm costs has kept producers from significantly improving their profit margins. The drought has been somewhat alleviated by recent rains. Nevertheless, additional moisture is needed for normal crop yields. Loan demand in the District increased in March, due to abnormally high levels of agricultural loan renewals and increased commercial loans. Savings deposit growth was also reported as strong, though fears were expressed about the effect on this inflow should short-term interest rates rise.
Directors report that the mood of businessmen in the Tenth District is largely one of optimism. Given the strong agricultural orientation of the District, the recent rains have provided a needed psychological boost, and other areas of the economy are generally showing strength. One troublesome situation that was mentioned is the depressed prices for wheat and cattle. Country banks are highly loaned up to farmers, and there are indications that their correspondents are beginning to apply pressure on these banks to encourage farmers to begin selling their wheat—some of which has been stored for 2 years.
In agricultural areas of Kansas, it was reported that "retailers have been doing amazingly well." Farmers are continuing to spend strongly on consumer goods, although farm implement sales are quite depressed. Elsewhere in the District, retail sales are generally good but not outstanding, while construction spending remains relatively weak.
In the labor market, unemployment still remains abnormally high, but excluding Kansas City (which is experiencing strikes of public school teachers and workers in heavy construction), the situation is untroubled. Furthermore, in Oklahoma City, General Motors announced plans to build an assembly plant which will ultimately employ 5,000 workers.
Several directors also commented on energy and capital investment. Wyoming and Colorado should benefit from the national commitment to shift from natural gas to low-sulfur coal. Outside investment in the energy field has been strong and a solar energy research center has been established in Golden, Colorado. While levels of capital spending appear to be rising, uncertainty remains a strong consideration influencing expansion. One director noted, however, that "a few good moves (by the administration) could restore confidence."
Farm prices rose 1 per cent in the month ended March 15, marking their fourth consecutive monthly gain. Although the index of prices received is now slightly above year-earlier levels, the index of prices paid by farmers for all items was 5 per cent higher in March than it was a year ago. Consequently, many producers are confronted with a rather tight price-cost squeeze in their operations.
The severe drought in many parts of the District has been temporarily broken by recent thunderstorms and showers. Most of Nebraska, Kansas, and the eastern half of Oklahoma have received good moisture during the past months. The wheat crop is now greening up, as are the pastures for cattle grazing.
Reports from District states indicate that the condition of the new wheat crop ranges from just fair to good. There is evidence of wind damage and winterkill in southwest Kansas, and insect problems are increasing in Oklahoma, where the wheat is now jointing. Despite the recent improvements in weather conditions, additional moisture will be necessary to achieve average yields. However, a large carryover of wheat will help maintain total supplies and prevent a sharp runup in price.
Most Tenth District banks contacted for the April Red Book indicated that loan demand had increased in March. In addition to renewals of agricultural loans, which would normally be repaid during this part of the year, a number of banks reported an increase in commercial loans to finance higher levels of inventories and receivables. One Colorado banker expressed apprehension about the effect of President Carter's upcoming energy proposals on the tourist industry and the demand for loans to finance purchases of recreational vehicles. Oklahoma bankers, on the other hand, expect the passage of a comprehensive energy bill to provide further impetus to the already strong demand for energy-related business loans. Some Oklahoma banks have already raised their local prime lending rate from 6 3/4 per cent to 7 per cent as a result of the strong loan demand in their area, and others expect to do so in the near future.
Strong savings deposit growth was reported in all areas of the Tenth District. Most banks indicated that the rate of growth of time and savings deposits was either stable or increasing. Some bankers stated that they expect this trend to be reversed if short-term interest rates rise by as much as 50 or 100 basis points. None of the bankers contacted expect the rebate package to have an appreciable impact on deposit growth, although some admitted that they were still puzzled by the 1975 experience when deposit growth exceeded expectations during the rebate period.