November 9, 1977
Economic conditions are generally good in the Tenth District, except in agriculture, and even there some improvement is observed. Directors and business economists believe the expansion will continue at a slow-to-moderate rate, held back largely by business reluctance to invest when there is so much uncertainty. A combination of price increases and government payments has increased cash flow to farmers, although the squeeze continues. Loan demand is up sharply in most banks, and expected to rise more rapidly than deposits in the month ahead.
According to Directors contacted, the major stumbling block to business fixed investment continues to be uncertainty about Federal Government policies and regulations. This is also the refrain of economists employed by businesses in the District. For the most part, Directors and business economists do not believe that developments in recent weeks have jeopardized the outlook for moderately slow growth in the economy in the year ahead. Of those who offered comments on the rise in short-term interest rates, all but one economist felt the increases were necessary to fight inflation.
With only a couple of exceptions, businesses intend to go through with the purchases of plant and equipment that they had planned earlier. General business conditions are observed to be good throughout the District, except in areas especially dependent upon sales to grain farmers. "They aren't buying anything," says one Director, who also notes, "This credit thing isn't getting any better out here (Kansas). The banks say they have gone as far as they can go, and some have told the farmers to consider selling some land."
Some signs of an easing in Tenth District farmers' cash flow problems are beginning to be observed. For the first 7 months of 1977, cash receipts from farm marketings increased 1.5 per cent over year-earlier levels for District farmers. Wheat and corn prices have slowly increased above summer lows, although they are still quite depressed. Additionally, in the District states, 222.4 million bushels of the 1977 wheat crop have already been placed under Commodity Credit Corporation (CCC) loans. In most instances, the net proceeds to farmers of these loans have exceeded the market price of the wheat. Substantial quantities of 1977 corn are also expected to go under CCC loans, again with net loan proceeds for many of the loans likely to exceed cash corn prices. Of the $1.2 billion in deficiency payments the Nation's wheat farmers will receive late this year under the target-price program, an estimated $501 million (42 per cent of the total) will be paid to wheat farmers in the Tenth District states. Payments will average almost $19 for each acre of wheat harvested in these states during 1977. Finally, fat cattle and feeder cattle prices are presently almost 13 per cent above year-earlier levels, while hog prices are currently 33 per cent above year-earlier levels. Thus, although the farm-price squeeze continues, District farmers are experiencing some modest improvement in cash flow.
The monthly survey of Tenth District bankers indicates that, for most respondents, loan demand is up sharply. Strength of the individual bank's loan portfolio reflects the economic diversity of the District. Construction loans for residential building, especially one-family homes, are reported strong in the Denver and Lincoln areas, while energy-related loan demand is reported strong in Oklahoma and in Denver. Other respondents indicate that inventory loans and correspondent bank loans are contributory factors in the strength of loan demand.
Most respondents dealing in agricultural loans say that, in general, new agricultural loans are simply extensions of old loans. One Denver banker feels that some of these loans have become illiquid, especially in over-lines from rural banks to large banks. One respondent mentions that the agricultural loan market was very tight in September, but has since eased due to the harvest being near completion and to the sale of grain inventories.
A majority of respondents expect loan demand to increase more rapidly than usual during the next month, although none expect strong agricultural loan demand. The expectation of strong loan demand in the future is reflected by the raising of prime rates to 7 3/4 per cent, an action taken by all but one banker surveyed. Almost all bankers expect future loan demand to outstrip deposit inflows, requiring them to use CD's as well as nondeposit sources of funds such as Fed funds.
Most bankers report that time and savings inflows had slowed or stopped in October. Only a very few report any evidence of disintermediation.