Beige Book Report: Kansas City
January 11, 1978
Reports of business and financial conditions in the Tenth District point to continued economic expansion. Although prospects for improvement in farm income are not that bright, the winter wheat crop looks good and prices of agricultural products have regained some strength. Purchasing agents for major manufacturers in the District expect the year to be good for business. These buyers are comfortable with their current inventories of materials, and they are neither experiencing nor anticipating a general acceleration in the prices of materials nor significant problems in maintaining stocks at desired levels. District bankers report a sharp increase in loan demand and a good increase in total deposits. These bankers do not expect deposit growth to keep up with loan demand, and they forecast sharp disintermediation if short-term interest rates rise to 7 per cent.
Purchasing agents in various types of businesses throughout the District report little change in the lead times for the items they buy, with a few exceptions. The exceptions are primarily in steel, especially sheet and plate, where some stretching out of lead times is being experienced, but not by all buyers. The purchasing agents who are finding steel harder to obtain attribute the change to layoffs in the domestic steel industry, and to less "dumping" by the Japanese. Some aluminum materials also are becoming somewhat less readily available, according to a purchasing manager for a manufacturer of small airplanes. A competitor, however, says he is having no problems getting aluminum.
The purchasing agents are generally optimistic about prospects for sales by their firms this year. Their levels of inventories of raw materials are neither excessive nor inadequate, say most buyers, who describe their stocks with phrases such as "ideal," "just right," "where we want them," and "according to plan." Most buyers expect the prices of materials to rise at about the rate of inflation. Certain petroleum-based chemicals and related products are expected to go up somewhat faster in price. Polyester fibers, used by two major rubber manufacturers, and a solvent, used by a paint manufacturer are two of the items expected to show sizable price increases soon. A manufacturer of furniture hopes to see an end to the frequent price increases, totaling 30 per cent in 1977, on plywood and particle board.
Following a 3-month rebound, farm prices have once again reached the levels of last July due largely to stronger markets for hogs, cattle, and corn. In December, farm prices were only 11/2 per cent above year-ago levels, which explains why retail food prices were not a particularly troublesome issue in 1977. Of course, it should be recognized that the stability in food prices has come at the expense of the farmer who has been confronted with serious cash flow problems and depressed incomes for most of the last 2 years as commodity prices have generally fallen. Moreover, although adjustments are occurring, most of the evidence suggests that income levels are not likely to show much improvement in the year ahead.
A recent report on the seeding of the new winter wheat crop shows that acreage nationwide will be down about 14 per cent from 1977 levels. If the 1.3 billion bushel projection is realized, 1978 production will be off 13 per cent from last year's figure. However, a larger carryover will help keep total supplies for the 1978-79 marketing year at a high level. Within the Tenth District, 1978 winter wheat acreage will be about 13 per cent smaller than in 1977. But the prospects for higher yields in 1978 are excellent since most of the wheat is in better condition now than it was last winter when severe cold and drought were affecting the District's agriculture.
Most Tenth District bankers contacted report loan demand is up sharply. Loans for natural resource development and energy-related businesses continue to be a source of strong demand, and credit needs for retail inventory financing have increased. Many bankers report heavy credit demand from agribusiness and from country banks to finance farm needs. In Lincoln, however, there has been a significant paydown in correspondent bank loans related to agriculture, as farmers have reduced their debts to banks by borrowing from the Federal Government. Consumer credit card loans have increased sharply at many of the banks surveyed, but auto loans are weak in most areas of the District.
Deposit growth has been good at District banks. Demand deposits have increased at several banks due to large public deposits. Passbook savings deposits continue to decline although outflows are reported to have moderated from the second and third quarter declines. Other time deposits and large negotiable CD's have increased. Bankers anticipate sharp disintermediation if short-term interest rates rise to 7 per cent. Several bankers feel that deposit growth will not keep pace with loan demand and that they will have to purchase funds in the near term.