Beige Book Report: Kansas City
June 14, 1978
Tenth District purchasing agents report price increases on a broad range of materials. Also, lead times are extending and some highly skilled labor is reported as being in short supply. Retail sales at major department stores are in an uptrend, especially since the end of the bad weather. Consumer demand for beef remains high, and further retail price increases may be expected despite recent government action. While agricultural loan demand has declined, in part because of higher farm prices, total district loan demand remains strong. Deposit growth, on the other hand, has not as yet been significantly affected by the new six-month money market CDs.
Purchasing agents for major manufacturers in the district report increases in materials input prices averaging close to 8 percent over the past twelve months. Specific materials mentioned with near 8 percent increases include fiberglass, aluminum, aviation engines, aviation fuel, and steel. Only copper prices were reported to have come down. Looking to the remainder of 1978, drug-related chemical prices are expected to remain unchanged, steel prices are expected to increase 4 to 5 percent, and fabricated truck parts may increase 12 1/2 to 13 percent. Lead times are extending, particularly for materials used heavily by the auto industry (steel, fiberglass, and fabricated transportional components). Other goods with expanding lead times are electric motors and copper. Demand increases and capacity constraints are often given as explanations for increasing lead times. Steel availability is expected to continue to tighten and fiberglass insulation will be a problem until significant new capacity is added. A shortage of skilled labor such as machinists, tool makers, and equipment operators was reported, and a custom builder of truck-tractors in Kansas City is now at "full" capacity. Inventory levels at respondent firms were generally satisfactory to a little heavy. Two directors reported input price increases for their industries approximately equal to those noted by the purchasing agents. Furthermore, both directors indicated that their sales were rising far more rapidly than might be expected given current real GNP growth, and each expressed a belief that the sales uptrend is likely to taper off.
Retail sales have been on an uptrend since March. Most stores indicated they have managed to recover fully from the bad weather. Most stores also reported that input prices have not been raised on all items and that a 6 to 7 percent price increase is likely for the remainder of the year. All stores indicated they would pass on as much of the increase as competition will allow. Inventories appear to be a little on the heavy side—probably due to a lack of January-through-March buying. However, no one seemed overly concerned about the situation and all respondents expect to have inventories in line soon. There were no reported inventory problems. Labor supply problems have resulted from the new minimum wage .and social security laws. With higher operating costs some managers reported they were forced to reduce their work force in order to maintain their profit margins. Consequently, they are having a hard time maintaining the same level of services as before. Sales are expected to be up 8 to 15 percent over last year, not adjusted for inflation.
The long expected price correction in the cattle market has apparently occurred in recent days as futures prices have tumbled from contract highs. Cattlemen have been further displeased by recent government action to permit an additional 200 million pounds of imported beef into the United States during the coming year. Neither cattlemen nor consumers should read too much into these occurrences, however. Consumer demand for beef remains quite strong and in the face of this demand, new market highs for slaughter cattle and further retail price increases before the end of the year should not be ruled out.
Banks contacted for the June Redbook indicate that loan demand continues strong, though government loan programs and higher farm prices have resulted in somewhat weaker demand for agricultural loans. Most of the banks surveyed have increased lending rates by 25 basis points in the past month and expect further increases by the end of the year. Deposit growth is moderately strong in the Tenth District.
Introduction of the six-month money market CDs has not yet had a major impact on inflows of time deposit funds. Surveys conducted by this Bank reveal that all of the large banks and most of the small banks contacted are offering the new money market CDs. All of the responding banks that are offering money market CDs are paying the ceiling rate. There has been a moderate amount of advertising of the new six-month certificates but some bankers indicated that they would intensify publicity in upcoming weeks. Consumer response to the new time certificates has been disappointing at most of the banks surveyed. The dollar volume of sales has been less than expected at most banks, and all banks except two reported that more than 75 percent of the funds used to buy the new time certificates came from existing accounts within the bank. A number of bankers did express the belief, however, that the money market CDs would become increasingly important in preventing disintermediation. After the June tax payments and the credit of quarterly interest on passbook accounts at the end of June, many bankers believe that the sale of the six-month certificates will increase substantially.