Beige Book Report: Kansas City
August 7, 1979
Nonfarm business in the Tenth District is beginning to show some of the nation's general weakness in economic activity, but the farm sector remains strong. Retail sales are generally weak, and input availability problems in manufacturing are lessening. Farm income will be high because of high grain prices and good crops. Deposit growth at commercial banks is weak, but loan demand continues strong.
According to Tenth District retailers, sales in current dollars are generally down about 10-12 per cent over this time last year. During the second quarter of this year, sales improved on a month-to-month basis, but remained below second quarter 1978 levels. In recent months homefurnishings, ready-to-wear, ladies sportswear, do-it- yourself items, bicycles, and garden supplies have recorded the strongest sales gains, while large ticket durable goods have shown the slowest gains.
Tenth District retailers have mixed views of their inventory levels, with many being led by the prospect of a recession to move to a lower acceptable level of inventories. But most District retailers expect sales to be strong this fall, because they believe the Midwest is less sensitive to recessions and because farm income will be good this year.
One of the Bank's directors who is close to the energy business reports there should be no more than isolated spot shortages of gasoline and diesel fuel through the center of the nation for the rest of this year. Another director notes that the tourist business has suffered significantly this summer in the mountain states of the Tenth District.
Tenth District purchasing agents report that major input prices are up significantly over this time last year. Even without petroleum product increases, raw materials have generally risen about 8-10 per cent, and some exceptional increases were noted in chemicals prices. For the remainder of this year, input prices are anticipated to increase very little. Most purchasing agents contacted felt that the major increases had already occurred for this year since many of their prices are locked in by contracts.
Input availability for most industries contacted has been a problem throughout this year, but has been easing through the summer months. For the second half of 1979, a continuation of the improving availability trend is anticipated by a majority of District purchasing agents. Overall, material inventory levels are satisfactory for the industries contacted. Most industries have been either maintaining or trimming their inventories throughout the second quarter of the year in an effort to keep them in line with recent sales trends. For the rest of the year, inventory levels are anticipated to remain unchanged unless the predicted recession alters fall sales dramatically.
Reported yields in most Tenth District wheat areas have been outstanding, which implies that total U.S. wheat production may exceed the USDA's most recent estimate of 2.1 billion bushels. With the sharp runup in grain prices, the income prospects of the District's wheat farmers have improved greatly for the 1979-80 period. The picture for other grains is also promising because of recent rainfall. Crop supplies for the 1979-80 marketing year should remain ample, and the high prices will boost crop income well above year-ago figures.
Recent reports on livestock numbers point to reasonably stable prices for the rest of 1979. Beef supplies will continue to shrink, but a substantial gain in pork production will temper any upward price pressures in the meat sector. Furthermore, data from the July 1 cattle inventory report provides solid evidence that breeders are beginning to rebuild their herds, which may produce greater price stability in cattle markets next year.
Agricultural credit conditions in the District appear to be tightening somewhat. Loan demand remains quite brisk, but adequate funds can generally be found to meet credit requests. Nevertheless, the average loan-deposit ratio of rural banks moved up to 64.1 per cent as of July 1, which compares with 62.8 per cent on April 1 and 62.6 per cent a year ago. Interest rates on farm loans moved up about 30 basis points in the second quarter.
Tenth District bankers contacted report that deposit growth has been weak during the past month, with demand deposits as a major source of weakness. Demand deposits have apparently been affected by high short-term interest rates and by a below normal tourist season in resort areas. On average, bankers report moderate growth in money market CD's. All bankers contacted are offering the new ceiling rate on both savings accounts and the 4-year variable ceiling account, but savings deposit growth is weak throughout the District. Some banks are requiring minimum balances ranging from $500 to $1,000 on the 4-year deposits. Inflows to the 4-year account have been from all types of deposits, with savings deposits the most frequently mentioned source.
Loan demand is reported to be strong throughout the District. Several bankers note that a strong demand for commercial loans reflects a slowdown in receivables and an increase in inventories. Both real estate and consumer loans-except installment loans for automobiles-are reported to be fairly strong. Some bankers report that in spite of strong loan demand agricultural loans were down, due to selloffs of participations to correspondents. Most bankers contacted have recently increased their lending rates, and are still trying to improve the quality of their loan portfolios.