Beige Book Report: Kansas City
September 12, 1979
Declining sales, planned inventory reductions, and rapidly rising prices characterize business conditions in the Tenth District. Purchasing agents report continued strong price increases for their inputs. Reflecting in part expectations of declining sales, both purchasing agents and retailers plan to trim inventories in the months ahead. U.S. farmers expect record crops and, as a result, prices received by farmers have fallen recently across the board. Agricultural loan demand continues to show strength, however, as does general business loan demand.
Purchasing agents in the Tenth District report that almost all input prices are up an average of 7 to 12 per cent over last year, with half reporting general increases of 10 per cent or more. A large majority of purchasing agents noted substantial increases within the past three months, and nearly all those contacted expect further price increases for the remainder of the year.
Input availability seems to be stabilizing according to most companies contacted, although several reported delivery problems earlier in the year. Current availability problems are believed to be temporary or seasonal and are expected to be alleviated soon. Materials inventory levels are generally satisfactory in the Tenth District, with only a few companies reporting levels that are too high. However, most purchasing agents contacted are planning to reduce their inventories. Reductions are planned because of expected future declines in sales, and adjustment for prior inventory buildups designed to avoid further price hikes. Most companies surveyed report adequate or excess plant capacity. A shortage of tool and die workers and experienced welders exists in the District, while other workers are in adequate supply.
Tenth District retail sales have generally declined in real terms, in the year to date, with sales in the past three months slowing somewhat further. Some stores had a slight increase in sales during August, probably due to school resuming. Weak items have been furniture and appliances, possibly due to a decrease in demand for new homes. Clothing of all types, especially sweaters and outerwear, and back-to-school items have had strong sales during the past three months. Some stores have scheduled clearance sales earlier this year (2-3 weeks), because of earlier school openings or the need to improve turnover of merchandise. A majority of the retailers have not changed their margins but have passed wholesale price increases on to the consumer. Most stores feel inventory levels are slightly higher than they would like, and thus anticipate some inventory trimming during the remainder of the year. In the final months of 1979, total sales are expected to reach a slightly higher level than in the 1978 period, with prices expected to rise further. Inventory purchases will be approximately the same or slightly lower than in 1978. Overall expectations for the remainder of the year are cautiously optimistic, as retailers are apparently not yet experiencing the full effects of the recession.
Prices received by U.S. farmers in August fell 4 per cent from July levels. All three major U.S. crops registered price declines as record production forecasts for corn (7.11 billion bushels) and soybeans (2.13 billion bushels) and a near record forecast for wheat production (2.13 billion bushels) were released. Prices have declined for meat animals as well, reflecting increased pork and poultry production and lagging consumer incomes. While decreased farm prices may signal future moderation in food prices, consumers can expect an increase of about 11 per cent for this year. Although farm prices are 11 per cent higher than a year earlier, recent broad price declines-for cattle and hogs particularly-will likely reduce this year's cash receipts from farm sales below earlier projections. Consequently, net farm income this year may be near the bottom of the U.S. Department of Agriculture's forecast range of $30-34 billion. Until recently, net farm income had been projected in the upper end of that range.
Most bankers contacted in the Tenth District report that loan demand is up, both over a year ago and over the last month. Business and agricultural loans are particularly strong in this District. However, some banks report stable or weakening demand for consumer, real estate, and construction loans. All bankers contacted raised their prime lending rates in the last month. As of September 4, most of the metropolitan area banks had prime rates of 12 1/4 per cent, following the lead of the large money center banks. Most bankers contacted expect further increases in the prime rate of 1/4 to 3/4 percentage points by yearend. Some bankers mentioned tightening other lending terms. One bank, for example, has shortened maturities on new real estate loans. Another will only consider floating rates on business loans of over 90 days. Most bankers said that in general they are being more selective. Demand deposits grew moderately or were down at most banks. All banks report declines in savings and small time deposits, but large CD's and money market certificates have increased at nearly all Tenth District banks. Most banks contacted believe that deposit growth will improve in the near future due to seasonal factors.