Beige Book Report: Kansas City
October 10, 1979
Agriculture and energy-based industries are providing support to the Tenth District economy, but signs of weakness remain. Retail sales are stronger, but still slow in real terms, and retailers are not optimistic. Most manufacturers consider materials supplies to be adequate, and many plan to cut inventories in anticipation of declining sales. Farm prices are expected to contribute less to inflation in the months ahead, although they rose sharply in September. In District banks, loan demand continues strong, but deposit growth is weaker than a year ago.
Retail sales in the Tenth District are showing substantial improvement over earlier this year, and the dollar volume is up 5 to 10 per cent over this period last year. Most kinds of goods are selling well, although business is slow in shoes and children's apparel. Clearance sales did not begin any earlier this year, except in the Denver area. Most retailers are satisfied with their inventory levels but are ready to trim stocks if sales do not hold up. Few expect sales to increase further during the next three months, but all expect wholesale prices to continue to rise, forcing more increases in prices at retail.
Purchasing agents in the Tenth District report increases in input prices of 7 per cent or more over last year. The electronics industry and industries using petroleum-based inputs are experiencing especially steep price increases. Most buyers note an acceleration in price increases since July. About half, however, do not expect any substantial price hikes during the remainder of the year. Inputs are still in short supply in the aerospace, electronics, and small appliance industries. Half of the purchasing agents in the other industries plan to cut their stocks of materials soon, because of high interest rates and expected sales slowdowns.
Prices received by U.S. farmers rose 1.5 per cent in September- because of improvement in prices for hogs, beef cattle, calves, wheat, and milk-and now stand at 11 per cent over year-earlier levels. Increases in prices received by Tenth District farmers were somewhat greater than for the U.S. as a whole because of the importance of livestock and wheat to District agriculture. Prices paid by farmers for goods and services rose 1 per cent in September to stand at 14 per cent over a year ago.
For the balance of 1979, farm prices are expected to remain fairly flat. Continued increases in U.S. pork production will temper upward pressure on meat prices. The September 1 U.S. Department of Agriculture hog and pig report indicates producers in the 14 major states-accounting for about 86 per cent of the U.S. hog and pig inventory-are still expanding production. The breeding inventory was up 10 per cent and the market hog inventory was up 17 per cent from year-earlier levels. Moreover, the summer pig crop increased 16 per cent over a year ago while fall and winter farrowing intentions were up 13 and 10 per cent, respectively. These data indicate abundant pork supplies through mid-1980.
Grain storage and transportation continue to concern farmers and the grain industry. However, principally because of increased nonfarm storage, it appears that Tenth District farmers will find adequate storage for the record soybean and corn crops to be harvested this fall. Transportation problems are more persistent, with farmers and country elevators making greater use of trucks-at increased transportation costs-to transport grain to elevators and terminals on main rail lines or barge lines.
Transportation bottlenecks, such as continued delays in getting the Rock Island Railroad moving, could jeopardize the ability of U.S. grain merchants to supply the potential export demand during the 1979-80 marketing year.
Except for some bankers in metropolitan areas, most Tenth District bankers report continued strength in loan demand. Agricultural loans at country banks are particularly strong, as are energy-related loans in Oklahoma and New Mexico. Other categories in general are growing at rates similar to a year ago. Some larger metropolitan banks are experiencing weaker demands for commercial loans in particular, but also for real estate, consumer, and construction loans. All bankers report raising their prime or base lending rates in the last month. Most metropolitan banks currently have prime rates of 13 1/2 per cent, following the lead of the large money center banks. Further increases in the prime rate of 1/4 to 1 percentage point are expected by year- end. Most bankers say they are more selective now than a year ago, and some express concern over their ability to meet existing customers' loan demands in the near future.
Deposit growth at Tenth District banks generally appears weaker than a year ago. Savings deposits are growing moderately or are down at most banks. Large CD's and money market certificates, however, are continuing to increase at nearly all banks. Some bankers also report increased purchases of Federal funds and discount window borrowings in recent months. Most bankers expect deposit growth to improve soon due to seasonal factors. However, except for some country bankers, they generally believe this growth will be less than in past years. Stronger growth than usual may occur at country banks due to unusually strong agricultural conditions.