Beige Book Report: Kansas City
November 14, 1979
Continued inflation and a slowing economy, but no excessive inventory accumulation, characterize the Tenth District economy. Purchasing agents report that quarterly price increases have now become standard. They continue to hold inventories under tight control as do retailers. The latter group seems to be experiencing money illusion, as increases in nominal dollar sales at a rate less than the rate of inflation are viewed optimistically. In District agriculture, a larger seeded acreage of winter wheat than last year is expected. Commercial banks have significantly tightened their credit policies in the past month.
Purchasing agents in the Tenth District report input price increases of at least 8 per cent over last year, with almost half citing price rises of 15 per cent or greater. The large majority have experienced price gains in the past three months, and anticipate further hikes in the very near future. Many report that quarterly price increases have become standard. The input availability problems experienced earlier in the year have been alleviated, and the consensus is that inputs will continue to flow smoothly in the coming months. Materials inventories in the Tenth District have been trimmed and are being held under tight control due to the uncertainty concerning sales and to high interest rates. Over half the companies contacted report a moderate amount of excess plant capacity, with just one company expressing a need for plant expansion. District firms do not appear to be having any problems due to labor shortages.
The majority of retailers contacted in this month's survey report gains in year-to-date sales of approximately 5 per cent to 12 per cent. Appliances and home furnishings have been selling best in recent months, while energy related home improvement products have also been strong. Most retailers are satisfied with current inventory levels and anticipate no major adjustments during the coming Christmas buying season. With little feeling of inventory overhang, almost all retailers expect clearance sales to follow the same timing as last year. Sales expectations for the remainder of the year are basically optimistic, paralleling strong gains in the most recent three months. Some retailers, however, do expect sales to flatten out this Christmas season. Prices are expected to rise as cost increases are passed along, but these anticipated increases do not include any increases in profit margins. Retailers will try to maintain current profit margins in the uncertain months ahead by continuing to exercise tight control over inventory levels.
Recent rain and snow over much of the Southern Plains hard red winter wheat belt brought some relief to generally dry conditions. While additional moisture is needed, farmers are completing final seeding-delayed because of dry weather. A larger seeded acreage than last year is expected, since there will be no 1980 required acreage set-aside for farmers to be eligible for wheat target price protection and Commodity Credit Corporation grain loans. Late seeding and dry weather mean there will be only limited amounts of wheat pasture available for fall and winter grazing of stocker cattle. This, coupled with the high interest rates on cattle loans, has caused farmers to delay stocker cattle purchases. As a result, the demand for, and the prices of, cattle to be placed on pasture this fall are somewhat lower than would otherwise be true. Prices for most raw farm products important to Tenth District producers registered declines in October. An especially sharp drop of 4 per cent in meat animal prices was recorded. Prices for cattle, hogs, calves, soybeans, corn, and broiler chickens declined, while the only Tenth District farm commodities showing increases were wheat and milk.
Tenth District banks surveyed this month report a significant tightening of credit policies since October 6. In addition to raising interest rates where not prevented from doing so by usury ceilings, banks report that they are being much more careful in their credit evaluations. There is a widespread fear that some potential borrowers may not have sufficient cash flow to make repayments at current levels of interest rates. Several banks specifically mentioned that they are trying to avoid loans to finance speculative activity. District banks have become especially restrictive in the consumer lending area, particularly in Kansas, Missouri, Nebraska, and New Mexico where state usury ceilings are holding down rates. In these states, many banks appear to have completely abandoned automobile lending. Banks throughout the District report that they are becoming more restrictive in credit card lending. High interest rates appear to have significantly dampened credit demand, except for loans to firms in the energy industry. District banks with significant energy-lending activity report little if any decline in the demand for credit. Mortgage lending appears to be rapidly grinding to a halt in the District. In states where usury ceilings are a factor, both banks and savings and loans have virtually stopped making commitments. In other states, a shortage of funds has caused many mortgage lenders to deliberately set interest rates at levels that they feel will choke off demand.