Beige Book Report: Kansas City
March 11, 1980
Some softening in economic activity is reported by businessmen in the Tenth District, along with continuing increases in both costs and prices. Housing starts are down substantially, and savings and loan associations are pessimistic about savings inflows for the rest of the year. Cattle feeders in the District have been experiencing some losses, and many farmers are having difficulty repaying loans. Loan demand is variable across the District, and total deposit growth appears to be stable.
The majority of Tenth District retailers questioned this month report mostly moderate gains in current dollar sales through February 1980 compared to February 1979, but sales have apparently softened since the last quarter of 1979. Most retailers remain optimistic about total dollar sales for the remainder of 1980, with expected gains ranging from 5 per cent to 20 per cent.
Most retailers report moderate price increases. Most increases have resulted from increased cost of petroleum-based products and increased cost for metal products such as jewelry and tableware, with costs of merchandise and transportation slowing somewhat. All retailers report that they are trying to maintain inventory markups and profit margins. Tight inventory control has become standard policy for all retailers. While some retailers report higher levels than desirable, no serious problems were noted.
Nearly all the purchasing agents contacted report substantial input price increases over the past year. Major suppliers have raised prices during the past three months, and further increases are expected before summer. Input availability is not a current problem in the District. Continued high interest rates and pessimistic outlooks for the economy lead most purchasing agents to desire low materials inventory levels. While over half of the purchasing agents still plan to trim their inventories further, a few report plans of inventory expansions to prepare for future delivery problems, as well as to compensate for earlier reductions that were too drastic.
Tenth District home builders' associations indicate that housing starts in the area are down at least 20 per cent compared to last year, with single-family housing starts doing considerably worse than that. There is some hope for a rebound later in the year if more prospective buyers are able to qualify for loans. Association spokesmen report that sales of new homes are mixed, and many new home prices are easing off.
Savings and loan associations in the Tenth District are decidedly pessimistic about the future of their savings inflows as the year progresses. There seems to be considerably less demand for mortgage funds so far this year, and commitments are being held down. Mortgage rates have been steadily rising and are currently around 14 per cent, but some savings and loan association spokesmen feel that mortgage rates will not rise much further.
Grain prices throughout most of the Tenth District have stabilized after the fluctuations caused by the grain embargo to the Soviet Union. Despite lower than desired prices, farmers in many areas are selling grain to meet current financial obligations or because the cost of carrying the grain for any longer period offsets any expected gain in price. Farmers in many areas are having difficulties repaying loans as they come due, especially farmers attempting to service large real estate debts. Higher interest rates are expected to cut loan demand somewhat. Continuing higher costs associated with irrigation of corn are forcing some farmers to reconsider spring planting options.
Cattle feeders within the District have experienced some losses in recent months due to the high price of feeder cattle and the increased interest costs associated with their purchase. Many smaller feedlot operators are not refilling the lots as the fed cattle are sold. While large feeding operations have also experienced losses, excellent rates of gain due to the mild winter weather in many areas have helped to limit those losses.
A survey of bankers in the Tenth District shows decidedly mixed results for loan demand. Total loan demand appears to be strongest at Colorado banks, with areas of weakness reported in Nebraska, Oklahoma, and Kansas City. Consumer loans, except autos, and energy-related loans show the greatest strength. Some banks report unexpectedly weak demand for agricultural loans, particularly in the livestock area. District banks continue to make few, if any, real estate loans. Several banks feel that strength in commercial and industrial loans may be coming from short-term financing of inventories and slower collection activity. Larger banks continue to raise their prime rate in line with increases at money center banks. Most banks surveyed report tightening their nonprice terms of lending.
Total deposit growth is reported to be stable by most banks. Some banks report a decline in demand deposits as customers continue to shift into interest-bearing accounts. While passbook savings deposits are down substantially, growth in money market certificates is quite strong. All banks surveyed offer 30-month certificates, with mixed success. In those cases where the certificates have proved popular, most of the funds shifted appeared to come from existing deposits at the bank rather than from new deposits. Recent ceilings on these certificates have not yet had an impact.