Beige Book Report: Kansas City
May 14, 1980
Economic activity in the Tenth District is beginning to slow markedly. Retailers report declining sales and slower increases in prices. Purchasing agents report a recent slowdown in the rate of increase of input prices. Inventories in retail and manufacturing are being reduced. Savings and loans report reduced savings inflows and mortgage commitments, and homebuilders report significant declines in the building and sales of new homes. The winter wheat crop is in fair-to-good condition, while supplies of fed cattle will be tight in coming months. Bank loan demand has continued to weaken, particularly for construction and real estate activity. Deposit growth remains generally steady, though demand deposits are declining at some District banks.
Retail activity in the Tenth District is weakening. Some retailers report only slight gains in January-April dollar sales over a year ago, while others report significant declines. Appliance and furniture sales have been particularly weak. All retailers contacted report declines in sales since mid-March, and all expect continued declines throughout the remainder of 1980. Most retailers report slower price increases in recent months, along with declining profit margins. Inventory levels are generally considered too high for current sales expectations and are to be trimmed throughout the remainder of the year.
Most purchasing agents report that input prices have risen by 10 per cent or more over the last 12 months, although many report that prices have recently begun to stabilize. Input availability is not a problem, with lead times decreasing throughout the District. Materials inventories are cautiously being held down. Over half the firms contacted have excess plant capacity, and about one-third of the companies have either idled some workers, or plan to do so soon.
Savings and loan associations contacted in the Tenth District report that savings inflows are down substantially from last year. Mortgage commitments are down significantly, due to a shortage of funds and high mortgage rates. However, mortgage rates in the District have recently fallen to below 16 per cent, and are expected to fall further throughout the year.
Tenth District homebuilders' associations report that housing starts are down about 50 per cent from last year, with single-family housing starts leading the decline. Many association spokesmen believe that home-building activity will begin to improve within the next three months. Although sales of new homes have been off considerably, there is not a critically high inventory of unsold homes, and builders are not reducing home prices significantly. Building materials are readily available throughout the District at stable prices.
The winter wheat crop throughout the Tenth District is reported to be in fair-to-good condition at the present time. Commodity groups are forecasting a large crop for 1980. The Wheat Quality Council has projected a 362 million bushel crop for Kansas, 12 per cent below the record crop of 1979. However, area bankers are less optimistic in their projections, observing that crop conditions are much more variable than last year. Wheat prices have shown an increase in recent days reflecting concern about the lack of rainfall necessary for continued crop development in the winter wheat area and very dry conditions in the spring wheat areas of the U.S. and Canada. Total U.S. wheat acreage is expected to be up 11 per cent over 1979.
Supplies of fed cattle will be tighter in coming months, probably producing some increase in cattle prices. Cattle currently being quarantined in feedlots because of DES implants will start coming on the market in about a week. That may result in only a short-term increase in slaughter weights and numbers marketed.
A survey of bankers in the Tenth District indicates a marked decline in loan demand in the last two months. Most bankers believe the decline in loan demand is primarily the result of high lending rates, but they also report that uncertainty about the current recession is contributing to the softening of loan demand. While the demand for all types of loans is generally weak, the demand for construction and real estate loans appears to be virtually nonexistent. Several bankers report continued strength in the demand for consumer loans. However, these bankers also report that they are discouraging this demand because of the Federal Reserve's Special Credit Restraint Program.
In the past month, the prime rate in the Tenth District has declined from the 19 to 20 per cent range to the 17 to 18 1/2 per cent range. However, the majority of bankers on this month's survey have tightened their nonprice lending terms, primarily because of the uncertainty regarding the effects of the recession.
Most bankers report their deposit growth to be generally stable. However, demand deposits are still declining at some banks, as customers continue to shift their funds into interest-bearing accounts. Money market certificates and large CD's continue to account for most of the deposit growth, although some bankers are no longer bidding aggressively for these deposits.