Beige Book Report: Kansas City
July 1, 1980
Business activity in the Tenth District is reflecting the national downturn. Weakening sales have led retailers to trim inventories. Inventory control is apparently even more of a problem for manufacturers, who are reducing input orders and production. There is no sign of a revival in homebuilding or house sales, although inflows to thrift institutions have improved slightly. Livestock prices may increase somewhat later in the year and thus improve income prospects in the farm sector. Loan demand at commercial banks is generally weak, as is deposit growth.
Most retailers contacted in this month's survey report that total dollar sales through May 1980 are somewhat better than in the first five months of 1979, but are slowing somewhat in the more recent months. Sales of furniture and appliances are particularly weak. Costs are continuing to increase for all types of merchandise, and at an increasing rate. The latest cost increases are expected to push up retail prices as retailers try to maintain markups. While most retailers indicate that current inventory levels are satisfactory, all retailers report that they have been trimming inventory levels slightly due to softening sales.
Half the purchasing agents contacted report an easing off of input price increases in recent months, and over two-thirds believe this trend will continue as the year progresses. Lead times for most inputs have been declining, and are expected to remain shorter than usual in the coming months. About half the purchasing agents indicate that inventory buildup has become a problem and they plan to reduce their orders to compensate. Most firms contacted have excess plant capacity, and over half have idled some workers. About one-third of the companies have recently cut back on their plant and equipment expenditure plans due to slumping product demand.
Tenth District homebuilders' associations indicate that housing starts are down more than 50 per cent compared to last year, with single-family starts leading the decline. There is no sign of a revival in homebuilding or house sales reported. Many association spokesmen believe that potential home buyers are waiting for mortgage rates to fall below 12 per cent before buying. They also report that inventory of unsold homes is not critically high, due to the unusually low number of completions, and that home prices are holding steady.
A majority of savings and loan associations contacted report improved savings inflows in May of this year compared to May 1979 and compared to the first quarter of this year. Most savings and loans expect to see only slight improvement in savings inflows for the remainder of 1980. While some noted that demand for mortgage funds has picked up recently, others indicate that demand remains at very low levels. Currently quoted rates on conventional mortgage loans range from 12 to 12.5 per cent with all District savings and loans expecting rates to drop the rest of the year to between 11 and 11.5 per cent.
Beef supplies will continue to remain tight and the cattle price outlook is beginning to look more optimistic. The numbers of cattle and calves on feed in seven states were the lowest on any June 1 since 1975 and 11 per cent below the level of one year earlier. May marketings of fed cattle were the lowest since 1975. Additionally, May placements of cattle on feed were off 13 per cent from levels of one year earlier indicating continued tightness in the future supply situation. Cattle prices may continue to increase somewhat throughout the summer due to the reduction in beef supplies.
Tenth District hog producers are facing grim prospects for profitability in 1980. But hog prices have improved in recent weeks and some price improvement is expected during the remainder of this year. The hog and pig inventory on June 1 was the largest on record, and producers are cutting back on production. A reduction in breeding stock along with lower farrowings should help reduce pork supplies and bolster prices towards the end of the year.
Farm machinery and equipment sales throughout most of the Tenth District improved somewhat during May, with slightly more improvement expected during June. The improvement is apparently due mainly to various manufacturers' programs including cash rebates, waivers of finance charges for up to 1 year, and agreements to finance purchases at some percentage rate below the prime lending rate. Area bankers report that they are receiving little demand for machinery loans.
Loan demand in the Tenth District is generally weak. High lending rates and a weakening economy appear to have resulted in a general decline in the demand for commercial and industrial loans as well as consumer loans. The demand for real estate loans, while still generally weak, has been strengthening in some parts of the District. Some bankers also report that some customers are experiencing economic difficulties and several bankers feel that some of their local auto dealers are facing bankruptcy.
In the past month, the prime rate in the District has declined from the 17 to 18 per cent range to the 12 to 13 per cent range. Nonprice lending terms generally remain unchanged. Most bankers report that their deposits are either flat or growing slightly. For the first time in many months, demand deposit growth appears to be in line with the growth of other deposit liabilities. However, no deposit category is showing any exceptional strength.