Beige Book Report: Kansas City
September 9, 1980
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Business conditions continue to be poor in the Tenth
District, with only residential construction showing some
improvement. Consumer spending is showing no vigor and retailers are
generally pessimistic about prospects for the rest of this year.
Manufacturing may be slowing further, judging from reports of
plentiful supplies of materials. Inventories of materials of
producers and of goods at retail are considered to be at
satisfactory low levels. Prices of materials and of retail goods are
stabilizing somewhat. Corn, sorghum, and soybeans have been hit hard
by the heat and drought; the yields of these crops are expected to
be only about three-fourths or less of the harvest once anticipated.
Agricultural credit appears adequate. Bank deposits are increasing,
but loan demand is flat. Interest rates have taken an upward turn.
Bankers are about evenly split on the question of where the prime
rate will go in the months ahead. Most savings and loan officers,
however, expect further increases in mortgage rates.
Retail Sales and Inventories
Retail sales in recent weeks are down
from their pace a year ago. Sales of durable goods are off the most.
Retailers are now absorbing rather than passing on increases in
merchandise costs. Store managers expecting weak sales through
Christmas, are holding down inventories and currently have their
stocks of goods at satisfactory levels.
Materials
Prices, Availability, and Inventories. Purchasing agents
note an easing in the rate of increase of input prices. Inputs are
readily available, with most lead times shorter than normal.
Inventories of materials have been cut; most purchasing agents plan
to maintain the current low levels. Several companies have recently
reduced their orders for materials; about half have some workers on
layoff and are operating at less than full capacity.
Homebuilding and Mortgage Rates
Homebuilders associations report
that new home prices have resumed rising. Despite slow sales, the
inventory of unsold new houses is not considered a problem. Building
materials are readily available at rising prices. Shutdowns by
suppliers, however, are causing concern over a possible materials
shortage next year. Homebuilding activity picked up somewhat during
the summer, but the outlook remains mixed, with builders keeping a
close watch on mortgage rates. Rates on conventional mortgages have
risen recently to their current level of 12 3/4 per cent. Mortgage
demand was fairly strong for most of the summer, but has slowed of
late. Executives of savings and loan associations expect mortgage
rates to increase to the 14 to 15 per cent range by the end of the
year, despite some expected improvement in savings inflows.
Agriculture
USDA sources estimate a reduction of 25 per cent in
District corn production and a decline of 30 per cent in the
production of both soybeans and sorghum this year, due to the
drought and hot weather. The Farmers Home Administration (FmHA) has
applied a disaster designation to all Missouri and Oklahoma counties
and to 70 per cent of the Kansas counties, thus making farmers in
these counties eligible for low-interest FmHA loans. Additionally,
some counties in Nebraska are presently being considered for
disaster designation. The declines in crop production throughout the
Tenth District probably will mean lower net farm income, but these
declines will be partially offset by higher grain prices.
Winter Wheat Planting Conditions
Many areas in the District have
received moisture in the past few weeks and the heat has abated
somewhat. Therefore, expectations of good planting conditions for
the winter wheat crop are reported throughout most of the District
states. Agricultural Credit. Credit conditions for agriculture
appear favorable throughout the District, with most states reporting
interest rates in the 13-14 per cent range. Most bankers are not
optimistic about net farm income this year, but they do not expect a
larger-than-normal number of farmers to be in financial difficulty
at yearend.
Loan Demand
Loan demand remains flat at most banks. The exceptions
include some banks in Oklahoma and New Mexico where loans are up due
to relatively robust local economies, and some rural banks where
loans are down because of seasonal factors associated with
agriculture. Agricultural and consumer loans show the greatest
weakness. Business loans are generally flat, while real estate loans
are level or rising. Loan demand is generally anticipated to be
level in the near future.
Prime Rates
All banks contacted raised their prime or base lending
rates in the last month. Most of the metropolitan area bankers
currently quote prime rates of 11 1/2 per cent, but a few are at 12
per cent. Base fees for local loans at some country banks remain
somewhat higher, 13 per cent or more. About half the bankers expect
their prime rates to ease somewhat in the months ahead, to perhaps
10 per cent by yearend. The other half, however, expect the prime to
be steady or up slightly over the next few months.
Bank Deposits
Bank deposits have been level or rising in recent
months. Small-denomination, floating-rate certificates show the
greatest strength. Other deposits also appear firm. Bankers expect
level-to-rising deposit growth in the near future. Rural bankers
appeared to be most optimistic, citing seasonal factors associated
with harvests.