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Beige Book Report: Kansas City

December 10, 1980

Overview
Economic activity in the Tenth District remains generally sluggish, although retail sales show some strength. Sales of new automobiles are off sharply, however. Manufacturers are trimming inventories of inputs and reducing orders accordingly. Agricultural credit conditions are improving with improved prices for farm products. Deposits and loan demand at commercial banks are generally flat.

Retail Sales and Inventories
Most Tenth District retailers report that sales in recent months have improved, relative to the first three quarters of 1980. Mild winter weather has slowed sales of winter clothing and accessories but appliance sales, and sales of higher priced items have improved slightly. Advertised promotional merchandise has sold well recently to very price conscious consumers-a price awareness that is expected to continue through the Christmas season. Most retailers, who intend to continue to expand advertising expenditures and promotional price cutting, are optimistic about 1980 Christmas sales.

Higher advertising and promotional expenses have put downward pressure on retailers' profit margins, even though merchandise cost increases have not been substantial in recent months. Retail prices during December of this year are not expected to increase markedly because of the influence of promotional price cutting in Christmas merchandise. The practice of tightly controlling inventory levels has benefited District retailers, as most of them are satisfied with current stocks. Recent improvements in sales have left some retailers slightly understocked, but most retailers expect to have enough merchandise to meet anticipated Christmas sales. District retailers will continue to monitor actual sales closely in order to adjust inventory purchases accordingly.

Manufacturers' Inventories and Input Prices
Half the purchasing agents contacted report a slowing trend in input price increases in the past three months, but most feel that prices will accelerate in early 1981. Current lead times on deliveries are lower than normal, but many purchasing agents expect lead times to lengthen because their suppliers have cut back production and depleted their inventories. New purchase orders are mostly down from last year as most companies have been trimming their materials inventories. Most companies are producing at somewhat below their normal levels, but only one-third of them report having workers on layoff.

Automobile Sales
District Automobile Dealers Associations report that auto sales in November declined markedly from their early fall levels. High sticker prices seem to be the main factor, but high interest rates are also having a depressing effect on sales even though loan money is available. High interest rates are forcing dealers to carry fewer cars in stock, which may also be having an effect on sales. Association spokesmen warn that there will be a wave of dealer closings if there is not relief from high interest rates in the next two or three months.

Agriculture
Agricultural credit conditions in the Tenth District are showing sustained improvement. Many bankers report they are experiencing higher pay downs on agricultural loans this year than in the past three or four years. Most attribute this increase to the substantial improvement in crop prices during the latter part of 1980. Loan demand remains slow in most District states as farmers continue to reexamine their credit needs. Sales of machinery, equipment, and buildings to agricultural producers are very slow, in most cases. Some replacement equipment is being purchased, but many farmers have decided to "make do" with their present equipment for another year. Machinery and equipment dealers appear to be suffering from this loss of trade.

Banking Developments
Loan demand is flat at most Tenth District banks contacted this month. Several banks in Oklahoma report moderate increases in commercial and industrial loans related to the energy industry, one of the few categories of loans that exhibits any strength. In other parts of the District, commercial and industrial loans have increased slightly because of an apparent involuntary rise in business inventories. Most bankers report that agricultural loans are relatively weak, with high borrowing costs causing some reductions in livestock herds. The recent rise in lending rates has also virtually eliminated any demand for mortgage and consumer installment credit. All of the banks contacted raised their prime or base lending rates in the past month. Most of the metropolitan area bankers currently have prime rates of 18 1/2 per cent, following the lead of large money center banks. Base fees at some country banks have recently increased to 20 per cent.

Deposits at Tenth District banks contacted are generally flat. Demand deposits have increased slightly at some banks, but in most cases remain flat. Savings deposits are down uniformly throughout the District. The major source of deposit strength is large CD's, which increased at banks experiencing some loan expansion.