‹ Back to Archive Search

Beige Book Report: Kansas City

August 11, 1981

Overview
Tenth District economic conditions continue mixed, with signs of weakening perhaps outweighing those of stability and improvement. Retail sales were down in July, although sales of new cars recently have been revived somewhat by dealer promotions. Purchasing agents note a decline in manufacturing activity. Inventory reductions are apparently underway at all stages, from material suppliers to retailers. Crops are in good-to-excellent condition in the District, but many farmers are under severe financial stress. Directors and representatives of the Mid-Continent Independent Small Business Association say that high. interest rates are ruining many small businesses. Residential construction and automobile sales are depressed most everywhere, but business conditions otherwise vary considerably across the District. In Denver, for example, nonresidential construction is booming, while in Omaha it has virtually stopped. Bankers in energy-rich regions report heavy demand for commercial, industrial, and commercial construction loans. Elsewhere, loan demand is flat-to-weak in all categories except agriculture, where it is strong.

Retail Trade
Sales during the month of July declined at most retail stores across the District. During the last several months, sales of appliances, furniture, and other big ticket items have been relatively weak. In particular, air conditioner sales have been slack this summer compared to the summer of 1980.

Retailers say that the cost of their merchandise rose about 5-6 per cent during the first seven months of 1981, as compared with gains of about 7 per cent in total dollar sales. Nearly all cost increases have been passed on to the consumer; retailers have maintained profit margins and inventory markups. The recent weakness in sales has left most stores overstocked, but retailers are optimistic that sales will improve in the coming fall and Christmas seasons. Automobile Sales. Dealers say that recent promotions offering below- market financing have given a boost to new car sales, which had been "horrible" for three months "because of high interest rates and the difficulties potential buyers have in getting bank loans." Although their inventories are at historic lows, dealers are trying to reduce them more. Dealer closings continue, including four in July in Denver alone, where economic activity is generally strong.

Purchasing Agents
Almost all purchasing agents note a recent stabilizing in input prices, but only half are optimistic that this stability will continue. Suppliers are keeping inventories very low, which is lengthening some lead times. Most purchasing agents say that business has slowed, and that they are buying fewer materials than last year. About one-half say their firms have excess operating capacity, while just under half report workers on layoff.

Agriculture
Crops across the Tenth District are in good-to- excellent condition. Growing conditions have been very favorable this summer because of widespread, generous rainfall and normal temperatures, a sharp contrast to the drought conditions of one year ago. The corn crop in Tenth District states is in very good condition, having received favorable temperatures and timely rains during the critical tasselling stage. The corn crop in western Nebraska and northwestern Missouri may be the best ever. The soybean crop is also in very good condition across the District. Grain sorghum is reported in good condition in Kansas and Nebraska.

Demand for loans at Tenth District agricultural banks increased during the second quarter of 1981, and is now stronger than at anytime since 1979. The average loan-to-deposit ratio for reporting agricultural banks was 61.2 per cent at the end of June, up from 59.6 per cent at the end of March. Half the banks responding to the survey of credit conditions preferred a loan-to-deposit ratio higher than the level they reported.

Financial Developments
Reports on loan demand at Tenth District banks are mixed this month. Banks in regions serving the energy industry report continuing strong demand both in commercial and industrial loans and in the commercial construction area. Other parts of the District indicated flat-to-weaker growth in these loan categories. In the face of high borrowing costs, demand for automobile loans and for mortgages remain severely depressed across the District. Basic lending rates at the larger banks range from 19 per cent to 21 per cent.

Growth of deposits at Tenth District banks continues to be slow, with the exception of those institutions experiencing strong loan demand in the energy area. Most banks feel that the shift into NOW accounts has been completed and that recent activity in these accounts reflects the normal behavior of transactions accounts. With the exception of a few large banks using large CD's to fund loan demand, money market certificates continue to be the main source of deposit strength.

The introduction of retail RP's is not yet widespread. Much of the activity seems to be concentrated in the Omaha market, with few banks participating in Denver, Oklahoma City, and Kansas City. Most bankers are not enthusiastic about retail RP's and in most cases are introducing them only in response to competition from other depository institutions.