Beige Book Report: Kansas City
December 16, 1981
Summary
Economic activity in the Tenth District continues to be
relatively weak. Although retail sales have been soft, retailers
generally report satisfactory inventory levels. Residential
construction and sales are weak in most areas. Improvement in
mortgage demand and mortgage commitments at savings and loans
institutions depends on hoped-for greater inflows of savings and
lower mortgage rates after the first of the year. The new winter
wheat crop is off to a good start, but cattle prices remain
unfavorable to producers. Loan demand at Tenth District banks
remains mixed, as does deposit growth.
Retail Trade
Most retailers in the Tenth District report sales for
the first 11 months of 1981 about 10 percent higher than last year.
But sales in October and November of 1981 were less strong, due to
weakness in sales of winter clothing, furniture, and appliances.
Sales of Christmas merchandise throughout the District also have
been less than most retailers anticipated. In spite of relatively
weak sales, most retailers express cautious satisfaction with their
inventories, in part due to optimism about sales during the rest of
December.
Industry Costs and Inventories
Most purchasing agents contacted in
the Tenth District report input prices have increased from 6-12
percent over the past year. No further price increases are expected
this year, but many expect increases of up to 10 percent in early
1982. Although fuel costs have been relatively stable, total
aviation industry costs rose 12-20 percent over the past year, with
further increases expected. Input availability is generally not a
problem for Tenth District manufacturers. Half the companies
contacted report inventory levels well above desired levels due to
declining sales and are planning to trim their inventories as much
as possible in the coming months.
Housing Construction and Finance
Most Tenth District homebuilders
associations indicate that housing starts have decreased 25-50
percent over the past year, with single-family units leading the
decline. Albuquerque seems to be hardest hit, with a decline in
housing starts of approximately 80 percent. Denver, on the other
hand, continues to have a strong market, with declines of less than
5 percent and single-family starts 6 percent above a year ago. Apart
from Denver, house sales are sluggish but inventory levels are near
normal. Building materials availability is expected to become a
problem in the coming months, particularly for lumber, due to lumber
mill shutdowns in some parts of the country.
At savings and loan institutions in the Tenth District, savings inflows in 1981 were down considerably from last year. Most savings and loans hope for some slight improvement in inflows in the near future, primarily due to hoped-for inflows from the new IRAs that the institutions plan to offer after January 1, 1982. The demand for mortgage funds at Tenth District savings and loans is reported as low-to-nonexistent, resulting in abnormally low levels of mortgage commitments. Most of the weakness in mortgage demand is attributed to high mortgage rates, which are currently averaging 17 percent at Tenth District savings and loans. Those rates are expected to fall slightly by the end of the first quarter of 1982, resulting in some slight improvement in mortgage demand and mortgage commitments.
Agriculture
The winter wheat crop in the Tenth District is
currently in good condition, with approximately the same acreage
planted as last year. Despite the unfavorable cattle price
situation, lower feed costs and lower prices for calves entering
feedlots point toward somewhat more profitable fed cattle production
by the spring of 1982. Some livestock producers are holding calves
because of currently unfavorable prices, and grazing them on
abundant wheat pasture. Other cow-calf producers have sold off
breeding stock to generate cash to repay loans, but are also holding
calves over the winter. At the same time, District bankers report
that many feedlots in their area are currently at full capacity. The
recent declines in interest rates may not significantly improve
customers' creditworthiness for new loans, since bankers feel that
continued low commodity prices have offset the relief brought by
lower interest rates.
Banking Developments
Loan demand at Tenth District banks is
following the mixed pattern of recent months. Commercial and
industrial lending is very strong in those areas serving the energy
industry. Consumer lending remains sluggish across the District, and
real estate loans are nonexistent. Prime rates range from 15 3/4 to
16 1/4 percent, down from 16 3/4 to 18 percent last month.
Deposit growth continues to be strong in areas with sizable loan demand but is relatively flat elsewhere. Most of the growth has occurred in the large CD category. While some banks continue to rely on CD's to finance new lending, other institutions are using CD's to reduce their exposure in the overnight market. Across the District, bankers report more than adequate liquidity.
After an initial spurt, consumer interest in All-Savers Certificates has tapered off and most institutions contacted anticipate little activity in the future. Attention has now turned to IRA/Keogh programs. Most bankers surveyed are extremely optimistic about these accounts becoming a stable source of long-term funds. However, there are considerable differences of opinion about the volume and sources of funds that might be attracted to these accounts.