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Beige Book Report: Kansas City

December 15, 1982

Overview
Business activity in the Tenth District appears to be generally flat, except for slight improvement in the housing sector. Soft retail sales have brought higher than desired retail inventories, but manufacturers' inventories are generally satisfactory. Housing starts are up slightly, as is demand for mortgage funds and commitments. Both deposit growth and commercial and industrial loan demand are up slightly at commercial banks. Tenth District farmers continue to experience financial stress because of poor income prospects.

Retail Trade
Most retailers in the Tenth District report only moderate gains in sales in the first 11 months of 1982 compared to the first 11 months of 1981. Sales improved slightly in November although durable goods sales remained weak. Merchandise costs have not risen recently but slow sales have put downward pressure on profit margins. Inventories are currently higher than desired for most retailers primarily because of slow sales. Most retailers anticipate that gains in sales during the remainder of the Christmas season will eliminate excess inventories and improve profit margins.

Purchasing Agents
Most purchasing agents contacted report modest declines or no change in input prices over the last year, and only minor price increases over the past three months. While purchasing agents expect no major price increases soon, a few expect input prices in 1983 to be about 6 percent higher than in 1982. Most firms contacted are having no difficulties getting materials, but some purchasing agents express concern about possible difficulties in 1983. They feel that if the economic upturn begins, suppliers may be caught understocked, and if it does not begin, more suppliers may close. Nearly all firms report satisfactory inventory levels. While most firms are trimming inventories in response to general economic conditions and the need for improved efficiency, others have stopped trimming and are trying to maintain inventories at minimal levels.

Housing and Housing Finance
The decline in interest rates has brought a significant rise in housing starts since October 1 in the Tenth District that could result in starts for 1982 exceeding those in 1981 by 25 percent. Respondents see this increase continuing, if interest rates stay at current levels. Sales of new homes have also increased recently. The slack demand in 1982 has resulted in new home prices similar to those in 1981, but respondents expect prices to move up in the spring. Inventories of new homes are at all- time lows. Material prices are reported to be at approximately the same level as in 1981, although some respondents report recent increases in lumber prices. Respondents are expecting a general increase in prices beginning in the spring of 1983.

Officers at Tenth District Savings and Loan Associations generally report little or no change in savings inflows compared to a year ago, but they expect increased activity in the near future. The introduction of money market deposit accounts is the primary source of their optimism. Most officers report recent improvement in the demand for mortgage funds and mortgage commitments, but a minority report continuing slack demand. Additional increases are expected, assuming continued declines in interest rates, but with no significant additional activity before spring. Loans are being made at interest rates of 12 1/2 to 14 5/8 percent, and further slight declines are expected.

Banking
Tenth District banks report little recent growth in loan demand. Consumer, agricultural, and real estate lending remain flat. About half the banks surveyed note increases in commercial and industrial loans, which is only partly seasonal. Most bankers report that loan quality has stabilized. The prime rate is 11 1/2 to 12 percent, down from 12 to 12 1/2 percent last month. Deposit growth is up slightly at Tenth District banks. Nearly all banks report growth in demand deposits, some of which is seasonal, and in large CD's. NOW accounts, small time deposits, and savings deposits have grown slightly, while money market and small savers certificates have remained constant. All banks surveyed plan to offer the new money market deposit account (MMDA). Very few are offering bridge accounts, however, and no significant movement of funds in anticipation of the new MMDA is reported.

Agriculture
The harvesting of crops throughout the Tenth District is virtually complete, with little damage from frost or recent heavy rainfall. Winter wheat conditions range from poor in Oklahoma to fair elsewhere in the Tenth District. As a result, little pasturing of cattle on winter wheat is occurring. Grain storage capacity continues to be adequate throughout the District. Despite considerable use of temporary storage facilities, the quality of stored grain is not expected to be adversely affected. Without a reduction in grain stocks, however, next year's storage capacity may be inadequate. District bankers report that some local areas are receiving slightly higher cash prices for their crops, resulting in an increasing number of farmers selling grain. Paydowns are being made by farmers on their agricultural production loans but at a slower than normal rate. Tenth District farmers continue to experience financial stress because of poor income prospects. Rural nonfarm businesses in the District are also experiencing nearly as much financial stress as a result of the depressed economy as are farmers.