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Beige Book Report: Kansas City

March 23, 1983

Overview
Tenth District business firms anticipate a quickening recovery in the second half of 1983. Inventories continue to be trimmed by most producers, but are satisfactory at the retail level. Mortgage lending activity is strengthening and housing starts are increasing. Winter wheat conditions are good throughout the District, and livestock prices are improving. Loan demand at commercial banks is generally unchanged, while deposit growth is strong because of the growth in money market deposit accounts.

Retail Trade
All respondents report nominal sales gains in the 5 to 10 percent range for January-February 1983 compared to January-February 1982. Retailers attribute part of the recent gains to the mild winter this year; they also indicate that sales of apparel have been strong and furniture and appliance sales have recently improved. Retail prices are stable and profit margins are improved throughout the Tenth District. Inventory levels at retail outlets appear to be satisfactory as the spring buying season approaches. Most retailers expect continued improvement in sales throughout 1983, with gains accelerating in the last half of the year.

Purchasing Agents
The outlook for manufacturers' input prices over the next few months is favorable, despite a slight rebound in steel and raw material prices. The recently announced increase in the base price of steel is not expected to stick due to weak demand, as purchasing agents anticipate continued discounting from base prices. Input prices overall are expected to rise 2 to 5 percent in 1983, mainly in the second half of the year. Inputs remain accessible and lead times short, with the exception of some lengthening of lead times for electrical components and lumber. There is some concern about input availability should the recovery be stronger than initially anticipated, especially because of existing low inventory levels. Yet almost all firms are still trimming their inventories, and intend to continue to do so.

Housing and Housing Finance
Homebuilders' associations report a boom in housing starts with the biggest increases in single-family housing. Sales of new homes are excellent, with prices generally stable. However, lumber shortages are beginning to appear in some areas, and will probably result in a gradual price rise for new homes. Although starts are not expected to maintain their January- February pace, 1983 is expected to be a much better year than 1982.

Savings and loan association officers report very high levels of savings inflows due primarily to the introduction of the money market deposit account. Most expect the positive inflow to continue, but at a somewhat slower rate. Mortgage loan activity appears to be strengthening, with increases in both applications and commitments. Long-term fixed-rate mortgages at 12 5/8 to 13 percent are more popular with consumers than adjustable rate mortgages currently offered at 11 1/4 to 11 3/4 percent.

Agriculture
Good winter wheat conditions are reported throughout the Tenth District, but there is little grazing of cattle on wheat pasture. As the signup deadline for the 1983 Payment-In-Kind program approached, District bankers expected a high percentage-more than 50 percent-of farmer participation, although a range of 40 to 90 percent was reported, depending upon the crop and the area. Wheat farmer participation is expected to average around 40 percent, while corn farmer participation is expected to average close to 80 percent. Most farmers in the Tenth District have been able to obtain credit for their spring financial needs. Livestock producers are doing better than last year due to a mild winter and higher prices. Production costs for all farmers may decline somewhat in 1983 as a result of lower inflation, declining energy costs, lower interest rates, and acreage cutbacks for major crops. However, at least 25 percent of District bankers' farm customers are experiencing severe financial stress this spring. Without improved economic conditions by yearend, District bankers estimate that 2 to 5 percent of their farm customers may go out of business.

Banking
Tenth District banks report that loan demand is unchanged from last month. Commercial and industrial lending is down slightly while real estate lending is up slightly. Although loan quality is generally stable throughout the Tenth District, a few banks have tightened nonprice terms of lending due to concern about quality. The prime lending rate ranges from 10.5 to 12.5 percent with 11 percent the most common rate. This represents a decline from last month's rates of 11 to 13 percent with 11.5 percent most common. District banks report strong growth in deposits and substantial shifts in the composition of deposits. Demand deposits and large CD's are down sharply from the previous month while conventional NOW accounts, money market certificates, and small saver certificates are down slightly. Super-NOW accounts are still being opened, but not in large numbers. In contrast, all of the banks surveyed report significant growth in money market deposit accounts (MMDA's). While most of the growth is from depositors shifting out of other types of accounts, net deposit inflows are a significant source of MMDA growth.