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Beige Book Report: Kansas City

May 8, 1984

Overview
The current moderate improvement in Tenth District economic conditions is expected to continue. Retail sales in early 1984 have been well above a year earlier, except in rural communities. A gradual slowdown in sales growth is expected, however. Prices are expected to be stable to slightly rising, both at retail and for materials inputs. Lead times on materials inputs are increasing, leading to some inventory expansion. New car sales are good in most district states. Housing starts are strong, but builders expect a slight decline as the year progresses. Demand for mortgage funds is down somewhat at savings and loan associations, which report making over 80 percent of new loans on an adjustable rate basis. District commercial banks report modest deposit growth and weak loan demand, with demand strongest for consumer loans. Winter wheat conditions vary widely across the District, depending on local disease and moisture conditions. Spring crop planting has been delayed in much of the district by excessive rain.

Purchasing agents
Most Tenth District purchasing agents contacted report input price increases of 5 to 10 percent since April of last year, but few report significant increases during the last three months. A majority expect further increases of 5 to 10 percent during the remainder of the year. Nearly all respondents report increasing lead times and some problem with availability of inputs, with little improvement expected over the course of the year. In general, materials inventories are at satisfactory levels after recent expansion in response to increasing sales and worsening lead times.

Retail trade
Most retailers report sales for the first three months of 1984 well above a year earlier, except in rural communities where there has been little or no improvement. Because of extremely competitive conditions, retailers have not raised prices. Furthermore, aside from increases to maintain markups if costs rise, prices are expected to remain stable through 1984. Many retailers report high inventories which they intend to trim. A gradual slowdown in sales growth is expected for the rest of 1984, but sales are expected to stay above year earlier levels.

Automobile sales
Automobile dealers in the Tenth District report generally improved sales in 1984 relative to a year ago although some areas of weak sales still exist, particularly in rural areas. Gains were strongest in Missouri and New Mexico, and weakest in Colorado. Domestic inventories are being expanded where possible in expectation of continued strong sales, while very low inventories continue to suppress the sales of imports. Most dealers report that funds are available both for floorplanning and for customer loans. All dealers contacted are optimistic about the outlook for sales through 1984.

Housing activity and finance
Home builders report housing starts are up from a year ago despite recent bad weather, but are expected to fall slightly as the year progresses. Sales of new homes are lagging slightly behind year-ago levels. New home prices are up 5-10 percent over a year ago. Home builders report no problems in obtaining materials. Savings inflows at savings and loan associations are generally unchanged from last year but are expected to increase slightly through the rest of 1984. Increased mortgage rates have slightly reduced the demand for mortgage funds. Further rate increases are expected to weaken demand the remainder of the year. Savings and loan associations are aggressively marketing adjustable rate mortgages with 80 to 100 percent of all new loans made in this form. Because the rates on most ARMs are tied to an index which lags market rate changes, recent increases in market rates have not yet resulted in significant collection problems.

Banking
Bankers' reports on both loan growth and deposit growth differ widely, ranging from slightly stronger to weak. Only in Colorado and Northern New Mexico do conditions seem uniformly good. Surveyed bankers report a slight increase in loan demand during the past month. Demand is strongest for consumer loans, especially auto loans, and for commercial real estate loans. A few bankers report a slight increase in residential real estate loans. Demand for commercial, industrial, and agricultural loans is flat Districtwide, however. The prime rate has increased to a range of 12 to 13 1/2 percent from a range of 11 to 12 1/2 percent last month. Most Tenth District banks report a slight increase in deposits from last month, nearly all due to MMDAs, IRAs, and Keogh accounts. Conventional NOW accounts and demand deposits increased slightly in the last month while Super-NOWs and passbook savings accounts remained constant. Large CDs also remained constant Districtwide, reflecting weak loan demand and modest deposit growth.

Agriculture
Winter wheat conditions throughout the Tenth District range from poor, due to disease or lack of moisture, to good. District hankers report that farmers' sign-up for the government's revised 1984 wheat program thus far has been high. The planting of spring crops in all but the southwest area of the District has been delayed by at least two weeks due to excessive rain. The calf crop in most of the District is above average with saving rates as high as 95 percent in some areas. Some yearling cattle are being sold this spring; others will be pastured until fall. Ample funds are available for farm operating loans this spring. Farm credit problems, however, are at least equal to those of last year, with some farmers wholly or partially liquidating assets to reduce farm debt. Unless farmers can substantially reduce their debt this year, farm liquidations will likely rise. Farm real estate values continue to decline as the supply of land on the market increases, but relatively few sales are being reported.