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Beige Book Report: Kansas City

June 24, 1986

Overview
Other than continued weakness in the energy and agricultural sectors, some recent improvement is reported in Tenth District economic conditions. Retail sales are at or above levels established last year. Retailers are generally satisfied with inventory levels, although manufacturers' purchasing agents continue trimming their materials inventories. The automobile market, however, is characterized by low sales, high inventories, and an uncertain future. Housing activity is expected to remain strong, and low mortgage rates continue to stimulate refinancing activity. Loan demand and interest rates at commercial banks are generally unchanged. Crop prospects are uncertain, but farmland prices may be stabilizing.

Retail trade
Retailers report year-to-date sales equal to or above levels established last year. They are optimistic that this will remain the case the rest of the year. Sales of apparel and accessories, cosmetics and fashion jewelry, and sportswear are strong. Sales of home furnishings and electronics are somewhat sluggish. Prices have moved slightly downward, but retailers expect to hold them stable through the end of the year. Retailers are generally satisfied with inventory levels, and they are attempting to keep them generally steady at levels slightly below last year's.

Automobile sales
Low sales, generally high inventories, and an uncertain future characterize district auto dealers' conditions. Favorable credit conditions have not stimulated sales, which are lagging behind 1985 levels. Moreover, with inventory levels already high in most areas, continued slow sales could have a magnified future adverse effect on dealers new car orders from manufacturers.

Purchasing agents
Most purchasing agents report prices of their major inputs about 2 percent higher than year-ago levels, with most of this increase occurring in the last three months. Prices are expected to remain at current levels for the remainder of the year. Most firms have been trimming their materials inventory levels and plan to continue this process for the remainder of the year.

Housing activity and finance
Area homebuilders report that year-to-date starts of single family dwellings have increased over last year's pace, while multifamily starts have varied widely. Sales of new homes are near last year's levels, and new home prices have remained steady. Most homebuilders expect housing starts to remain steady during the remainder of the year. Builders report good availability of housing materials and no delivery problems. Materials prices are generally steady, though most builders continue to encounter higher lumber costs. Savings and loan institutions have experienced reduced savings inflows relative to a year earlier and have mixed expectations for the months ahead. Mortgage activity continues to be strong because of demand for refinancing. Mortgage rates have been holding steady, and most respondents expect them to remain so for the rest of this year.

Banking
Total loan demand was generally unchanged and total deposit activity has been mixed at Tenth District banks during the past month. Most bankers surveyed indicate a continuation in strong refinancing activity in residential real estate loans while commercial and industrial loans, consumer loans, commercial real estate loans, and agricultural loans were mostly unchanged or down from one month ago. No respondents have changed their prime rate or consumer loan rates during the last month. Mixed total deposit activity reflects variation mostly in demand deposits and large CD's. Other deposit categories were generally unchanged.

Agriculture
The wheat harvest in Oklahoma is about 50 percent complete, with yields ranging widely from below average to exceptional. In Kansas, the harvest has been delayed by wet weather. Agricultural lenders report that a large proportion of the wheat crop will be put in storage under CCC loans. A severe storage shortage, however, may force some farmers to market some of their wheat.

The corn crop is rated good to excellent throughout the Tenth District, with some planting completed ahead of schedule. Except in Nebraska, soybean and sorghum planting is slightly behind schedule due to wet weather, but bankers are optimistic about prospects for these crops nonetheless.

Despite uncertainty about the effects of the dairy herd buy-out program, cattle feeders in the Tenth District are marketing their livestock on schedule. Although some cattle feeders held back livestock initially, very few are sticking to that strategy now. Those cattle feedlots making wide use of forward contracts and/or hedging strategies have been able to keep marketings on schedule better than others.

Agricultural lenders in some parts of the Tenth District report that the long sought stabilization in farm land values may be under way, although, in many cases, not enough land has been traded to determine which direction prices are moving.

Falling oil prices have created additional financial hardships for ranchers who earn income by leasing their oil-bearing property. Such ranchers are faced with either reduced income from their oil leases, or with termination of the leases. The loss of oil income may contribute to business failure for some ranchers.