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Beige Book Report: Kansas City

December 1, 1986

Overview
Only modest improvement is apparent in Tenth District economic activity. Retail sales continue to improve, although district auto sales shared in the national decline. Inventory levels generally are viewed as satisfactory, and prices are expected to remain relatively stable. The energy and agriculture sectors remain weak. Some weakening in housing activity is expected. Demand for mortgage funds has moderated and mortgage rates are expected to remain steady. Total loan demand at commercial banks was generally constant or down over the past month.

Retail sales
Tenth District retailers report that sales are moderately stronger than a year ago and generally have been improving over the last three months. Recently, retail sales of furniture, electronics, and women's apparel have been particularly strong. Prices have changed little during the last three months and are expected to remain relatively stable. Most retailers are satisfied with their current inventory levels, although some would prefer to trim their inventories modestly. Most retailers expect sales during the holiday season to be as good as or better than last year.

Automobile sales
Tenth District automobile dealers experienced poor sales in October following the end of low-interest factory incentives. Inventories of 1986 models have been depleted, but dealers are building their stocks of 1987 models cautiously because they are not optimistic about the short-run sales outlook. Buyers have been conditioned to expect incentive programs, and many dealers expect that sluggish sales will soon force the automobile manufacturers into a new round of incentives.

Purchasing agents
Purchasing agents in the Tenth District continue to report slightly higher input prices, due partly to the depreciation of the dollar and the steel strike. Most purchasing agents expect relatively stable prices over the next three months. Materials are readily available, and no problems with availability or lead times are expected. Inventory levels generally are regarded as satisfactory. Some firms, however, have been trimming inventories and plan to continue this policy for the rest of the year.

Housing activity and finance
Most homebuilders report that single-family housing starts have increased from last year's levels, but multifamily starts have varied widely by locality. Homebuilders expect normal seasonal declines in single-family starts during the winter. Multifamily construction, however, is expected to be substantially weaker because of overbuilding in many areas. New home sales are generally above year-ago levels. Builders report no problems with either the availability or delivery of housing materials. Materials prices have been steady, although some builders expect rising lumber prices.

Many Tenth District savings institutions have accepted limited savings inflows in the face of intense rate competition and flat loan demand. Most expect this situation to continue into 1987. Demand for mortgage funds has moderated. Mortgage interest rates have stabilized and are expected to remain steady or trend slightly downward.

Energy
The district's weakened energy industry continues to suffer from the uncertainty surrounding international crude oil markets, oil prices have firmed somewhat, but remain well below year-ago levels. As a result, exploration and development activity in the district has rebounded slightly but remains generally depressed. The average weekly number of operating drilling rigs in the Tenth District was up again to 223 in October from 215 in September, but remains far below the 550 rigs working in January.

Agriculture
Wet fall weather conditions have delayed harvest operations in many regions of the Tenth District. The corn, soybean, and milo harvest is 85 to 100 percent complete in some areas, but elsewhere 50 to 65 percent of the crop is still in the field. Yields have been high across the district, with record yields expected in many areas. Many regions are experiencing tight storage conditions, but storage shortages are expected to ease as more of last year's stocks are marketed. Most areas report good to excellent winter wheat and wheat pasture conditions.

Harvest delays have meant production loan paydown delays, but many lenders still expect paydowns to improve over last year. Lenders also suggest no loosening in credit conditions for the coming production year, with credit refusal rates expected to be about the same as last year. Effects of the new farm bankruptcy legislation may be reflected in the 1987 farm credit situation. Lenders feel that the new Chapter 12 provisions weaken their position with troubled loans and marginal borrowers. Lenders expect the added creditor risk to lead to tougher credit review standards and more cautious lending.

Banking
Total loan demand was generally constant or down, and total deposit activity was mixed at Tenth District banks during the past month. In all categories of loan demand, more bankers reported increased weakness than reported increased strength. Consumer, real estate, and agricultural loans were areas of particular weakness. While most banks have lowered rates on consumer loans, further interest rate declines are generally not expected. Demand deposits, large CDs, and small time deposits tended to remain constant or decline, while NOWs, Super-NOWs, and passbook savings accounts tended to remain constant or increase. MMDAs, IRAs, and Keogh accounts, on balance, remained unchanged. Most banks are considering lowering their passbook savings rate below 5 1/2 percent. if they have not already done so.