Beige Book Report: Kansas City
August 9, 1989
Overview
The Tenth District economy continues to grow moderately. Overall
retail sales continue to increase, although new car sales are weak.
Increases in manufacturers' input prices are moderating and most
materials are readily available. Retailers and manufacturers are
both trimming inventories. Drilling activity, while variable from
month to month, is below its year-ago level. Housing activity
remains weak, with the effect of slightly lower mortgage rates not
yet evident. Loan demand at commercial banks is flat to somewhat
stronger for most loan categories. Lower yields likely held winter
wheat production below average despite acreage increases.
Retail Sales
Most Tenth District retailers report sales increases over last year
and over the last three months. However, merchandise sales are
expected to be flat over the rest of this year and most respondents
are reducing their inventories. Prices have been steady and are
expected to remain so in the near future. Tenth District automobile
dealers report weak new car sales over the last month. Dealers
expect 1989 sales at or below 1988 sales and are trying to trim
inventories.
Manufacturing
Most respondents report that input prices rose moderately over the
last year. However, input prices changed little over the last three
months, and only small increases are expected over the next three
months. Although some lead times have lengthened, most materials are
readily available. Nearly all respondents are trimming their
inventories and plan to trim further in coming months. The inventory
reductions reflect a recent build-up of excess inventories at some
firms as well as long-term efforts to reduce normal inventory
levels. Most Tenth District manufacturing plants are operating near
full capacity. However, one steel manufacturer reports that the
recent strength of the dollar has hurt sales of U.S. produced pipe
and rails. Several firms report problems in finding skilled labor.
Energy
Volatility in oil prices appears to be contributing to month-to-
month variability in district drilling activity. Drilling activity
also remains below year-ago levels. After falling in June to 225,
the average number of active drilling rigs in the district increased
sharply to 246 in July. Exploration and development activity,
therefore, stands about 8 percent below the level of one year ago.
Housing Activity and Finance
District housing activity is down from a year ago, and most
homebuilders report a slight decline in starts from a month earlier.
New single-family home sales and prices have been steady and
multifamily construction is virtually at a standstill. Most
respondents expect little change in housing activity for the rest of
the year.
Deposit inflows at district savings and loan institutions are slightly higher than a month ago but lower than a year ago. However, deposit inflows vary substantially from one institution to another. Some respondents attribute the recent behavior of deposit flows to uncertainty about the new savings and loan legislation. Although mortgage demand has been mixed, modest growth is expected in the near future. Nearly all respondents report slightly lower mortgage rates, but most expect stable rates in coming months.
Banking
District commercial bank respondents report more increases in loan
demand than decreases. Increased demand is reported to be most
apparent for commercial and industrial loans, home equity loans, and
agricultural loans. Decreased demand is evident for home
construction and commercial real estate loans. Demand for other
types of loans is said to be generally unchanged. Among responding
banks, loan-to-deposit ratios are about the same as a month ago but
somewhat higher than a year ago. At most banks, lending rates both
to businesses and consumers have either fallen in the last month or
are expected to decline in the near future. Deposit levels are
generally the same or somewhat higher than a month ago. Demand
deposits and small time and savings deposits have shown the greatest
strength.
Agriculture
Winter wheat yields and quality vary widely across the district as
the harvest nears completion. Some fields in Kansas and Nebraska
were not harvested due to crop damage from cold weather, drought,
insects, or hail. Wheat quality in Kansas was reduced by harvest
delays due to late season rainfall. In other parts of the district,
however, wheat yields and quality were average or above average.
Overall, yields likely held winter wheat production below average
despite acreage increases.
The district corn, soybean, and milo crops are generally in good condition. Across most of the district, recent rainfall has improved crop growing conditions, and good yields are likely if further timely rainfall is received. But in some areas, where planting was delayed last spring, crops could be threatened by an early frost.
Little expansion in district cattle and hog numbers is expected this year. District fed cattle prices remain strong, but cattle feeding margins are being squeezed by the high price of feeder cattle. High feeder cattle prices, in turn, are contributing to large profit margins for cattle ranchers. Although such profits would typically result in an expansion of cattle herds, drought-diminished feed supplies are likely to restrict herd expansion this year. Slaughter hog prices are higher, but little expansion in hog-feeding activity is likely because feeding margins remain near break-even levels.