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Kansas City: March 1994

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Beige Book Report: Kansas City

March 9, 1994

Overview
The Tenth District economy continues to grow moderately. Retail sales and residential construction are increasing, and the demand for bank loans is strengthening. Farm income prospects remain weak, however, and activity in the energy sector is sluggish. Retail prices are generally stable, while prices of manufacturers' inputs show some slight increases.

Retail Sales
Retailers report moderate increases in January's sales, despite bad weather in parts of the district. Most retailers attribute much of the strength to clearance sales on several categories of merchandise. Sales are expected to climb steadily in the next few months. Retailers expect pressure from competition to keep prices stable over the near term. While most retailers are satisfied with current inventory levels, a few respondents report higher-than- desired levels.

Automobile sales were mixed last month, but dealers are optimistic about sales in 1994. Dealers are generally expanding inventories to meet the expected demand. Financing is readily available.

Manufacturing
Purchasing agents report stable to slightly increasing input prices compared with a year ago. Few expect price increases in the near term. Some agents report slight problems with input availability and scattered increases in lead times, but they generally expect few problems for the remainder of the year. Most respondents are satisfied with their current inventory levels after actively moving to reduce them. Most respondents who sell abroad report flat to slightly decreasing export sales. Firms report a few incidental problems due to bad weather in the eastern United States, but no serious impact on production.

Energy
Energy activity in the district remains sluggish despite higher natural gas prices. While cold weather helped boost the price of natural gas, glutted oil markets held down the price of crude oil and drilling activity in the district slipped. Overall, the average number of operating rigs in district states slipped from 278 in December to 259 in January. The rig count continued to fall in the first two weeks of February to 239.

Housing
Builders report that housing starts were steady to off a bit compared with a month earlier, but up significantly from a year ago. Sales of new homes are flat compared with both a month ago and a year ago. Inventories of unsold homes remain low. Building materials are readily available, but prices of materials, especially lumber, have increased. Builders report that weather conditions have had little impact on construction apart from the usual seasonal effects.

Mortgage refinancing activity has declined, but respondents generally expect the demand for mortgages to rise due to increased homebuying in the spring and summer. Respondents report that mortgage rates have risen and expect rates to increase further over the rest of the year.

Banking
Loan demand rose last month at most reporting banks. Most banks report higher demand for commercial and industrial loans, consumer loans, and commercial real estate loans. Demand was mixed for home mortgages, home equity loans, residential construction loans, and agricultural loans. Loan-deposit ratios were constant to up compared with the previous month, while investments were mixed.

No respondents changed their prime rate last month or expect to in the near term. Most banks left their consumer lending rates unchanged and expect no change in the near future. Lending standards were also unchanged.

Deposits were flat to down at most banks. While money market deposit accounts were generally higher, demand deposits, NOW accounts, small time deposits, and large CDs were all mixed.

Agriculture
Dry weather has stunted the winter wheat crop in part of the district's main wheat-producing area. Timely rainfall will be needed through the rest of the growing season to ensure normal wheat yields this summer. The dry weather has also trimmed the supply of winter wheat pastures available for grazing by district cattle herds. An ample supply of hay and other forages, however, is available to offset the shortage of wheat pastures.

Most district feedlots are quickly selling off the large inventory of cattle that has built up in recent weeks. High feed prices and weak cattle prices have pushed feeding margins well below break- even. While some feeders continue to wait for higher cattle prices before selling their cattle, most feeders are selling now to limit their losses.

Early reports from year-end credit reviews at district agricultural banks indicate few problem loans and healthy equity levels among district farm borrowers. Federal disaster assistance and higher crop prices cushioned the financial impact of large crop losses caused by wet weather and flooding in the eastern part of the district. Overall, most farm borrowers in the district entered the new year in solid financial condition. But with further losses in the livestock sector, prospects for district farm income have weakened.