April 12, 1972
Construction is still an important source of economic strength in the Tenth District. Housing starts, which have been considerably greater than last year, are expected to continue strong through the year, and nonresidential construction activity also is expected to improve. District savings and loan associations report continuing large inflows of savings and substantially increasing mortgage commitments. Real estate lending by banks remains strong, and banks' construction loans are on the rise throughout the District. Other business lending is growing, though less universally than construction loans.
In the last Red Book, it was reported that retail meat prices had risen sharply and that further increases would likely occur. The most recent consumer price index confirms the reports made a month ago, as meat prices accounted for 70 per cent of the sharp advance in retail food prices posted in February. With all the national attention on food prices, spot checks were made with a few retail food chains to determine what changes, if any, have occurred in meat prices in recent weeks. Modest increases have occurred in some cases but the general tone reflected greater stability than was anticipated a month ago. Very recently, meat prices have weakened, with the respondents reporting that the prospects for further declines are good in the near term. Nevertheless, it is unlikely that any downward adjustment in wholesale prices will be passed on fully to the consumer; thus, retail meat prices, after a brief period of uncertainty, may show less downward movement than currently reported.
Construction activity continues to be a source of strength for Tenth District economic activity. Commercial and industrial construction in the District are expected to be better this year than last year, with the last half of 1972 expected to be better than the first. Road and heavy construction activity are expected to improve in Kansas and Missouri due to actual and anticipated increases in funding of new state highway building programs. The housing market is good, and housing starts continue well above the same period last year. Several large housing contractors interviewed believe that 1972 as a whole will continue to surpass 1971 in housing starts, although one respondent feels that the national housing boom may be peaking out.
Homebuilders interviewed have varying feelings about the possible effects of changing finance costs. One company doesn't anticipate much effect on housing starts this year from any firming of mortgage rates, while another expects a quick change in the rate of housing starts if mortgage rates go up later this year. A third respondent thinks that loan rates could rise one-fourth of 1 per cent with no slowdown in construction, but that a larger rise would lead to a tapering off in housing starts after a three or four month lag.
Interviews with a number of large savings and loan associations in the District suggest that home mortgage interest rates are expected to remain the same or rise slightly in the near future, following a general decline in the last three months. Most associations reported no change in nonrate terms. Savings inflows continued to be strong through March at nearly all institutions interviewed, in some cases, especially so.
There were two exceptions noted to this pattern: one firm reported March inflows not so good but noted that its competitors were doing better because the respondent firm is refusing "big ticket depositors who are too unpredictable;" a second respondent attributed a March slowdown in inflows to its dropping of 6 per cent savings certificates. Mortgage commitments were uniformly reported as very strong and increasing substantially. Of those firms making loans on both single-family and multi-family units, most report a greater emphasis on single-family dwellings.
The upturn in business loan demand at commercial banks, seen as only quite tentative by Tenth District bankers at the time of the last Red Book, has gained in scope and size over the last several weeks. Nearly all of the gains are emanating from local borrowers—no upsurge was reported among national accounts. This imbalance, which may be due to many Tenth District banks not following the prime rate when it went below 5 per cent earlier this year, is expected to diminish with the rise of the national prime rate back to District levels.
The upturn is least evident in Kansas City, where business lending seems fairly flat, while the most vigorous growth was reported in Tulsa. Construction loans were on the rise everywhere. The advance in loans to other types of businesses is broadly based, with many industries borrowing for a variety of purposes. Moderate gains in business loans are expected during the second quarter. In other loan categories, real estate lending remains quite strong, and consumer installment loans continued to rise in March, at what some bankers feel is a faster pace.
Demand deposits were steady or declining in March at District banks, while time deposits continued to climb. The several-months-old pattern of decreases in large CD's and increases in consumer savings and time deposits continued to hold, although rising marketable CD rates are expected to moderate these trends.