June 13, 1973
The Tenth District economy looks very good, although our respondents had a few complaints. The ability of bankers to loan is being squeezed as deposit inflows weaken while business loan demand does not. Auto dealers are disappointed that big cars have stopped selling well, but they allow that customers are buying up small cars fast. Farmers are having to pay much higher prices for their supplies, but stand to make a net gain because of the favorable price situation for agricultural products. The overall strength of the regional economy is summarized by retail sales totals, which continue to rise. This healthy business situation would be dealt a severe blow, according to our special respondents on tax shelters, if investment funds now flowing heavily into cattle and construction were suddenly cut back by tax reform.
Deposit flows at several large District banks have been somewhat weaker than expected. Most bankers feel that high short-term interest rates are inducing intensified efforts to economize on money holdings.
Only a little disintermediation out of consumer-type time deposits has been noted. Many of the banks contacted indicated that they need to roll over up to 50 percent of their large CDs in June. About half are continuing efforts to reissue shorter dated CDs, while the rest are trying to stretch their maturities to prevent a bunching three months hence. The latter group is offering higher rates out to six months, and level or declining rates from six months to a year. No takers are being found beyond six months.
Business loan demand remains very strong. Several banks noted that their volume of business loans has not been growing quite as rapidly of late, but attribute this to their reluctance to loan, rather than to a lack of demand. The cost of rolling over June CDs and expectations of an even tighter squeeze over the next few months have caused banks to raise credit standards and limit new loan commitments. Prime rates to large borrowers have followed the lead of the New York banks. The small borrowers' prime ranges from 6-1/4 percent to 7-1/4 percent at District banks. Attitudes about changing it vary considerably. Several banks feel they are locked into whatever the rate was when the dual system was instituted, while others are increasing their small borrower prime with a lag behind that to large borrowers.
Retail sales continue to boom in the Tenth District. Most department store executives said sales were up in May over April, and running considerably ahead of last year. The increase seems to be fairly widespread among all types of products. Some of the executives singled out women's apparel as a strong seller. Most stores reported a continued high volume of durable goods sales. Furniture and appliances are still selling especially well. What was earlier described as an "excellent" year for auto sales is now being characterized as "good" by dealers throughout the Tenth District. Respondents almost universally cite the gas shortage, or the threat of a shortage, as being responsible for a shift in demand from luxury cars to economy cars. As the current model year draws to a close, compact cars and pick-up trucks are in short supply.
According to several builders, realtors, and investment counselors, private capital that is financing the construction of office buildings and housing units, especially multi-family dwellings, would be greatly reduced should the tax shelter reform proposal be enacted. Estimates of the amount of new construction that would be dried up ranged from 20 to 60 percent. The individuals contacted foresee a severe shock to the economy should the proposal become law without a transitional phase.
Owners and operators of cattle feedlots, as well as investment counselors knowledgeable in cowboy economics, also were asked about the probable effects of removing the tax shelter. The feedlot managers acknowledge that prepayment of expenses is the rule, and that many of the owners live as far away as Connecticut. Investment counselors estimate that a third of the cattle on feed in the country, and 60 percent of those in major feedlots, are owned by individuals attracted by the tax shelter aspects. Removing the tax shelter, therefore, would drive down the price of feeder cattle, reducing the supply and increasing the price of beef over time.
Due to a sharp drop in shipments, meat animal prices have recently approached levels that are squeezing slaughtering margins under current meat price ceilings. The low slaughter has been somewhat surprising since, on the basis of the animal inventory figures, larger supplies normally would be expected. If numbers have been overestimated and high feed costs continue to erode profit margins, prices may be pressing against the ceilings most of the year, causing economic hardships for feeders and processors alike. In fact, one large packer has announced an immediate cutback in production and employment at all plants because of an inability to operate profitably under the price ceilings.
After a temporary dip in April, farm prices advanced 4 percent in May, to an all-time high. Although farm prices are currently averaging one-third above a year ago, the prices farmers pay for inputs are up
sharply also. Over the past 12 months, these prices—including those for feeder livestock and feed—have risen 14 percent, offsetting some of the farmers' gains from rising output prices. Despite continued uncertainty over the weather and new crop prospects, all indications—particularly recent quotations in the future's market—point to another outstanding year for farm income. On a more somber note, however, these projections raise serious doubts that a turnaround in food prices can be achieved by year-end.