December 12, 1973
The Tenth District economy appears to be slowing down. Loan demand has flattened or is declining; real retail sales are off vis--vis a year ago; and, the dislocations and depressing effects of the energy shortage are now clearly beginning to be felt. Retailers are pessimistic about the year ahead. Among District livestock feeders and bankers the prolonged period of lower meat animal prices is a source of increasing concern. In addition, a strike involving TWA has seriously affected the Kansas City economy.
A six-week strike by TWA cabin attendants has resulted in a cutoff of much of the $12.8 million monthly payroll to the metropolitan area and reduced convention and tourist business by about 15 percent, according to estimates of the City Development Department. In addition, the energy shortage has resulted in pilot layoffs to accommodate reduced flight scheduling. The decreased demand for standard-sized automobiles has led to layoffs for 6,600 workers at the local GM assembly plants as of December 17, and there are increased reports from small local manufacturers of shortages of petrochemical-based plastics which have caused them to curtail operations and reduce employment. Several rural school districts using natural gas on an interruptible basis have received notice of curtailment of supplies and have switched to alternate, but more expensive propane systems.
Department stores are ringing up Christmas sales at about last year s pace in dollar volume. Selling especially well are apparel items, and stay-at-home durables, such as stereos, and TVs do-it-yourself merchandise, and gardening equipment. While most store executives expect to finish the year strongly, many doubt that 1974 will be very good. Their pessimism in many cases stems from the energy crisis, which they think may require closing earlier, may discourage the driving shopper, and may interfere with shipments of merchandise to the stores.
Reports from auto dealers show car buying behavior here to be similar to that for the nation as a whole. New and used intermediates are selling poorly; luxuries and compacts are moving well. Judging from the sample of those contacted, about half of the dealers would prefer rationing to an increase in the price of gasoline. Few would say how they felt about the year ahead, although one Buick dealer thought sales could be off as much as 50 percent.
Retail sales and other business in the Kansas City metropolitan area cannot help but suffer from a continuation of the TWA strike. Not many months ago, the reports coming out of Wichita were especially rosy, thanks in part to a booming light aircraft industry. Now, however, the energy pinch on general aviation is having severe repercussions. In the District's western states of Colorado, New Mexico, and Wyoming, the skiing season is getting underway. If there is compliance with the voluntary controls, ski areas will surely be hurt, although it is too soon to tell by how much. As one of our Bank's skiers observed, "It now will take three or four hours longer for the bus to reach Colorado from Kansas City, so I end up with less skiing and more riding fatigue at the same price." Looking further into the future, regional analysts are observing that the probable loss in tourism in the western part of the District will be largely offset by the accelerated development of major deposits of oil shale, uranium, and coal in those states, although such help will be some time in coming.
Continuing a recent trend, farm prices declined another 1 1/2 percent during the month ended November 15. Lower prices for cattle, calves, broilers, and soybeans contributed most to the decrease. This prolonged period of lower meat animal prices has caused much concern among livestock feeders and bankers in the District, since profits have fallen sharply. Several weeks ago, it was expected that beef slaughter rates would accelerate to year-earlier levels reflecting the buildup in numbers during the freeze period. Once this backlog was worked off, prices were expected to strengthen. Instead, slaughter rates have generally continued to run below year-ago levels, and the market is still receiving fleshy animals which has kept prices down longer than expected.
Also contributing to this phenomenon has been a widening of the farm-retail price spread on beef. Very little of the sharp decline in the farm price has been reflected at retail, which has resulted in a lackluster consumer demand for beef. Although some of this price stickiness can be justified by higher costs for labor, transportation, packaging, and electricity, the recent surge in beef margins seems unusually large under the Phase IV guidelines. Therefore, for a large part of the District's cattle industry, these developments, when combined with the uncertainty over the energy shortage, have greatly dimmed the outlook for the period ahead.
Tenth District bankers contacted report that total demand is either stable or declining., The only exception is one bank in the Kansas City area which says its loan demand is exceptionally strong. Our weekly reporting bank figures suggest an even weaker loan demand picture for the District than is indicated by our telephone survey.
Rates charged on loans by most banks appear to be uniform and unchanged from last month except for one bank whose rate was lowered and then raised to the previous level.
The picture for deposits appears to be somewhat mixed throughout the Tenth District, with no pattern emerging between loan demand and total deposits. Most bankers also report CD rates below those of New York, some were experiencing small runoffs, and most expected CD rates to rise in the future.