September 15, 1976
The moderation in national economic activity is not readily apparent throughout the Tenth District at this time. Most purchasing managers contacted report that demand remains strong, although their inventory investment policies, for the most part, remain conservative. The protracted hot, dry weather has taken its toll in the District's agricultural sector, with continued deterioration in the condition of corn and soybeans observable in many parts of the Midwest since September 1. However, current estimates of crop losses suggest that significant upward price pressures for these commodities are unlikely. Business loans fell slightly at Tenth District banks contacted, while the overall level of negotiated certificates of deposit in the District continues to decline.
Discussions with a number of Tenth District purchasing managers suggest that the moderation in national economic activity has not impacted on the District. With the exception of several purchasing managers whose companies are in the consumer durables area, the majority of respondents reported that sales were good. Demand for steel storage facilities is currently fairly strong; and except for demands related to highway construction, sales strength for steel fabrications and other construction materials appears to be holding up. Although lead times from their suppliers have not lengthened much, most purchasing managers do express some concern over steadily increasing prices from their suppliers. One respondent questioned whether the recently announced steel price increases were based on demand and near-capacity operation or were the result of pressure from the auto industry to have steel hikes coincide with price increases on the 1977 models. The recision of those steel price increases reinforced his belief that the order books of the steel industry are still soft and that they backed off in order to strengthen their position. Despite the generally expressed concern over price increases, inventory investment plans remain cautiously conservative. Most purchasing managers contacted indicated that their inventories were adequate and little, if any, shortages were being experienced. No major alterations in inventory are planned unless there appears to be some firming-up in consumer sales.
In conversations with a number of Kansas City Federal Reserve Bank directors, there was little, if any, pessimism expressed regarding economic prospects. One director commented, "there is no feeling the recovery is about to be aborted." Another expressed the view that "the psychology is not gloom," even among farmers who were still angry over the earlier ban on exports which took money out of their pockets.
United States corn and soybean production projections have been reduced as a result of continued warm, dry weather across the Midwest. September 1 conditions indicate a corn crop of 5.89 billion bushels, down from a 6.19 billion bushel projection a month earlier, but still slightly above the record 1975 harvest, A 1.27 billion bushel soybean drop is projected, down from 1.34 billion bushels a month earlier, and 16 percent below 1975 production.
The condition of corn and soybeans has continued to deteriorate in many parts of the Midwest since September 1. In a number of areas some corn fields intended for grain harvest are instead being chopped for silage. Missouri farmers, experiencing weather even drier than last summer, expect yields substantially below normal for both corn and soybeans. Nonetheless, it presently appears that reductions below earlier output projections for corn and soybeans may result primarily in stemming price declines, rather than in sharply increasing prices.
Business loans fell slightly at Tenth District banks contacted in the September survey. Loans to construction companies and agribusinesses were mentioned as two areas of decline, as were loans to national accounts, Consumer loans, which are usually fairly slow in August preceding a September rise, were generally flat in August. Bankers expect near-term auto sales to be much improved over last year, but several expected the strength to come from sales of the remaining 1976 line, rather than from the 1977 cars. Bankers have kept their local prime rate at 1/4 to 1/2 percent above the 7 percent national prime. Several banks, preferring to make loans mainly to local customers, have set for their national customers a 7 1/4 percent rate. Most bankers expect the prime rate to remain constant for at least the next month.
The level of negotiable certificates of deposit is still declining overall in the District. A few banks, though, have been rebuilding their CD portfolios to lock in funds for an anticipated increase in loan demand. However, most bankers contacted—including a director of this Bank—have preferred to stay in Federal Funds because of their uncertainty regarding the timing and strength of the expected rise in loan demand.