May 10, 1978
The Tenth District economy seems to be in good shape after a weather-depressed first quarter. Spring has been cold and rainy, but retail sales have shown a strong seasonal increase. Department store executives believe their inventory levels to be excessive, although they expect rising sales will take care of the problem. Purchasing agents drawn from a cross section of businesses report lengthening lead times for some items, and continually rising prices for almost all inputs. Inventories of materials are generally considered to be at satisfactory levels. The wet spring has been good for the winter wheat crop, but it has delayed corn planting. Looking ahead toward the grain harvest season, transportation and storage problems can be anticipated. In banking, loan demand continues strong, although farm loans have declined, and total deposits are growing well despite flat-to-declining levels in time and savings deposits.
Retail sales this spring at District department stores are up healthily over last year, and store executives are optimistic that consumer demand will continue to rise at least modestly in coming months. Inventories at retail, however, are reported to be "too high", largely because of sales that did not materialize during the unseasonably cold winter weather. Price increases at wholesale, the retailers report, are routinely passed on to the consumer by maintaining a customary percentage markup over cost.
The prices of raw materials and intermediate goods are generally 6 to 10 per cent above those of last year, according to purchasing agents in the District. While the prices of certain inputs are up even more (e.g., lumber and pulpboard), the prices of a few others are actually lower than those of a year ago (e.g., denim fabric). Lead times on orders of capital goods are lengthening, say purchasing agents, naming castings as an item in especially short supply. Most buyers say their inventories of materials are at satisfactory levels, although a majority of those who are not satisfied are trying to reduce stocks.
Although the cold, wet spring across the Great Plains and Middle West has improved production prospects for wheat, it has created some problems for corn and soybean producers. After a late start, corn planting is now under way. However, additional delays much past the middle of May could well result in lower total U.S. corn acreage than presently anticipated. At this time, it is uncertain whether producers would then switch acres from corn to soybeans or increase their participation in the Government's feed grain diversion program. Thus, initial corn and soybean production estimates for 1978 incorporate a high degree of uncertainty.
Although initial projections for 1978 U.S. wheat and feed grain production are down from 1977 levels, storage space for the new crop will likely be tighter than at any time in recent years. Transportation delays and the loss of storage capacity (principally at export elevators) because of elevator explosions have compounded the space problems in many rural areas. These transportation problems are unlikely to be resolved before the 1978 wheat harvest begins. Consequently, farmers may experience some short-term cash flow disruptions as a result of their inability to market 1977 and 1978 crop production as quickly as they might like.
Tenth District bankers report that loan demand continues to grow at a rapid pace. Business loan demand is particularly brisk, with large increases in both loans to businesses supplying firms active in the oil fields and in term loans for petroleum and mineral production. Construction lending has increased sharply, and loans to mortgage bankers are up. Borrowing by agribusiness firms, especially grain elevator companies, is strong. However, farm loans have declined, due in part to funds being available from Government support programs. This decline in farm loans has increased the liquidity of country banks, and the loan demand of country banks has, consequently, been slack. Demand for real estate loans is strong. Consumer loan demand is moderate.
All of the bankers surveyed report strong deposit growth. Demand deposits are up sharply, but time and savings deposits have leveled off or are declining. Further increases in interest rates are expected to result in additional savings outflows, especially at thrift institutions. Bankers expect to have sufficient funds to meet loan demand over the next few months.