September 13, 1978
Business activity and inflation are both strong in the Tenth District. Price increases continue to be in the 6 to 8 per cent area for most inputs. Neither input availability nor capacity utilization currently appear to be major problems. Retail sales are generally reported as sharply higher than last year, but expectations are for a sales slowdown in the fourth quarter. On the agricultural front, credit conditions and farm income have greatly improved over last year. Bankers in the District report a mixed loan picture in general, but sharply higher consumer installment loans.
The economies of Oklahoma and Nebraska are doing very well, according to directors from those states. The Oklahoma City area is thriving due to energy development, agriculture and, especially, a new GM plant. The general business climate is good, capital investment is very high, and there seems to be a "buyer's panic" in housing. In Nebraska, too, the economy is strong, buoyed by an especially good agricultural situation. Businessmen there are expressing a "cautious optimism."
Purchasing agents for firms in the machinery, drug and medical equipment, transportation, electrical goods, and furniture industries report that prices for most of their inputs have risen about 6 to 8 per cent over the year. Aluminum and steel prices, however, are each up about 15 per cent. Over the past 3 months, primary metal products have increased about 5 per cent and paper packaging products have gone up 6 to 7 per cent. With the exception of paper products, which are anticipated to increase an additional 6 to 7 per cent, no major price increases are expected for the remainder of the year. Input materials availability has not presented any major problem for the industries surveyed this month. Lead times for inputs in the nonfarm transportation equipment industry, however, have been increasing and are expected to increase further this year. Currently, most purchasing agents consider their materials inventory levels to be adequate for meeting upcoming demands, or perhaps even slightly higher than needed. Tool and dye makers are still in short supply, but this shortage has not created any bottlenecks in production. Plant capacity is adequate in most industries contacted, but near full capacity is reported for some furniture, truck-trailer, and medical supply manufacturers.
Retail sales in the Tenth District are generally up sharply over year-ago levels. It appears that major appliances, home furnishings, and other big ticket items are selling rather slowly, except in the Denver area. Sales strength appears to be in new fall and winter clothes, school apparel, and other seasonal items. Most stores indicate that those price hikes that have occurred have been in the 3 to 7 per cent range. However, half of the stores said they had to absorb some of their increased costs simply because of increased competition. Most stores report that their inventory levels may be a "little" high, but are much better than last year. Retailers believe that consumer resistance to higher prices will be strongly felt in the fourth quarter and that competition will be exceptionally keen. As a result, some managers expect softening in consumer purchases and slowdowns in sales volume. Inventory levels are expected to remain in good condition.
Agricultural credit conditions across the Tenth Federal Reserve District have shown continued improvement since late last year. Although the demand for farm loans remains strong and District agricultural banks continue to have high loan-to-deposit ratios, farmers' cash flows have shown substantial improvement and this has been reflected in their ability to service outstanding loans in a timely manner. This cash flow improvement is partly a result of government assistance, and partly of loan refinancing. A more important factor has been improved farm income. Paced by increased beef prices-up more than 40 per cent from a year ago-and record farm export sales for fiscal 1978 (estimated at $26.6 billion), realized net farm income is expected to be about $25 billion this year compared to $20 billion in 1977. Cash receipts from farm marketings for the first 6 months of 1978 in Tenth District states have exceeded year-earlier levels by 18 per cent.
Most bankers contacted in the Tenth District report moderate loan demand. Bankers in Colorado and Oklahoma report heavy demands for real estate loans, and most bankers in other areas are experiencing moderate increases. Agricultural loans are up moderately in Kansas and Missouri, apparently due to loans for agricultural inventories. Other areas are experiencing either flat or decreased agricultural loan demand. Commercial and industrial loan growth is mixed in the District, with a slackening of loan demand by national accounts. Consumer installment lending is up sharply throughout the District. All bankers contacted indicate that they raised their prime lending rate in September, and some expect it to peak in the fourth quarter of 1978 at about 10 per cent. Deposit growth is moderate at most banks contacted. Demand deposits are down throughout the District. Time deposits are up sharply, especially in Denver and Kansas City, but savings deposits are flat. Most large city bankers attribute the lack of disintermediation to the money market CD's. While all bankers contacted are currently offering the ceiling rate on money market CD's, some may not if the 6-month Treasury bill rate increases further.