October 11, 1978
Business activity continues to be strong in the Tenth District. The volume of consumer purchases at retail stores is growing, some labor markets are tightening, and prices are rising rapidly. Inventories at retail stores are viewed as satisfactory, as are materials inventories of manufacturers. Fall planting and fall harvests are both progressing well on the District's farms. Loan demand at commercial banks remains strong, and deposit growth is moderate.
Most Tenth District retail stores surveyed are reporting sales increases (dollar volume) about 10 to 12 per cent ahead of year-ago levels. Sales of men's and women's apparel, appliances, and furniture have shown the greatest strength. However, there seems to have been a softening in consumer purchases in recent months, as inflation worries apparently are having an effect on buying. Most retailers are passing on cost increases to their customers, in order to maintain profit margins. Inventory levels are generally reported to be satisfactory. Those stores with growing inventories are chiefly in areas with rapidly growing sales. The outlook for the rest of the year and the first half of 1979 is mixed. Those companies with stores in areas with booming economies (i.e., Denver and Kansas City) are especially optimistic.
Compared to this time last year, prices for most major industrial inputs are up approximately 8 to 10 per cent, according to Tenth District purchasing managers. During the past three months, the August steel price increase has contributed to a 5 to 8 per cent increase in major inputs for the small appliance, machinery, and agricultural equipment industries. Reactions toward anticipated price increases for the remainder of the year are mixed, with those industries which rely on primary metals products expecting increases ranging from 2 to 6 per cent.
Input material availability is beginning to present some problems, as lead times are lengthening in all industries contacted—particularly in the aerospace, agricultural equipment, and office and computing equipment industries. For the aerospace industry, this problem is particularly acute and is expected to worsen throughout the year. For the other industries, purchasing agents have been able to adjust for the lengthening, thereby avoiding any significant availability difficulties.
Currently, material inventories are at satisfactory levels. Over the past few months, inventory expansion has occurred in the aerospace, agricultural equipment, and machinery industries. This action is partly a hedge against possible ill effects from another hard winter, and partly the result of expectations for strong future demand. These industries expect to continue their inventory expansion for the remainder of the year.
Skilled labor for the aerospace industry is in short supply, and plant operations are at full capacity. The small appliance industry is experiencing some difficulty in finding assembly line workers, but is still operating at near full capacity. The remainder of the industries contacted are experiencing no real difficulties with labor supplies or plant capacity.
Planting of the new winter wheat crop is progressing reasonably well, although hampered by a lack of moisture in some areas. However, most observers expect that the planting process will be completed fairly soon and that the new crop will probably be reasonably well established before it goes dormant for the winter.
The dry weather has been conducive to the harvesting of fall crops in the District. Though the harvest is running a little behind normal, good progress is being made. Generally, corn yields are good, especially in Nebraska where a very large crop is expected. The prospects for soybeans are somewhat spotty in the District, because of the weather problems that were encountered last spring. Many people remain quite concerned about the availability of storage and transportation facilities. Most commercial facilities are full, but new on-farm storage may alleviate most, if not all, of the potential storage problems.
Most bankers contacted in the Tenth District report that loan demand remains strong, with particular strength in the demands for agricultural and real estate loans. Demands for commercial, consumer, construction, and energy-related loans are also reported as moderate to strong. Nearly all bankers contacted raised their prime lending rates last month and expect further increases before the end of the year. Most have followed the money center banks to current prime rates of 9 3/4 per cent. About one-half of the bankers contacted have either tightened other lending terms recently, or expect to do so in the near future. Yet most bankers expected no problems in meeting future loan demand. However, some may cut back on real estate loans.
Deposit growth is moderate at most banks contacted. Demand deposits are flat or up moderately; savings deposits are flat or down slightly from a year ago due to higher interest rates and shifts to money market CD's; and time deposits are generally up over a year ago. With the possible exception of demand deposits, deposits are expected to grow moderately in the near future due to crop harvests, higher cattle and grain prices, and a boom in energy-related industries. Most bankers contacted will offer automatic transfers beginning November 1 but do not anticipate a strong response immediately.