November 15, 1978
Business activity in the Kansas City District is characterized by rapidly rising prices, satisfactory materials availability, and little improvement in real sales volume. Purchasing agents in the Tenth District report substantial input price increases so far this year and anticipate further increases in the final quarter. With a few exceptions, however, input availability and inventory levels remain satisfactory. District retailers note a recent strengthening of sales, but, in real terms, sales have not improved over last year. Bankers contacted report that loan demand remains strong for most loan categories, especially construction and agriculture. In agriculture, the financial situation is somewhat better than a year ago, due to higher farm prices and improved cash flows.
According to Tenth District purchasing agents, prices for most major inputs are up approximately 8 to 10 per cent over this time last year. For the remainder of the year, input prices are anticipated to increase for metal, clothing, and building materials. Cardboard is expected to increase an additional 5 to 10 per cent. Input material availability does not appear to present a serious problem for most industries contacted. The transportation industry, however, reported an increase in lead times as well as some difficulties in obtaining an adequate number of rail cars and trucks. Also, the container industry reported that lead times for steel-based input products have been increasing and are expected to continue to increase for the remainder of the year. In the building materials industry, insulation and concrete are very difficult to obtain. Currently, material inventory levels are at satisfactory levels for all industries, with the exception of the metals industry where inventories are too high due to a slack demand from the agricultural sector. As a result, the metals industry will continue trimming its inventories. Most industries contacted expressed no real problem regarding labor shortages. Only firms in the transportation industry and some in the metals industry appear to be near full capacity.
Retailers report that while dollar sales have been improving in the past three months, they are up only about 10 per cent over last year. Mild weather throughout the District was cited as having the effect of delaying sales of winter goods. Other goods that have been weak are home improvement items and major appliances. Clothing, housewares, and domestic goods have been selling well. Retail prices have recently been fairly stable. Most retailers felt that prices may rise about 1 to 2 per cent in the fourth quarter. Inventories have been characterized as "in line with sales" by most stores. Those experiencing somewhat heavy inventories expect them to be corrected by strong Christmas sales. Most retailers, in fact, were optimistic about the Christmas season, though they felt it might be a little slower than last year.
Bankers contacted in the Tenth District report that loan demand remains strong, particularly for agricultural and construction loans. Demands for consumer, real estate, and energy-related loans are also reported as moderate to strong. All bankers contacted raised their prime lending rates recently and expect further increases before the end of the year. As of November 3, most had prime rates of 10 1/2 per cent. Some of the bankers contacted mentioned tightening other lending terms recently or possibly in the near future. Despite these comments, most bankers do not expect to have problems meeting future loan demand. However, some mentioned cutting back on consumer, real estate, and new loans.
Deposit growth is moderate or down slightly at most banks contacted. Demand deposits are up moderately, but savings deposits are generally flat or down slightly from a year ago due to higher interest rates and shifts to money market CD's. Time deposits are generally flat or up slightly over a year ago. Deposits are expected to grow moderately in the near future due to seasonal factors and a strengthening agricultural sector.
Farm loan demand in the Tenth District has strengthened recently, causing some renewed pressures on bank liquidity. However, due to higher farm prices and significantly improved cash flows, the overall financial picture for the District's agriculture is somewhat brighter than it was a year ago. The upturn in loan demand pushed average loan-deposit ratios at rural banks during the third quarter to levels near the high ratios of a year ago. As of October 1, the average ratio for the District was 63.4 per cent, and ranged from 58 per cent in Oklahoma to 73.8 per cent in Wyoming.
Apparently, farmers are now borrowing to take advantage of profit opportunities. While this development has placed new pressure on bank liquidity, the prospects are good that the farmers will be able to repay their loans as they mature. In the past year, farmers have significantly improved their loan repayment performance. But because of the strains on liquidity, bankers are maintaining collateral requirements, and many continue to refer loans to other credit agencies. Though referral activity does not appear to be increasing very significantly, interest rates on farm loans are rising and now stand about 40 to 45 basis points above year-earlier levels.