December 13, 1978
Tenth District economic activity continues strong, but with some signs of less support from consumers and from nonfarm businesses. Manufacturers are finding supplies adequate to operate at near capacity levels in most cases. Retailers detect some softening in sales, but see no cause for alarm. Inventories at retail as well as at the producer level are considered to be in good shape. Farm real estate values are rising rapidly with the recovery of farm income and the prospects for favorable farm product prices. Agricultural loan demand is strong, but commercial loan demand is weakening. Bankers expect prime rates to rise further.
Tenth District purchasing agents expect prices of most major inputs to continue to rise, perhaps at an accelerated rate, in the year ahead. In recent months, the prices of steel, wood materials, and jet fuel have increased particularly rapidly. However, buyers in most industries are not having much trouble obtaining materials. Some problems with suppliers are being experienced by the machinery and nonfarm transportation equipment industries. All industries contacted, except the machinery industry, are operating at close to full capacity. The furniture industry is having difficulty finding skilled labor.
Material inventories are at satisfactory levels, except in the electrical goods industry where they are reported to be excessive. The airline industry expects to be cutting fuel stocks because of cash-flow problems arising from increasing fuel costs. Other industries plan to maintain current inventory levels through the first quarter of 1979.
Sales by District department stores are reported to be ahead of last year at this time, but some respondents detect a softening in the last three months. Sales of fashions, fabrics, and other "wearables" have been quite good recently while hardlines, appliances, and major ticket items have slowed down. Good weather probably has delayed the usual winter buying of some seasonal items, say store executives. While some retailers expect strong sales in the first quarter, others are less optimistic.
Retailers say their inventory levels may be a shade high, and they plan some cutbacks in purchases and some increase in promotions. Still, inventories are said to be in better shape than a year ago, and stocks are expected to be back into balance by April 1.
Farm real estate values are continuing to rise at a brisk pace in both the District and the nation as a whole. As of October 1, 1978, District land values were—depending on the type of farmland in question—11 to 13 per cent above year-earlier levels, with about half of this increase occurring during the third quarter. These increases are very much in line with recent USDA figures on farm real estate values which, for the year ending November 1, 1978, show an annual gain of 12 per cent for District states as well as for all U.S. farmland.
Higher farm incomes, reflecting stronger commodity prices and increased Government benefits, account for most of the strength in the farm real estate market. For the nation, net farm income in 1978 is expected to run about 30 per cent above the 1977 level, and it is clear that net income within the Tenth District will also be up rather significantly this year. Given the favorable price prospects for most farm commodities in 1979, together with the outlook for net farm income, which promises to remain fairly steady, further increases in land values are likely to occur in 1979. If the land transfer rate holds up or increases in the period ahead, the demand for farm real estate loans will remain strong, notwithstanding the possibility of higher interest rates.
Most bankers in the Tenth District report that loan demand remains strong. However, some bankers in metropolitan areas-Kansas City, Denver, and Lincoln-report some softening. Agricultural loans are particularly strong, according to those banks making them either directly or through correspondents. Construction loans are generally up, also. Commercial loans at the larger banks show the most weakness. Nearly all bankers contacted have prime rates of 11 1/2 per cent, following the lead of the large money center banks. All expect further increases in the near future. Most bankers do not expect to have problems meeting future loan demand. However, some mentioned having higher-than-desired loan-asset ratios, cutting back on real estate loans, and being more selective in general.
Deposit growth is moderate or down slightly at most banks contacted. Demand deposits are flat or down slightly at all but a few country banks. Savings deposits are generally down due to higher interest rates and shifts into money market CD's. One banker notes, however, that his savings deposits are up slightly due to automatic transfers. Time deposits are generally flat or up slightly over a year ago. Several bankers, who say that they have recently become more aggressive, report increases in large CD's and money market CD's. Most bankers believe their demand, time, and savings deposits will grow no more than moderately in the near future due to rising interest rates and stiff competition for funds. Bankers who are aggressively seeking interest-sensitive funds expect continued inflows of these funds.