January 31, 1979
Business activity and inflation remain strong in the Kansas City District. Purchasing agents report that input prices are rising at a 7 to 10 per cent rate and that they are beginning to encounter some input availability problems. Fourth quarter retail sales were very strong, but retailers expect some softening in upcoming months. Financial conditions in the agricultural sector continue to improve with the uptrend in farm prices, especially for livestock. The recent improvement in farm cash flows has been reflected in better liquidity positions at rural banks. Loan demand is reported to be fairly strong throughout the District, and bankers are not expecting any decline in interest rates before mid-1979.
Tenth District purchasing agents expect the prices of most major inputs to continue rising in 1979 at approximately the same 7 to 10 per cent rate experienced during 1978. The prices of steel and plastics have grown particularly rapidly during the past three months. Lead times have been lengthening in nearly all industries contacted, creating availability problems for some inputs. For example, tools for the small aircraft industry are reported in extremely short supply and the agricultural machinery industry is finding steel difficult to obtain. No labor supply problems are reported, except in the small aircraft industry where there is a serious shortage of skilled workers. The agricultural equipment, machinery and rubber products industries are operating at nearly full capacity. Present levels of input inventories are satisfactory for nearly all industries.
Retailers report that sales have been strong in recent months, and extremely good in December. Clothing, toys, and electronic games have been big sellers while fabrics and home decorations have been unusually weak. Despite strong fourth quarter performance, business activity is expected to slacken in 1979. Most retailers contacted predict that sales in the first half of 1979 will be but 7 to 10 per cent above those in the first half of 1978, before adjustment for inflation. Though inventories are currently viewed as being at satisfactory levels, many retailers plan some reductions by spring in anticipation of the slowdown in sales growth.
Recent reports from the U.S. Department of Agriculture confirm that meat supplies for 1979 will probably exceed 1978 levels by a small margin, with beef production declining and pork and poultry production rising. The prospects for larger pork supplies- particularly during the second half of 1979-may dampen some of the upward price pressures in the cattle industry. Production levels for corn and soybeans in 1978 were recently revised upward, adding further to the abundant supplies available for 1978-79. Unless 1979 production levels are greatly reduced-an unlikely event based on the planting intentions report-crop prices could weaken substantially during the second half of the year.
One Bank director, who has consistently expressed concern about the agricultural situation over the last two years, now feels that most farmers are satisfying their cash-flow requirements. He observes that consumers do not now seem to be resisting rising meat prices, but wonders how much longer this situation will last. He believes that the credit needs of farmers are generally being met by the banking community, although the impact of rising interest rates on farm cash flows is causing some concern. Money is now readily available for livestock loans, but bankers are scrutinizing their other agricultural loan requests quite closely.
Agricultural credit conditions in the District continue to show improvement. Relative to a year ago, loan demand seems to have tapered off, fund availability has increased, and farmers have improved their repayment performance. Moreover, loan-deposit ratios at rural banks declined slightly in the fourth quarter-but they are still somewhat above year-earlier levels. The average ratio as of January 1, 1979, was 62.2 per cent.
Tenth District bankers report widely varying experience in deposit growth since mid-December, with the most common response being that deposit growth has been lower than during most of 1978. Money market CD's have continued to grow strongly, but there has been some weakness in both savings deposits and IPC demand deposits. Bankers express the view that ATS accounts will continue to grow in 1979, although the initial growth spurt in these accounts is over. With the exception of one Omaha bank, there are no plans to extensively promote ATS accounts in the early part of 1979.
Loan demand is reported to be moderately strong, although several bankers suggest that it has been slightly weaker than a year earlier. Most banks report that loan-deposit ratios are about at the desired level, but several banks that have recently experienced weak deposit growth find themselves with slightly higher ratios than would be preferred. One Kansas City bank reports that it is planning to tighten nonprice terms on consumer loans, and several banks report slightly more restrictive lending policies.
Bankers' expectations as to interest rates are fairly evenly divided between those who think that interest rates are now at or near their peak and those who expect some additional increases in short-term rates. There is general agreement that rates will show little decline before mid-1979.