March 14, 1979
Strength in business activity and continued inflation still exist in the Tenth District. Retail sales are strong, but concerns about inventory accumulation are beginning to be expressed. Both retail prices and manufacturers' input prices are rising rapidly. Most inputs are in adequate supply. While cattle ranchers and feeders are doing well, some nervousness about the future also exists. Loan demand at commercial banks is strong, while deposit growth is at best sluggish.
Directors contacted report very little unemployment in their areas, along with continued strength in housing and in retail sales. One Director noted the presence in people's minds of a "deep seated distress about inflation" and a perception of failure to do anything about it.
Most Tenth District retailers contacted report strong sales gains for January and February, following an exceptionally strong December. Apparel, jewelry, fabrics, and sporting goods have been strong sellers recently, while major appliance and furniture sales have varied from store to store. Inventories are now high and bothersome to many retailers, a change from the last several surveys. About half of the stores have already had early clearance sales due to high inventory levels. More sale promotions and a cutback in purchases are planned to bring inventories into line.
Retail prices are up as a result of higher prices from manufacturers and higher labor costs, the latter partly attributable to minimum wage increases and higher social security taxes. Most respondents noted increasing use of credit in order to purchase "non-essential items" and suggested that in the near future consumers won't be able to afford those items at all. The future is expected to be "tough," "lean," and worrisome. However, most respondents see sales for 1979 up about 10-15% with prices up 7-10%.
Tenth District purchasing agents report most input prices to be 6- 15% above last year's levels, with prices of paper products, steel, and lumber rising especially rapidly. Substantial input price increases occurred during the first quarter of 1979, and prices are expected to rise even more rapidly for the rest of 1979.
Most purchasing agents report adequate supplies of most major inputs, and only moderate increases in materials lead times for the first three months of 1979. Although input inventory levels are generally regarded as satisfactory, some respondents plan to expand inventories of items such as steel, due to fear of strikes.
Plant capacity was reported as only a mild production constraint for most industries, although occasional single firms did report more severe problems with limited capacity. Shortages of skilled labor, especially machinists, are present in the furniture, nonfarm transportation equipment, and machinery industries.
The index of prices received by farmers has increased in each of the last four months, with a 3 percent increase in February following a 5 percent increase in January. Rising cattle prices have been an important source of strength for farm prices in recent months. Strong consumer demand for beef has resulted in surprisingly high fed cattle prices and intense competition for feeder cattle—from a reduced supply—to refill feedlots. Continued strong consumer demand for meat has also added substantial strength to pork and poultry prices.
Fed cattle price movements to the mid-$70 range would not be surprising for short periods this spring and summer. Moreover, slaughter cattle prices in 1979 are unlikely to weaken much from present levels. The full impact of the present dressed beef prices at $1.06 per pound—up 22 percent thus far in 1979 and 43 percent in the past year—has not yet been felt at the retail counter. Thus consumers can be assured of additional increases in retail beef prices in the coming months even if fed cattle prices should stabilize.
One Director noted that although the cattle industry is booming, there is a nervousness present, based on past experience and a fear of consumer resistance to higher beef prices. Feeders especially are jittery about a possible downturn catching them with feedlots full of high-priced feeder cattle.
Most bankers contacted in the Tenth District report strong loan demand, with agricultural and consumer loans particularly strong. The prime rate is 11 3/4 percent in all larger District banks contacted, while smaller banks report prime rates somewhat below that level. Further prime rate increases are expected in the near future. Only one-half the banks surveyed report a tightening of their lending terms, but virtually all banks are being more selective in their loan activities.
Deposit growth is generally stable or declining. Many banks believe this sluggishness to be primarily seasonal. Bank customers are becoming increasingly sensitive to interest rate differentials, which may explain the strength in CD growth and the weakness in demand deposit growth. Savings deposits are reported to be generally flat, while time deposits and automatic transfers generally are growing moderately.