April 11, 1979
Economic activity continues generally strong in the Tenth District, although there are signs of weakening consumer demand and scattered indications of declines in construction. Most manufacturers are operating at or near capacity, and are scrambling for materials to keep their inventories of inputs at satisfactory levels. Purchasing agents have not observed any abatement in the rate of increase of materials prices, nor do they expect any in the months ahead. Retail stores report some moderation in wholesale price increases, but lackluster sales volume. Farm income stands to benefit from the increased price of livestock, and agricultural loan demand is very strong. Deposit growth is uneven among banks across the District, judging from the mixed reports received. Bankers do not expect to be changing their prime rates for a while.
Retailers say their sales receipts are up only slightly from year- ago levels. Retail sales volume in recent months has been increasing much more slowly than in late 1978, making retailers apprehensive about their prospects for the rest of the year. The large gains that were reported five to six months ago have sharply dissipated, and store executives are quite concerned about the possibility that a recession may begin in the third quarter.
Prices paid by retailers have been rising somewhat in the last two or three months, but there seems to have been some moderation in the increases. Compliance with price standards by manufacturers is cited as one reason for the moderation. Retailers feel that their inventories are a little high—particularly when looking at a flat third quarter with recession overtones. However, some stores say they built up inventories in anticipation of the Teamsters strike.
Purchasing agents say prices for most major inputs are approximately 10 to 12 per cent higher than this time last year, with some steel inputs and petroleum based inputs registering increases of 20 to 50 per cent. During the first quarter of this year alone, prices of commodities such as copper, aluminum, steel, corrugated shipping materials, and petroleum products have risen about 10 per cent. Buyers expect input prices to continue to rise rapidly, especially prices for aluminum and oil-based supplies.
Most industry spokesmen consider their current inventories of materials to be at satisfactory levels. But, inputs are becoming increasingly difficult to obtain as lead times are stretching out substantially, especially in the machinery, agricultural equipment, and aircraft industries. A prolonged Teamsters strike threatens to make matters worse.
Several Tenth District metropolitan areas report tight labor markets. On the other hand, one Director from Omaha says that architects, engineers, and construction workers in that area cannot find work. Another Director is bothered by the apparent relaxation of the wage guidelines, believing that any change now will cast employers who complied in a bad light.
Farm prices are continuing to rise to record high levels. In March, the index of prices received by farmers rose 2 per cent, the fourth consecutive monthly increase. Beef cattle prices jumped nearly 10 per cent for the month, and this increase was responsible for most of the increase that occurred in the index of farm prices. Not all farm prices rose last month, however. Lower prices for hogs and vegetables partly offset the gains for other commodities. Nevertheless, farm prices in March were 23 per cent above year- earlier figures. This strong gain coupled with the prospects for the remainder of 1979 suggests that net farm income will exceed the 1978 level of $28 billion.
The sharp improvement in 1978 farm income has been reflected in the farm real estate market, which in the past year rose 14 per cent nationwide. Within the Tenth District, the annual increase ranged from 7 per cent in New Mexico to more than 20 per cent in Colorado and Nebraska, averaging about 14 per cent for the District as a whole. Although interest rates on real estate mortgages have increased about one percentage point in the past year, the bright prospects for 1979 farm income will probably outweigh most concerns about the cost of borrowing. Thus, further increases in land values seem likely in the Tenth District.
Most bankers in the Tenth District report that loan demand is strong, with agricultural loans, especially cattle loans, particularly strong. The demand for consumer, commercial, and retail loans is generally good, while the demand for housing and construction loans is mixed. All banks surveyed report prime rates between 11.50 and 11.75 per cent, and no rate changes are planned for the near term. However, most bankers say they are becoming more selective in their lending activity.
Bankers give mixed reports on deposit growth. Most of the perceived sluggishness in growth is attributed to seasonal factors. Savings and time deposits are normal to flat while the other deposit categories are showing varied behavior among banks. The mixed reports for money market and large CD's are a marked change from the general strength indicated in these areas during the March survey.