July 5, 1979
Economic activity in the Kansas City District remains strong, although signs of future weakening are beginning to emerge. Purchasing agents in the Tenth District report rapidly rising input prices and difficulties in obtaining materials and labor. Retailers report that sales are weakening and that inventories are growing above desired levels. The winter wheat harvest has been excellent and has not been hindered by serious fuel shortages. Commercial and industrial loan demand is strong, although real estate lending has likely peaked. Further increases in interest rates are not anticipated.
Tenth District purchasing agents report that the prices of most major inputs are currently 8 to 10 per cent higher than at this time last year. The prices of metals, wood products and petroleum based products have risen particularly rapidly during the past three months. Further increases are expected throughout the remainder of the year, although uncertainty regarding the energy situation makes estimating the magnitude of these increases difficult. Lead times have lengthened slightly for most industries contacted, creating availability problems for some inputs. In general, however, material inventories are at satisfactory levels. With few exceptions, labor remains in short supply. In describing the region's labor market, one director states that "anyone who wants a job can get one." Limited plant capacity is also a problem in several industries.
Retailers report sales to be significantly above those of a year ago, although by a smaller amount than had been expected. The rate of growth of sales has been slowing over the past three months and gains during the remainder of the year are expected to be moderate. Nondurables such as men's and women's apparel have been among the strongest selling items, while durables such as furniture and appliances have been among the worst. Price increases are reported to have been moderate during recent months, as retailers claim to have been trying to follow President Carter's price guidelines. Retail inventories are scheduled for trimming over the near future, because they have recently grown above desired levels.
Somewhat more favorable growing weather for spring planted crops in the United States and Russia, along with an excellent U.S. winter wheat harvest, may result in some tempering of wheat price increases. With the wheat harvest about 90 per cent complete in Oklahoma, a director characterizes the crop as "absolutely excellent with 40 bushels per acre yields common." The Kansas wheat harvest, just beginning, also promises to be one of the largest in recent years. No serious fuel shortages are apparent in those states to hamper either harvest or transportation of farm commodities to market. In Nebraska, however, fuel supplies are tight and considerable concern is expressed about availability of fuel to power irrigation pumps and to transport cattle to market.
Farm level wheat and feed grain prices across the United States have increased sharply in recent weeks, reaching the price trigger levels at which grains can be sold without penalty from the three-year farmer-owned reserve stocks. Moreover, it is possible that wheat and corn prices could continue to increase to levels at which the Commodity Credit Corporation (CCC) would call for repayment of CCC loans on grains in the reserve, as has already occurred with barley and oats. U.S. average farm level prices of 175 per cent of the national loan rate for wheat and 140 per cent for corn are sufficient to trigger calling of the loans. CCC loan rates for wheat and corn are $2.35 and $2.00 per bushel, respectively.
Most bankers contacted in the Tenth District report that loan demand has been strong. A number of smaller banks report heavy seasonal demand for agricultural loans. Most large banks indicate strong demand for commercial and industrial loans, with inflation apparently accounting for much of the strength. However, bankers generally feel that real estate lending has peaked, and they do not plan to actively pursue this type of lending. Some bankers also anticipate a reduction in loan demand because of a potential slowdown in industries that are heavily energy dependent. Some large city banks have lowered their prime lending rate to 11 1/2 per cent, and they expect further decreases in their prime rates due to an anticipated slowdown in the economy. Most rural banks contacted expect their rates to be flat during the remainder of the year. Some bankers report slightly more restrictive lending policies, while others report that credit standards have not changed since the beginning of the year.
Deposit growth has been moderate to flat at most banks contacted. Demand deposits have been flat or up slightly at most banks. Savings deposits are down from a year ago due to shifts to money market CD's and other time deposits. Most bankers contacted are not overly concerned about the future of their AT programs because of the recent court ruling, but there has been a noticeable decline in advertising throughout the District.