January 29, 1980
Inflation remains strong in the Tenth District while business activity continues to slow. Purchasing agents report suppliers have recently increased prices for material inputs and further increases are expected in the near future. Retailers report good January sales performance due to mild winter weather, but expect sales over the coming year to increase by less than the increase in retail prices. The recently imposed grain embargo has produced uncertainty in area grain markets and the resulting decrease in marketings has produced cash flow difficulties for many farmers. Loan demand is moderate in most areas of the District while deposit growth is reported to be moderate to strong.
Purchasing agents contacted in the Kansas City District report input prices have increased by 10 per cent or more over the past year. Most purchasing agents indicate that suppliers have raised prices within the past three months, and all expect further price increases over the next three months. With the exception of the aircraft and electronics industries, input availability is not a major problem in the District, nor is it expected to become one during coming months.
The majority of purchasing agents report that material inventories are to be kept low during the next several months because of high interest rates and a pessimistic outlook for the economy. About half the companies contacted will need to further trim their inventories to reach their desired lower levels. The majority of firms contacted indicated that they were operating at about normal capacity for this time of year. Labor is in adequate supply in the District although a shortage of skilled labor continues to exist in Wichita and Colorado Springs.
Most retailers contacted report that sales during January are 6 to 20 per cent higher than a year ago, mostly as a result of mild weather which has encouraged shopping. Most retailers expect sales to increase between 5 and 8 per cent during 1980, while retail prices are expected to grow by 10 per cent or more. Inventories are currently at satisfactorily low levels, and are expected to be kept at low levels by means of continued winter clearance sales.
The embargo on grain sales to the Soviet Union is having short-term effects upon Tenth District agriculture. Area grain markets are nearly at a standstill, because of farmers' unwillingness to sell until some of the current price uncertainty is resolved. Transportation problems are being exacerbated as grain backs up from port elevators to local grain elevators. Shortages of grain storage facilities are occurring in many areas and wet grain is compounding storage problems.
Many farmers are experiencing cash flow difficulties. Loans are now due that were to be paid by receipts from grain marketings. Agricultural banks are finding it difficult to meet the increased demand for loans and extensions because of slow deposit growth at many rural banks. Machinery and new equipment dealers are also feeling the impact of the embargo, as orders for new equipment are being canceled by farmers concerned about 1980 income prospects. Production yields may decrease in the 1980 crop year as farmers reduce fertilizer purchases and use more crop rotation.
The District's 1980 winter wheat crop production is heavily dependent upon weather conditions during the next two months. Wheat seedlings did not achieve enough growth during the fall to adequately protect the topsoil.
Lack of snow cover coupled with strong winds has led to erosion of topsoil in many areas and loss of some planted acreage. Moisture levels are sufficient at the present time due to recent rainfall. Snowfall is needed both for moisture and as protection against extremely cold weather.
Loan demand is moderate in most areas of the Tenth District. High lending rates and usury ceilings are limiting real estate, business, and automobile loans. However, growth in agricultural loans remains relatively strong, in part because the embargo on grain exports to the Soviet Union is causing increased demand for loans to finance inventories of wheat and corn. Lending rates have been relatively stable in the past month and are generally expected to remain stable for the next several weeks.
Most of the bankers contacted for the January survey report moderate or strong deposit growth. Money market CD's continue to account for most of the deposit growth. However, the 2 1/2-year floating rate CD's are also attracting substantial funds.