April 15, 1980
The Tenth District economy is feeling the squeeze of tighter credit and activity appears to be weakening. Retail sales, adjusted for inflation, dropped during the first quarter of 1980 from their year-earlier pace. Inventories in manufacturing and in retailing are reported under tight control. Purchasing agents are finding materials readily available, but at ever-rising prices. Farmers are having difficulty getting credit at terms they can afford. Bankers worry about serious credit problems in the agricultural sector this spring and summer. Bank loan demand has weakened considerably since last month, probably because of the higher cost of borrowing and the more restrictive credit practices. Demand deposit growth continues strong.
Retailers report that dollar sales of their department stores held up in March, as compared to the volume a year earlier, after deteriorating in February. For the first quarter as a whole, sales in real terms were down from a year ago in most stores. Clothing has been selling fairly well, while sales of durable goods have been weak. Some retailers now say they are cutting profit margins instead of passing on all cost increases. Most store managers are still trimming inventories, although they do not regard stocks as excessively high.
Purchasing agents report input prices have risen 10 percent or more over the past twelve months. Most buyers note sizable price increases in recent months, and only a few purchasers expect a let-up in the price hikes as the year progresses. No widespread shortages of materials are evident and lead times are not expected to lengthen much, except possibly in the case of some defense-related inputs. While very few firms report much excess plant capacity, some note a loosening of the labor market in their metropolitan areas. Purchasing agents, pessimistic in their economic outlook and burdened with high interest rates, plan to maintain low levels of materials inventories. Desired inventory reductions have already been achieved by many companies, which have in some cases enjoyed stronger-than-expected sales.
The agricultural credit conditions in the Tenth District remain tight with scattered fund shortages occurring in Nebraska, Kansas, and Wyoming at some smaller agricultural banks. Slow deposit growth and strong farm loan demand are resulting in relatively high loan-to-deposit (L/D) ratios at District agricultural banks. Credit availability in Nebraska is particularly tight with over three-fourths of the agricultural banks reporting L/D ratios of 70 percent or more.
Some bankers cite the 6-9 percent credit growth guidelines as contributing to shortages, since all their loan demand qualifies for special treatment under the controls. A few large regional correspondent banks, important in agricultural lending, indicate that they may have some difficulty servicing peak correspondent loan demand this year while abiding by the 9 percent ceiling on bank credit growth.
Alternative sources of credit for agricultural producers may be somewhat limited this spring. Production Credit Associations (PCA) are finding that many new requests for credit do not meet their credit standards. Additionally, both PCAs and Federal Land Banks are experiencing loan processing delays which may affect the availability of credit during critical production periods. Merchant and dealer credit is also more difficult to obtain this year on all agricultural inputs.
Many bankers are very concerned over farmers' ability to repay 1980 lines of credit. An increase in planting costs of 20-25 percent combined with declining farm product prices pave the way for significantly lower net farm income in 1980. Within the District, the heaviest burden of declining prices will be carried by cattle feeders and pork producers.
A survey of bankers in the Tenth District indicates substantially weaker loan demand as compared with last month. Most bankers cite increased customer resistance to the higher costs of borrowing. Real estate and agricultural lending has been particularly hard hit, with several bankers foreseeing serious problems in the agricultural sector over the next six months. While there is some demand for consumer loans, banks have tightened terms of lending, particularly in the credit card area. Some banks report restricting the availability of credit cards as well as plans to raise minimum payments and impose user fees. A few banks report continuing strength in the commercial and industrial area from ongoing energy-related projects. Even in those parts of the District where energy and mining play important roles, however, bankers are no longer optimistic about being insulated from a deteriorating economy. In addition to raising the prime rate, several banks report requiring higher compensating balances. In the consumer area, there is increased concern over the quality of loans being made as well as some evidence of a rising delinquency rate.
On the positive side, most bankers report stable to stronger demand deposit growth. Growth in money market certificates and large CD's continue at a rapid rate. However, passbook savings accounts are still declining.