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Beige Book Report: Kansas City

March 15, 1989

Overview
Slow growth continues in the Tenth District economy. Although retail sales are improving, new car sales are mixed. Manufacturers report significantly higher input prices and strains on capacity. District farmers and ranchers are generally in relatively good financial condition after strong income growth last year. Housing activity is little changed from a year ago, however, and home mortgage demand is steady to lower as rates trend higher. Uncertainty about world oil production and prices continues to restrict improvement in the energy sector. Loan demand at commercial banks remains relatively stable, while deposit growth is somewhat weaker.

Retail Sales
Most respondents report current-dollar sales slightly ahead of a year ago, and all respondents report improving sales over the last three months. Promotional activity, in general, is at a normal level. Prices have been relatively steady. All respondents are satisfied with their inventories, which for the most part remain lean. Retailers expect sales to hold at current levels.

Automobile Sales
Sales results have been mixed, with some respondents reporting increases over the past month and others reporting decreases. Adequate dealer and customer financing is generally available. Most dealers report satisfactory inventory levels, although some desire a slight inventory reduction. In general, dealers expect 1999 sales to be near 1988 levels.

Manufacturing
Most respondents indicate input prices are up relative to a year ago and are significantly higher than three months ago. Price increases are expected to continue the rest of the year. Despite some increases in lead times, firms report few difficulties getting materials and do not anticipate future problems. Inventory levels are generally satisfactory, though some firms plan increases. Plants are operating close to full capacity, but no bottlenecks or labor shortages are reported.

Energy
Despite the firming of oil prices since the beginning of the year, the district's energy industry shows few signs of improvement. Uncertainty about OPEC's resolve to rein in production has held down drilling activity in the region and nationwide. The average number of active drilling rigs in the district fell from 246 in January to 219 in February, a fifth below the average of one year ago.

Housing Activity and Finance
District housing activity is generally unchanged from a year ago. Most homebuilders report housing starts were stronger in January than in December, in large part due to good weather conditions. Single-family construction continues to be such stronger than multi- family construction. New home sales and prices generally have been steady. Most respondents expect steady or improved housing activity in the coming months.

Most respondents from district savings and loan institutions report a net outflow of savings deposits over the last month. In almost all cases, net deposit flows were less favorable than a year ago but either unchanged or improved from January. Most respondents expect net outflows of deposits to continue over the near term. Almost all respondents noted adverse reactions of depositors to the recent publicity regarding the savings and loan industry. Mortgage demand is steady to lower. Nearly all respondents report mortgage rates are trending higher. Respondents expect rates to be steady to slightly higher in the coming months.

Banking
The majority of district banks surveyed report little change in loan demand over the past month. Commercial real estate loans were down slightly, while consumer real estate loans increased. Responses regarding consumer loans and commercial and industrial loans were mixed. As the survey was taken, virtually all banks were in the process of making their second 50 basis point increase in their prime rate within a month. Deposits at district banks were constant to down slightly over the past month. All categories of transaction accounts showed weakness, and remaining deposit categories were essentially unchanged.

Agriculture
Most district farmers and ranchers withstood last year's drought and entered 1989 in relatively solid financial condition. Farmland values continued a steady rise toward yearend and are now 16 percent above the lows recorded in late 1986. Results of spring credit reviews by district agricultural bankers reflect generally high farm incomes in 1988. Strong incomes have allowed district farmers and ranchers to pay down debt and replace worn farm machinery. Bankers throughout the district report agricultural loan demand is generally stronger this spring than in recent years. The greater financing requirements of a larger planted acreage and smaller advance deficiency payments are contributing to increased demand for operating credit.

Much of the district's winter wheat crop is under weather-related stress. Warm early winter temperatures and a lack of snow cover left the crop vulnerable to subsequent cold weather, but the extent of damage is not yet known. Some areas of the district have recently received beneficial rains, but subsoil moisture reserves remain below normal. Additional rainfall is needed to ensure development of the crop through the remainder of the growing season.

Despite continued high cattle prices, little expansion has occurred in district cattle herds. Operators are generally maintaining herds at current levels. Inadequate wheat pasture in some areas of the district and high feed prices have discouraged ranchers from enlarging herds.