October 31, 1990
Overview
The Tenth District economy continues to grow slowly. The
agricultural sector remains strong, supported by good fall crops and
high cattle prices. In the energy sector, drilling activity is
increasing at a modest pace. Retail sales--including new car sales--
are softening, however. Both retailers and manufacturers are trying
to trim inventories. Housing starts are down from a month ago as
mortgage rates remain steady to somewhat higher. Loan demand at
commercial banks was unchanged last month, despite decreases in the
demand for commercial and industrial loans and commercial real
estate loans.
Retail Sales
District retailers report flat to worsening sales over the past
three months. Most respondents are trimming inventories as sales are
expected to soften through the rest of the year. Prices, which have
been generally flat to slightly higher, are expected to stabilize in
coming months. New auto sales in most district states are down and
are expected to be flat to down during the rout of the year. Dealers
are generally trying to trim inventories, partly because of the cost
of floorplanning. Dealers are having trouble getting some potential
buyers financed because buyers are less qualified and lenders are
tightening credit standards.
Manufacturing
Purchasing agents report increasing input prices over the last three
months following a period of stable prices. The recent price
increases result partly from fuel surcharges pushing up
transportation costs. Respondents expect input prices to increase
further over the next three months. Several firms are reducing
stocks in light of higher than normal inventory levels. While few
firms are having difficulties obtaining inputs, some are concerned
about the future availability of petroleum derivatives.
Energy
Exploration and development activity in the district is increasing
but continues to lag behind the rate of oil price increases. The
district rig count rose from 282 in August to 305 in September,
bringing the third quarter average to 12 percent above last year's
level. Over the same four-quarter period, the price of crude oil
increased about one-third. Industry observers expect a stronger
increase in drilling activity only if oil prices remain above $25 a
barrel for a sustained period.
Housing Activity and Finance
Housing starts are generally down from last month. New home sales
across the district are mixed, while new home prices are generally
stable. Most builders expect starts and sales to remain flat or show
slight improvement in the months ahead, depending on developments in
interest rates and the Gulf crisis. Prices of building materials are
rising, but availability is not a problem.
Most district savings and loan respondents report net outflows of deposits over the last month and expect additional outflows in the near term. Mortgage demand is down and is expected to weaken further due to seasonal factors, a weaker economy, and stable to higher mortgage rates. Respondents exhibit considerable uncertainty about the future direction of mortgage rates.
Banking
Commercial bankers report that total loan demand was unchanged last
month. Increases in the demand for consumer loans, home mortgage
loans, and agricultural loans were offset by decreases in the demand
for commercial and industrial loans and commercial real estate
loans. Loan-to-deposit ratios are down slightly from both last month
and a year ago. Total deposits increased slightly over the past
month, with increases in demand deposits, IRA and Keogh accounts,
and small time and savings deposits. NOW accounts and large
certificates of deposit fell. Bankers report no major changes in
their prime rates or consumer lending rates and expect no changes in
the near future. Most respondents report they have not changed
credit standards over the past month. A few respondents, however,
have either tightened credit standards or are reviewing loan
applications more closely.
Agriculture
The fall harvest in much of the district has reached the halfway
point and is progressing on a normal schedule. Dryland corn and
soybean yields are generally about average, while irrigated crop
yields are above average in parts of Kansas and Nebraska. Milo
yields are variable.
Winter wheat planting is proceeding on schedule in most of the district, and the new wheat crop is developing nicely. But wheat planting was delayed by dry soil conditions in western Oklahoma and southern Kansas and by the late harvest of soybeans from double- cropped acreage in Missouri. Low wheat prices are expected to maintain a high rate of participation in the government price- support program despite anticipated cuts in support levels.
While lower crop prices and reduced support levels may restrain farm income growth, high cattle prices continue to support strong incomes for district cattle producers. In response to high prices, most district ranchers are choosing to sell feeder cattle instead of feeding them to heavier weights or retaining them for breeding herds. High fed cattle prices and low feedgrain prices are offsetting the effect of high feeder cattle prices on cattle feeding margins. As a result, most district feedlots are operating at capacity.