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Beige Book Report: Kansas City

June 19, 1996

Overview
The district economy continued to grow at a moderate pace during the past month. Retail sales, manufacturing, and construction activity strengthened, while activity in the energy industry increased slightly. Farm income prospects remained weak, however, due to a poor wheat crop and low cattle prices. Labor markets remained tight for both entry-level and skilled workers, but wages generally held steady. Prices for some materials used in manufacturing and construction increased slightly, but retail prices held steady.

Retail Sales
Retailers report sales increased modestly during the past month and remained above last year's level. Sales of men's apparel were strong, although sales of home furnishings were weak. Retailers generally expect sales to strengthen during the next few months. While retailers indicate satisfaction with their current inventory levels, most plan to increase inventory purchases through the remainder of the year. Automobile dealers report sales increased modestly last month. The dealers expect further sales gains in the months ahead and note that demand for light trucks and sport utility vehicles exceeds the available supply.

Manufacturing
Manufacturers continued to operate at high rates of capacity use. None of the manufacturers, though, report production bottlenecks due to capacity constraints. Manufacturing materials were readily available, and lead times for obtaining materials were unchanged. Most manufacturers were satisfied with inventory levels, although a few were trimming inventories of finished goods. A late- April survey of district manufacturers indicated the pace of manufacturing activity had strengthened since earlier in the year, and manufacturers expected further gains in coming months.

Housing
Most builders report housing starts increased last month and remained above last year's level. Most of the gains were in single-family construction, with smaller gains in multifamily units. Builders generally expect homebuilding activity to remain brisk during the summer months. Sales of new homes increased slightly last month and remained above last year's pace. Builders were satisfied with current inventories of unsold homes, which were at a normal level for the season. Prices of new homes last month held steady at a level somewhat higher than last year's. Construction materials are readily available, and builders expect little change in availability or delivery times in the next few months. Builders expect lumber prices to increase further, however, before leveling off later in the year. Mortgage lenders expect mortgage demand to remain strong throughout the summer.

Banking
Loans generally grew faster than deposits at respondent banks last month, slightly pushing up loan-deposit ratios. Most banks report gains in commercial and industrial loans, consumer loans, home mortgage loans, home equity loans, and commercial real estate loans. Residential construction loans held steady, and agricultural loans declined. Security investments were down slightly.

Most banks report a slight increase in total deposits, with gains in MMDAs, large CDs, and small time and savings deposits. Demand deposits, NOW accounts, and IRA and Keogh accounts held steady.

None of the respondent banks changed their prime rate last month, and none expect a change in the near future. Most banks also held their consumer lending rates steady and anticipate no changes in the near term. Lending standards were generally unchanged.

Energy
Activity in the district energy industry increased slightly in May, despite declining energy prices. Prices of crude oil and natural gas fell sharply in May but remained well above last year's level. The number of drilling rigs operating in the district at the end of the month increased slightly to a level about 9 percent above a year ago.

Agriculture
Recent wet weather has improved prospects for district crop production. The rains generally arrived too late to salvage the wheat crop in Kansas and Oklahoma, where farmers may harvest less than half a normal crop. But the rains will likely boost wheat yields in the northern half of the district. The additional soil moisture also improves prospects for milo and other crops some farmers will plant to replace failed wheat fields.

The district cattle industry remains trapped between low cattle prices and high feed costs. As a result, district feedlots have trimmed production schedules, and many are operating at less than full capacity. With demand for young feeder cattle down, district ranchers are reducing the size of breeding herds. Few ranchers are exiting the industry altogether, but many are trimming herds by aggressively culling lower quality cows.

High crop prices should offset crop losses for many district farmers and boost incomes for those who harvest normal or near normal crops. Nevertheless, with a poor wheat crop in prospect and losses accumulating in the cattle industry, agricultural bankers expect a sizable increase in the number of farm loans to be refinanced this fall. Overall, some erosion in equity is likely this year for many district farmers and ranchers, but strong balance sheets should enable most to survive the tough year.

Wages and Prices
Labor markets remain tight in much of the district, with employers reporting tight supplies of both entry- level and skilled labor. Some retailers report a shortage in both the quantity and the quality of available workers, but wages have continued to hold steady since a normal year-end increase. Manufacturers report rising prices for some materials, especially petrochemicals, and builders report rising lumber prices. Retail prices held steady last month but remained somewhat higher than last year's level. Most retailers expect prices to remain stable in the months ahead.