fedgazette

District economy to expand in 2005

Ninth District Economic Forecast

Rob Grunewald - Regional Economic Analyst
Toby Madden - Regional Economist

Published January 1, 2005  |  January 2005 issue

Results of the Minneapolis Fed's business outlook poll and statistical forecasting models point to a growing Ninth District economy in 2005. More than 85 percent of respondents to the business outlook poll are optimistic about their community's economic prospects. In addition, the Minneapolis Fed's statistical models show growth in employment, personal income and home building in 2005 (see forecasts).

During 2004, employment growth in the district returned to pre-recession downturn levels, a trend predicted to continue in 2005. Gains in wages are expected to remain modest, while pricing pressure on energy and some materials for manufacturing and construction will likely persist in 2005. Strong prices and large harvests provided district agriculture producers with solid revenues in 2004; the outlook for 2005 is upbeat as prices are expected to remain healthy.

Chart: District Nonfarm Employment, October 2004

Includes repair and maintenance, personal and laundry services, and religious, grantmaking, civic and professional and similar organizations.
Source: Bureau of Labor Statistics

Employment growth is steady

In October 2004, district nonfarm employment levels returned to about where they were in October 2000, just before the beginning of the economic downturn. Minnesota is the only state where employment is just slightly below October 2000 levels; other district states are above the mark.

Chart: Nofarm Employment Percent Change, October 2003-October 2004

While several industries posted job growth during the four-year period, manufacturing employment remains down from four years ago. From October 2000 to October 2003, over 150,000 net manufacturing jobs were lost in the district. However, during the past year about 25,800 jobs were added, a 2.8 percent increase. Only employment in natural resources and mining (5.4 percent) and professional services (3.4 percent) showed stronger increases from October 2003 to October 2004; the only sectors posting decreases were government (-0.6 percent) and other services (-0.2 percent). Moderate job growth is expected in most areas of the district in 2005, while unemployment rates will remain about the same (see forecasts).

Wage increases were muted in 2004. District manufacturing wages grew 2.9 percent during the three-month period ended in October, compared with a year ago. Respondents to the business outlook poll expect wages across all sectors to grow moderately: 78 percent predict 2 percent to 3 percent growth in 2005. Wage increases were soft in part due to higher benefit costs, particularly health insurance. However, modest wage growth is also an indication that district labor markets are not as tight as they were during the late 1990s, when manufacturing wage growth reached 4 percent annually.

Price pressures on materials and energy

During 2004, prices for construction and manufacturing materials and energy products grew significantly. This led to an increase of 4.4 percent in wholesale prices for finished goods nationwide in October compared with a year ago. However, prices were higher still further up the production line, as intermediate materials, supplies and components were up 9 percent and crude materials were up 15.7 percent during the same time period. However, increases in the consumer price index have been more modest. In October the CPI was 3.2 percent over a year earlier, and only 2 percent higher when removing the more volatile food and energy sectors.

On one hand, higher energy and materials costs and the weaker dollar have created pressures to raise consumer prices, but on the other hand, strong global competition among sellers of consumer goods and modest growth in wages combined with strong productivity have worked in part to counter these pressures. A majority of business poll respondents from retail, manufacturing, construction and agriculture indicated they expect to raise prices for their products in 2005.

Housing construction slows; commercial construction improves

Housing units authorized have slowed slightly during the past year. October year-to-date authorization levels in district states were 0.5 percent above the same period last year, after increasing over 6 percent during 2003 compared with 2002. While mortgage interest rates crawled higher, October rates for 30-year conventional mortgages averaged 5.72 percent compared with 5.45 percent in March, still well below historical averages. The forecast models point toward increases in housing units authorized in 2005.

Meanwhile, the slow commercial construction sector is showing signs of improvement. While retail construction has remained solid over the past four years, office building construction has been slow, particularly in the Minneapolis-St. Paul area, due to relatively high vacancy rates. However, contracts awarded for private building projects in Minnesota and the Dakotas were up 3.5 percent in October year to date from last year, according to the Construction Bulletin. Contracts awarded for all large construction projects, including public buildings, roads and sewers, were up 2 percent.

2004 great for agriculture; 2005 outlook upbeat

High prices and large harvests provided Ninth Federal Reserve District producers solid revenues in 2004. In addition, substantial rains reduced the area of drought. However, higher input costs put a damper on record revenues. The outlook for 2005 is upbeat, as prices are expected to remain healthy.

Even with a cool summer, district farmers produced some record harvests and received strong prices in 2004. Districtwide, farmers enjoyed an increase in total production of corn, soybeans, small grains and peas in 2004 from 2003. Nevertheless, district sugar production decreased from 2003. Average prices increased in 2004 for corn (4 percent) and soybeans (33 percent) and decreased for wheat (4 percent) compared with 2003. Input costs, particularly energy and labor, increased. In addition, the high moisture content of the corn crop required many farmers to dry the grain with expensive propane.

Meanwhile, dairy and hog farmers enjoyed higher prices for their products. Average 2004 hog and milk prices rose 34 percent and 27 percent, respectively, from 2003. Cattle prices remained stable at healthy levels. Meanwhile cattle on feed declined slightly; for example, South Dakota feedlots noted a 1 percent decrease in October 2004 compared with October 2003.

The outlook for agricultural income is unclear as prices are mixed. The U.S. Department of Agriculture has forecast 2005 prices to drop for corn, soybeans and milk compared with 2004. Meanwhile prices for wheat and cattle are expected to remain strong. Ranchers expect higher profits with the decrease in feed costs. However, with any projections in agriculture, unforeseen events can tip the scales. Some farmers and ranchers are cautious in their predictions for 2005, as they look at high fuel and other input costs, and continuing drought in parts of the district.

AVERAGE FARM PRICES
  2001/
2002
2002/
2003
Estimated 2003/2004 Projected 2004/2005
(Current $ per bushel)

 

 

 

Corn
1.97
2.32
2.42
1.70-2.10
Soybean
4.38
5.53
7.34
4.60-5.30
Wheat
2.78
3.56
3.40
3.20-3.50
  2002 2003 Estimated 2004 Projected
2005

(Current $ per cwt)

     
All Milk
12.11
12.52
15.95-16.05
13.85-14.65
Choice Steers
67.04
84.69
84.60
82.00-88.00
Barrows & Gilts
34.92
39.45
52.79
47.00-51.00

Source:
U.S. Department of Agriculture, estimates as of December 2004.


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