The district economy continues to grow at midyear as predicted
in early 1999, and the Minneapolis Fed's regional forecasting models foresee a growing economy through 2000. However, employment growth
is slower than expected, agriculture performance is still weak and
banks, while still healthy, may experience a fall-off in profits.
Home building provides boost, but employment growth will slow
Increased home building has erupted as a big surprise in the economy.
Six months ago the model was showing a decline in authorized housing
units for three states. Now, in all states authorizations are anticipated
to exceed historic growth averages. Year-to-date housing units authorized
were up 62 percent through April compared to a year ago in South
Dakota, up 24 in North Dakota and up 22 percent in Minnesota.
Unlike home building, employment growth is predicted to finish
slower in 1999 than the model suggested six months ago. In January
the model expected a 2.9 percent increase in district nonfarm employment;
now a 1.6 percent increase is predicted.
District nonfarm employment growth for the three-month period
ending in May increased 1.2 percent in 1999 compared to 1998. Construction
employment picked up 6.4 percent, although the sector comprises
only 3 percent of district nonfarm employment. Employment in services
and retail trade outpaced the district average while manufacturing
employment slipped 0.6 percent, indicating that the composition
of the labor market continues to shift away from manufacturing industries
to service companies and retail stores. The model predicts that
district nonfarm employment will pick up in 2000 compared to 1999
in most areas, except Montana and North Dakota.
Employers hiring new workers are competing with a shrinking labor
pool. The district unemployment rate reached 3.1 percent in May,
the same rate as a year earlier. The model anticipates district
unemployment will decrease to 2.8 percent by year-end 1999, slightly
higher than January's prediction of 2.6 percent, and is expected
to drop to 2.5 by year-end 2000.
As the search for employees continues to prove difficult, district
employers are boosting wages to attract quality workers. Average
hourly earnings in manufacturing grew 3 percent in the three-month
period ending in May compared to a year earlier, and higher than
last year's 2.5 percent increase.
Despite strong economic growth and increases in wages, prices
remain subdued with some increases in home prices. During the first
quarter of 1999, housing prices grew over 5 percent in Minnesota,
Montana and North Dakota, but remained level in Wisconsin and decreased
slightly in South Dakota. Minneapolis/St. Paul's strong housing
market pushed prices up 10 percent in April compared to a year earlier.
Low prices, changes in market have farmers worried
Forecasts for farm commodity prices remain dismal. In addition,
government subsidies and other structural changes to the agriculture
industry are making farmers' decisions more complicated.
Increased demand for U.S. agriculture products will balance an
expected increase in supply of crops to keep prices close to this
year's depressed levels. The strengthening of the Asian economies
is likely to increase U.S. grain exports, while at home the use
of farm products for energy production is expected to increase domestic
demand. On the supply side, U.S. corn supplies are anticipated to
increase by about 3 percent in 1999. U.S. soybean supplies for 1999-2000
may reach record levels, exceeding 3 billion bushels for the first
time, and the second largest wheat inventories in the 1990s are
|Average Farm Prices
($ per bushel)
With the expected increases in supply matching or exceeding increases
in demand, agriculture crop prices are projected to remain at or
below their low 1998-99 levels, according to the U.S. Department
of Agriculture (USDA).
Meanwhile, the demand for meat products remains stable, while
the supply of meat products is mixed. According to the USDA, beef
production is likely to decline 6 to 7 percent in 2000, while pork
production in 2000 is forecast to be about 3 percent lower than
the 19.3 billion pounds expected this year.
Because of anticipated reductions in the supply of beef, fed-cattle
prices are expected to rise from the mid $60s per hundred pounds
in 1999 to the lower $70s per hundred pounds in 2000. Hog prices
should hold in the upper $30s per hundred pounds in 2000, little
changed from 1999.
Not only does the outlook for prices have farmers worried, but
they are also concerned about the continued impact of the 1996 farm
bill, which established a seven-year transition period to ease farmers
from the old subsidy regime to a market-oriented farm policy. This
will force farmers to respond more to market forces than to government
subsidies. In addition, farmers are uncertain about how much special
aid they will receive from the federal government this year. The
poor outlook is also reflected in the most recent agricultural
There is some good news. New developments in genetics and farm
production technologies will allow the farmer to produce more efficiently
over the long term. In addition, price contracts and crop insurance
are available to help farmers reduce their risk as a result of market
disruptions and natural disasters.
Stellar bank profits may be challenged
Commercial banks registered another strong year in 1998. Profitability
as measured by pretax return on average assets was 1.91 percent
during 1998, down marginally from last year's record high of 1.95
percent. Strong asset quality, continued high levels of fee and
service charge income, and low overhead expenses helped Ninth District
banks continue the streak of robust performances witnessed over
the past eight years.
However, there are challenges to banks' stellar record of profits.
Bank profits have actually been declining since the middle of last
year and fell to 1.76 percent during the first quarter of 1999,
the lowest level since 1992. The downturn in profitability can be
traced to a persistent tightening of banks' net interest margins
(the spread between the interest rates at which banks borrow and
lend) which have been falling steadily over the last two years.
With overhead expenses near historic lows and growth in noninterest
income starting to stall, bank profits are likely to come under
additional pressure during the rest of the year.
The asset quality of district banks as measured by the level of
defaulted and past-due loans still remains strong. Yet, there are
also signs of potential weaknesses in certain areas. Losses on consumer
loans, which constitute a relatively small percentage of the district's
total loans, have been rising steadily and were 20 percent higher
in the first quarter of 1999 when compared with last year's first
quarter. Credit card loans showed significant deterioration during
the first quarter with losses more than doubling to 3.4 percent
of average credit card loans. Stress from the district's weakening
agriculture sector is also beginning to affect banks, as past-due
agriculture loans rose to their highest level since 1993.