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Solid growth expected for district economy

2004 Mid-Year Ninth District Economic Forecast

July 1, 2004


Toby Madden Regional Economist
Rob Grunewald Regional Economic Analyst
Solid growth expected for district economy

The district economy is expected to grow sturdily in the second half of 2004 and during 2005, according to the Minneapolis Fed's forecast models. Even though gasoline, commodity and materials prices have recently jumped (see related stories on natural resources and gasoline prices), the district economy seems to be weathering the bumps in prices, as indicated by solid growth in retail sales, construction and manufacturing. Hiring is also picking up as companies are facing increased demand. The overall outlook for agriculture is favorable with strong commodity prices and generally good growing conditions, except for some drought-stricken areas.

Recent price increases have economists keeping an eye on major price gauges. The consumer price index increased 3.1 percent in May compared with a year ago. Excluding the more volatile food and energy components of the CPI, other prices were up 1.7 percent, a relatively mild gain in prices.

However, input prices have been on the rise. Wholesale prices, as measured by the producer price index, were up 5 percent in May relative to a year ago. Intermediate materials and supplies, and crude products for further processing were up 7 percent and 22 percent, respectively. Energy, commodities and building products have all posted significant price gains during the past few months.

Some people are concerned that higher gas prices may deter summer travel and reduce income available for consumer spending. Furthermore, higher wholesale costs place pressure on profit margins or lead to surcharges. Despite these price developments, retail spending and the construction and manufacturing sectors have shown positive growth.

U.S. retail and food services sales were up 8 percent (not adjusted for inflation) in April compared with a year ago. An informal survey of contacts at district malls indicates that traffic and sales were solid in May. In addition, bookings for summer travelers are at or above last year, according to discussions with district tourism officials. A survey of resort, hotel and campground operators conducted by the Minnesota Office of Tourism showed that over 45 percent of respondents expect higher revenue during the summer months; 23 percent expect decreases.

Despite higher costs for building materials and borrowing costs for buyers, residential construction has continued to expand. While mortgage rates have recently increased (but remain low relative to historical levels), housing units authorized in district states climbed 6 percent for the three-month period ending in April compared with a year ago. The Minneapolis Fed's forecast models point toward continued growth in home building into 2005.

Commercial construction activity remains slow, but recent improvements were noted. Contracts awarded for large construction projects decreased 6 percent for the three-month period ending in April compared with a year ago, as reported by the Construction Bulletin. However, according to an informal e-mail survey conducted by the Associated General Contractors of America in May, most builders surveyed in the district claimed they have seen steady to increasing business since last year.

District manufacturing activity has shown signs of expansion. Manufacturing employment levels are slightly higher than a year ago, while new orders and production are picking up. Creighton University's Business Condition Index for Minnesota and the Dakotas showed solid growth in May. The Index indicates that the manufacturing sector in Minnesota has grown steadily since June 2003, after more than two years of contraction. Meanwhile, North and South Dakota have experienced only a few months of contraction since 2001, with particularly strong growth in 2004.

District employment picks up

Solid activity in several sectors of the district economy has helped spur gains in employment. In April seasonally adjusted nonfarm employment in the district showed its largest year-over-year (1.3 percent) and previous month (0.5 percent from March) gains since January 2001 and November 1994, respectively.

Chart: Nonfarm Employment, April 2004

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

Industries with the largest increases in April compared with a year ago include construction (4.4 percent), leisure and hospitality (2.6 percent), professional and business services (2.4 percent) and education and health services (2.3 percent). In contrast, industries posting declines include other services (1.4 percent) and government (1.5 percent), with reductions noted across staffing levels for federal, state and local employees.

The Minneapolis Fed's forecast models predict growth in district employment in 2004 and 2005, along with slight decreases in unemployment rates.

Ag outlook favorable

After a solid year of agricultural revenues in 2003, the first half of 2004 brought strong prices for many major district agricultural products, including record prices for some dairy goods. Crops emerged quickly this year due to early plantings and timely rainfall. However, about half of the pasture lands in Montana remained in very poor to poor condition due to lack of moisture. The price outlook for 2004 and 2005 is encouraging for livestock, crop and dairy producers, but continued drought across western portions of the district is a major concern.

Respondents to the Minneapolis Fed's first quarter (March) agricultural credit conditions survey were optimistic about farm profits and land prices. However, concerns about higher input costs have farmers on alert. Fertilizer costs are up 7 percent from a year ago, and diesel fuel is 17 percent more expensive. Meanwhile, drought continues into a sixth year as 67 percent of Montana's subsoil moisture in early June was rated as short or very short compared with 37 percent a year earlier.

The outlook for agricultural income is strong due to solid prices. As shown in the table, estimated 2004 and projected 2005 prices for corn, soybeans, milk and hogs are higher than 2003. Meanwhile, prices for wheat and cattle are expected to remain at strong levels through 2005. If the weather is cooperative and input prices do not further accelerate, district agricultural producers should have another excellent year.

  2001/2002 2002/2003 Estimated 2003/2004 Projected 2004/2005
(Current $ per bushel)      
Estimated 2004
(Current $ per cwt)
All Milk
Choice Steers
Barrows & Gilts

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