April 11, 1973
Economic activity so far this year has matched expectations, and bank directors look for business to remain strong for the rest of 1973. District retailers report sizable first quarter sales gains and expect business to remain good. District labor markets have tightened considerably in recent months and some manpower shortages are beginning to emerge. One director looks for only a modest expansion in livestock production in his area this year, while another anticipates a noticeable increase. Most directors foresee some further advances in interest rates and view the two-tier prime rate proposal favorably.
According to our directors, no noticeable erosion of consumers' confidence has occurred. Businessmen generally look for business to remain strong throughout 1973, but they are uncertain about the economic outlook for 1974. Inflation is generally considered this year's major threat to the district's economy. A primary concern in the district's agriculture areas, however, is that the Administration's efforts to curb food price increases could reduce farm income.
A telephone survey of large district department/discount stores and automobile sales managers indicates that district retail sales remained strong in the first quarter of 1973. Large retailers with outlets located primarily in the Minneapolis/St. Paul metropolitan area reported first quarter sales gains ranging from 8 to 12 percent over the first quarter of 1972. Year-over-year increases in the number of autos and trucks sold during the January-February period ranged from 9 percent to 28 percent among the regional automobile sales managers surveyed. District retailers and automobile sales managers expect brisk sales growth in the months ahead. Retailers state that a late Easter this year should boost second quarter sales gains, and both retailers and automobile sales managers are counting on the Federal income tax refunds to have a noticeable impact on sales.
The district's unemployment rate has declined approximately one percentage point since last fall and some labor shortages are starting to emerge. Minnesota job vacancies in manufacturing, for example, in early 1973 were three times as great as they were a year ago. Two directors find that skilled labor is becoming difficult to hire, but unskilled workers are plentiful. Another director states that fewer workers are applying for jobs at his firm's plants. A South Dakota director reports shortages of both skilled and unskilled workers and states that a lack of farm laborers could hurt agricultural production in his state.
Directors' views concerning livestock production in 1973 vary. A South Dakota director looks for only a modest expansion in livestock production for several reasons. Older farmers in his area would rather remain liquid than tie up funds in livestock production, while younger farmers have difficulty obtaining necessary capital. Uncertainties surrounding pollution control requirements in South Dakota also mean that farmers are unclear about the costs involved in expanding livestock production. Furthermore, current market conditions have dampened farmers' enthusiasm to expand their production, and memories of hog overproduction in 1970 and 1971 tend to make farmers cautious. On the other hand, a Montana director looks for a sizable increase in his area's livestock production.
Although directors' responses vary, most agree that commercial bank interest rates will climb further. Commercial bankers in one director' s area believe that interest rates could advance another one-quarter to one-half of a percentage point. One director thinks that interest rates won't peak until late summer or early fall, and another that the Committee on Interest and Dividends will largely determine future interest rate movements. One director expects interest rates to remain at their present levels.
Some directors endorse a two-tier prime rate, while others express reservations. One twin cities area director indicates that his bank has already implemented a two-tier prime rate and is charging 6 3/4 percent on loans over $500,000 and 6 1/2 percent on loans under that amount. Another director feels that the two-tier prime rate is a "great thing" because it provides a break for the small businessmen. In implementing a two-tier prime rate, two directors are concerned about defining "large" and "small" businesses and believe the community's size should be a factor in determining whether a business is considered large or small. One director also wonders how loans already tied to the prime rate will be handled under a two-tier scheme.