February 12, 1975
Reports continue to indicate a slowing in District economic activity. Even though the District has so far avoided large layoffs, labor market conditions have softened, and unemployment was expected to rise. Economic developments have also made District consumers hesitant to spend, and in January, many retailers had to cut prices to stimulate sales. Rebates have helped to spur District auto sales, and several directors felt tax rebates would help promote consumer spending. In general, business activity has been somewhat better in the District's rural areas than in the Minneapolis/St. Paul metropolitan area. The District's farm economy, however, is not as strong as a year ago. Bank directors cited several reasons for the recent declines in grain and soybean prices.
Although the District has escaped large layoffs, labor market conditions have undergone some softening. After the burst of layoffs reported in January's Redbook, no significant layoffs have occurred in the Minneapolis/St. Paul metropolitan area. However, help wanted advertising has fallen in the Twin Cities, and hiring has slowed. The policy of Twin Cities area businessmen was described as running a "tight ship" with a willingness to let work forces decline gradually. Also some shrinkage in middle management employment has occurred at some large firms which had laid off shop workers earlier.
Outside of the Minneapolis/St. Paul metropolitan area, several directors reported only seasonal unemployment increases. However, a Western Montana director stated that a third of his state's workers in the forest products industry were out of work. Layoffs have also occurred in the forest products industry in the Upper Peninsula of Michigan, but these employment declines are being offset by strength in that area's mining industry. In general, bank directors were looking for further weakening in District labor market conditions and additional rises in unemployment.
District retail sales in January reflected the weakening in District business activity. One director associated with the retail trade industry termed consumer spending in January as "soft." Another report indicated that Minneapolis/St. Paul area retailers have had to engage in price cutting and sales promotions in order to attract business. Promotions have helped to reduce inventories but have hurt retailers' profits. Retail spending has held up somewhat better outside of the Minneapolis/St. Paul metropolitan area. In the Upper Peninsula of Michigan, for example, tourist spending was up in January, and retail spending was quite good. Several other directors from rural areas also indicated that consumer spending had held up quite well in their areas. However, a Western Montana director described January retail spending in his area as "sad." With regard to the future, several directors indicated that a tax rebate would help to stimulate retail spending.
Auto rebates have helped to offset recent declines in District automobile sales. One major car manufacturer's sales in the Minneapolis/St. Paul metropolitan area during the last 2 weeks of January were up 85 percent from those reported in the previous 2 weeks. In addition, several directors stated that the rebates have stimulated auto sales in their areas. One interesting observation by two directors was that the rebates have helped to promote the sales of autos not eligible for rebates. Dealers in the Minneapolis/St. Paul metropolitan area hope that the rebates will bring their car inventories down to desired levels by the end of February. On the negative side there is a feeling that many car buyers are customers who would have bought in any case and are merely accelerating their purchases to take advantage of the cash rebate.
Bankers responding to our latest agricultural credit conditions survey reported that the District's farm economy was not as strong as a year ago. Bankers reported that some customers may be getting "into difficulty," but there were no reports of widespread bankruptcies. Many bankers stressed, though, that another year like 1974 could be disastrous. Although recent declines in grain and soybean prices have helped, livestock producers are still in a cost-price squeeze. Also, the early January blizzard caused heavy livestock losses in Minnesota and Eastern South Dakota. For many farmers, however, sales of 1974 crops will help bolster farm receipts in early 1975. Many bankers anticipate strong loan demand in 1975 to help cover farm operating costs. But increased deposit flow, primarily from crop sales, should provide the funds needed to meet loan demand, at least through the first quarter. Conditions will likely be tighter in the spring as seasonal borrowing needs pick up.
Grain and soybean prices have declined markedly, and bank directors cited several reasons for the falling prices. First, the cancellation of Russian and Chinese orders have lessened export demand for grain. Second, cattle feeders have cut back on their demand for feed grains. A Montana director, for example, indicated that many livestock producers are doing without feed grains. Third, recent price declines were attributed to larger January 1, 1975 carryovers than anticipated by market participants. Finally, users of grain products have reduced their buying in order to cut down accumulated inventories. These price developments have brought some relief to the District's livestock producing industry but imply some income reduction for those farmers still holding 1974 crops.