June 11, 1975
District business activity has improved in recent weeks, and Bank directors were able to cite evidence that the recession appears to be bottoming out in their regions. The decline in district labor demand appears to be leveling off, and in some areas job openings have increased. Several directors reported a recent improvement in consumer loan demand, and district business loan demand has been stronger than nationally. Nevertheless, manufacturing sales were expected to remain weak through the end of 1975.
In commenting on current business activity, directors cited various reasons why they felt that the recession seems to be bottoming out in their areas or industries. A Twin Cities area banker stated that his bank's corporate customers reported that business activity has picked up in recent weeks. In the Minneapolis-St. Paul area, substantial progress has been made in correcting inventories, and many companies have achieved lower than desired inventory levels. A director whose firm produces consumer food products indicated that his industry's sales prospects have improved in recent weeks. Business in one director's community took a definite turn for the better in May, and a major building products manufacturer in the area has started to recall workers. An Upper Peninsula director reported that a major paper manufacturer recently experienced an increase in orders, but business continues off for the copper industry. Tax rebates have stimulated consumer spending in another director's area, but manufacturing has continued weak. In western South Dakota, preliminary evidence points toward a good tourist season. In the agricultural sector, spring planting has nearly been completed, and moisture conditions are generally satisfactory; if conditions continue to be favorable, large crops are probable this fall.
Despite these favorable comments, the results of our latest Industrial Expectations Survey, taken in early May, indicated that manufacturers were feeling the impact of the recession and were not optimistic about their future sales prospects. District manufacturing sales were up 4.5 percent from a year earlier in the first quarter, and they are expected to increase only 1.1 percent in the current quarter. In February, respondents had anticipated a much larger sales advance of about 9 percent in both the first and second quarters. District manufacturers do not foresee any substantial recovery during the last half of this year, as no sales growth is expected in the third quarter and as only a 4.0 percent sales advance is anticipated in the fourth quarter.
District labor market conditions have improved, and several directors indicated that the demand for labor has recently increased in their areas. In the Minneapolis-St. Paul metropolitan area, there have been few, if any, recent layoffs of workers. Another Twin Cities director felt that firms would have to start rebuilding inventories and step up production, which, in his opinion, would cut the layoff rate and spur the rehiring of workers. Several directors reported that job openings had increased in areas outside of the Twin Cities metropolitan area and that some firms were recalling workers. However, no directors foresaw any significant decline in their area's unemployment. Recent initial claims data indicated that district joblessness will continue high.
Directors' comments on loan demand also reflect their views about the recent improvement in business activity. Several directors characterized consumer loan demand at banks in their areas as good. Depressed auto sales, however, have held down consumer loans in some areas. District banks have not significantly changed the terms or interest rates for consumer lending.
Business loan demand has been stronger in the district than in the nation, and directors characterized business loan demand as being either flat, firm, or good. The opinion was expressed that a turnaround in the economy will probably bring forth some increase in business credit demands during the second half of this year. Whether or not this will show up in bank loans, however, depends upon the competition from alternative credit markets. Currently, the wide spread between the prime rate and the commercial paper rate makes it attractive for borrowers to avoid banks. Some companies which had been unable to sell commercial paper during the 1974 credit crunch have now reentered the market. The Bank's directors, in general, reported little change in bank credit requirements or loan terms. One view, however, was that lending policies on business loans in the Twin Cities became more restrictive in the past three months. Also, strict constraints remain on the management of loan commitments.