Beige Book Report: Minneapolis
August 11, 1976
Although bank directors in early August were generally favorable about the District's economy, other sources indicated some concern about the economy's performance. Many directors were optimistic about consumer spending for their areas, and District retail sales held up quite well, but an actual resurgence in consumer spending had not occurred. Also, our latest agricultural credit conditions survey indicated a weakening in farm earnings and a cutback in farm spending. Several directors reported a considerable amount of residential construction in their areas. Apartment construction and nonresidential construction, however, were not strong throughout the District. Looking toward fall, directors looked for economic policies—particularly those regarding agriculture—to play an important role in the Presidential campaign.
Although many directors reported favorable retail sales gains in recent weeks and were encouraged about the future, other information indicated that no resurgence in consumer spending had taken place. A director whose firm is a major producer of consumer goods stated that food and soft goods sales revived in June and July and expected business to be good this fall. Economists for two major retailers headquartered in the Minneapolis-St. Paul area were not so optimistic. They reported that, since their firms' sales had yet to revive, their outlook for the second half of this year was weakening. One economist said that he had not made a downward revision of his sales forecasts for the last half of 1976 but had less confidence in them than earlier. The other stated that his firm had forecast a 10 percent sales increase for the second half of 1976 but was currently anticipating only a 5 to 6 percent gain. And both firms adopted a more cautious position on inventories than they had earlier this year.
The results of our latest agricultural credit conditions survey, taken in late July, indicated that weakened farm earnings had tended to dampen agricultural spending. Many agricultural bankers appraised farm earnings as being somewhat worse in July than they had reported in April, and 51 percent of those surveyed reported recent farm earnings lower than a year before. In assessing the prospects for the next three months, bankers were slightly more pessimistic—55 percent expected lower farm earnings than last year.
The present crimp on earnings seems to stem largely from low grain prices, the continued withholding of 1975 crops from the market, and unprofitable cattle operations. Expectations that earnings could worsen have been generated by inadequate rainfall in much of the District's crop regions.
As might be expected from their assessment of farm earnings, agricultural bankers reported cutbacks in spending by farmers. Forty-one percent of the bankers responded that recent spending was lower than at the same time last year, and 48 percent expected spending in the coming three months to continue lower than a year before. These figures are substantial revisions of their responses in April, when only 31 percent reported low spending and 25 percent expected more low spending for the next quarter.
Most directors reported quite strong residential construction activity but mostly in just the single-family market. A director whose firm is a major producer of temperature controls cited information indicating that single-family construction was much stronger in the Ninth District than in the nation. He expected that strength to increase in the third quarter. With regard to apartment building, he mentioned a national association of home builders survey, which found a rather sharp second-quarter recovery in multifamily construction that was expected to gain momentum during the remainder of 1976 and into 1977. Also, a recent Twin Cities metropolitan area apartment survey reported that vacancy rates had declined to quite a low level, a usual sign that a pickup is due. However, many observers felt that rental rates were not high enough to justify new apartment construction in the District.
Reports from directors on building activity in their respective areas showed nonresidential construction weaker than residential construction. However, the director whose firm manufactures temperature controls believed nonresidential construction had begun to recover and should be very strong by 1977, up 10 to 15 percent in constant terms.
Directors agreed that economic policies would be a major part in this year's Presidential campaign. One director thought that policies regarding inflation would be important to either side because of the apparent voter concern in that area. Another expressed concern that spending promises made during the campaign could generate inflationary expectations.
A matter of concern to many directors is the particular role of agricultural policies in this year's campaign. A Montana director said that recent supply and demand conditions point toward a weakening in wheat prices—a weakening which would benefit the Democrat's argument for reimposition of price supports. That director also expected criticism of the Ford Administration for imposing agricultural export embargoes which are associated with falling prices.