Beige Book Report: Minneapolis
October 13, 1976
The dominant economic event in the Ninth District continues to be the drought and its impact on the region's business activity. Reduced crop yields and a depressed livestock industry are manifestations of this situation, and concern now centers on their impact on income in late 1976 and into 1977. In contrast to agricultural developments, however, some strengthening is evident in other sectors of the region's economy. District retailers report some pickup in sales while auto sales and the tourist business continue to be good. District home building has been quite strong this year. With regard to price expectations, District firms do not foresee any excessive inflationary pressures developing and many indicate demand is not yet strong enough to justify large price increases.
The drought has affected the District economy in several ways. The most obvious is reduced yields on many crops, especially corn and soybeans. Though the District wheat crop was quite good, dry weather has impaired river navigation and some difficulty is being experienced in shipping wheat from this region. In addition, the drought has increased livestock marketings and this has helped push livestock prices well below year-earlier levels. Also, the drought conditions are currently retarding seeding of winter wheat, and if top soil moisture is not replenished this winter and next spring, reduced yields are likely again next year. Drought-induced shortages in cash farm receipts throughout the remainder of the year and into 1977 will hold down District personal income growth and restrict District business activity. In response to this situation, loans at District ag banks, Federal land banks, and production credit associations have already increased. However, bank liquidity is not yet a problem, though some lenders were voicing concern about loan repayments.
Retail sales were disappointing last quarter, with summer and back-to-school business below expectations. Nevertheless, business in this region was reported to be better than in many other parts of the country. More recently though, District retailers surveyed by this Bank stated that business has begun to improve, and they are quite optimistic about the outlook for fall and the holiday season. Although some unwanted inventory accumulation occurred this summer as sales slackened, retailers are generally satisfied with current inventory levels and are cautious about building inventories for the Christmas season.
District auto sales have been rising about in line with national sales increases. Full- and intermediate-sized autos are in particularly short supply in this area, although demand for these sizes has moderated slightly over the last quarter. Ford and Lincoln/Mercury dealers so far have had no problems satisfying consumer demands, despite the strike.
It was a good summer for the tourist business. Large resort owners throughout the District had a very profitable summer, with most reporting an increase in vacation traffic. However, the closing of this fall's hunting and fishing seasons in northern Minnesota, due to dryness and fire danger, is expected to significantly decrease that area's tourist and recreational spending.
Home building in the District has been particularly strong. Although residential building permits for the year are only 7 percent above 1975 compared to the 30 percent national growth, the District's decline in 1973-75 was not nearly as severe as the nation's. As a result, District housing unit authorizations are back to the 1972 rates, whereas the nation is still running 30 percent behind its 1972 pace. Availability of mortgage funds for private housing is good, loan commitments are at a high level, and liquidity at financial institutions is above year-earlier levels.
Home building may be showing strength, but other construction activity is weak. In dollar terms, both nonresidential and nonbuilding contract awards are off significantly from last year in the District.
Although prices are expected to continue climbing, District firms responding to a special survey do not foresee excessive price increases either for the goods they purchase or the products they sell. An economist for one major retailer headquartered in the Twin Cities indicated that his firm's prices on merchandise purchases have been quite stable and expects his firm to increase their prices about 5-1/2 to 6 percent next year. Another Twin City-based retailer's economist believes retail prices won't increase significantly until demand becomes firmer.
Two construction firms report moderate increases for most material costs, except for lumber and plywood, and don't look for that trend in price increases to change.
Most manufacturing prices are stable. Weak demand was holding price increases down for an apparel manufacturer and a major paper products manufacturer in our District. Also, three manufacturers of communication and computer equipment do not foresee excessive price increases. However, a publishing firm did indicate a steady increase in paper costs.
An area food producer said milk prices have dropped and expected them to stay low. Only seasonal increases are foreseen for poultry and eggs; however, some increase is foreseen in beef and pork prices by the end of the year.