February 9, 1977
Weather continues to dominate district economic activity in early 1977. Cold weather has sharply reduced district fuel supplies, but the region has been spared the severe economic disruptions experienced in many Eastern states. Last year's dry weather and the prospects of continued drought are curbing farm-related economic activity. However, some improvement in district nonagricultural economic activity is indicated, and the outlook is for modest improvement.
In contrast to the eastern part of the United States, fuel shortages here have not seriously disrupted business activity. Fuel supplies in the district are at precariously low levels, and the public has been strongly urged to conserve energy. Recent conservation measures appear to have been effective, and some rebuilding of fuel stocks has occurred. Also, this region is generally better equipped to handle cold weather problems than many other parts of the country. Consequently, the Directors of this Bank believe that fuel supplies should be adequate for the remainder of this winter. Concern is expressed, though, about how the emergency legislation to allocate natural gas might affect this region.
Economic activity in the Ninth District continues to be affected by last year's drought, and concern is great regarding this year's moisture conditions. In January, 86 percent of the bankers responding to our latest Agricultural Credit Conditions Survey reported farm earnings down from a year ago. Furthermore, 78 percent of the respondents expected earnings during the next three months to be down from last-year. Farm income is affected by low production in the drought-stricken areas of Minnesota and South Dakota, but the situation is not much better in the remainder of the district, with low farm commodity prices making most operations only marginally profitable at best. Besides low beef and milk prices, cattle and dairy operators in the drought areas face the additional problem of increased production costs through the necessity of buying feed and hay at this time.
In response to their lower incomes, district farmers are cutting spending to a minimum. In January, 73 percent of the bankers responding to the Agricultural Credit Conditions Survey reported farm spending at a lower level than last year, and 75 percent expected spending to be below year-earlier levels during the next three months. This Bank's Directors also report that spending in many agricultural communities has softened, and farm implement dealers, in particular, are experiencing a sharp curtailment in business.
According to this Bank's Directors, much of the shortfall in farm-related spending in the first half of 1977 may be due to a reduction in confidence rather than in income. Though many farmers still have sizable inventories of grain which could be sold to supplement incomes in 1977, they have been reluctant to sell due to low prices and the feeling that these inventories provide some security against the continuing drought conditions. In addition, many farmers are hesitant to order even the most necessary of production inputs (such as chemicals and fertilizers) for the spring, fearing that the drought will continue.
Depressed earnings are increasing farmers' needs for refinancing. Greater-than-usual demand to refinance farm debt is observed by 69 percent of the bankers responding to the January survey (up from 47 percent in October), and 79 percent expect higher refinancing demands in the coming quarter. In addition, bankers remain somewhat pessimistic regarding the ability of farmers to continue payments on existing loans. Among those responding, 75 percent characterize the current rate of repayment as "slow," 73 percent expect an adverse change in the ability of farmers to repay debt, and 55 percent report finding a greater proportion of farmers at their debt limits than usual. Even in those areas of the district where 1976 crop production was good, refinancing is being sought by farmers who are withholding crops from the market in hopes of more favorable prices. Where farmers are at their debt limits on operating loans, many are having to refinance their farm real estate.
Employment in the district has recently increased, and prospects are for modest job growth in 1977. Most Directors of this Bank indicate that labor market conditions have been stable to modestly improved in their areas. In South Dakota, for example, a new manufacturing facility is expected to provide 600 additional jobs in the eastern part of that state. And in the Upper Peninsula of Michigan, the settlement of a labor dispute combined with improving conditions in the copper industry are expected to augment jobs in that area. Furthermore, labor market conditions have improved in the Minneapolis-St. Paul metropolitan area: in December employment was up 2.0 percent from a year and the unemployment rate had declined to 5.4 percent from 6.4 percent.