Beige Book Report: Minneapolis
January 11, 1978
As we enter the new year, most indicators of economic activity in the Ninth District remain strong, and the near-term outlook is generally favorable. Declines in unemployment, strong retail sales, and booming residential construction were reported in 1977 and are expected to continue, perhaps at moderated paces, in early 1978. Large crop carryovers are expected to continue downward pressure on commodity prices. Despite historically high loan-to-deposit ratios, Reserve Bank directors are not aware of serious liquidity problems at district agricultural banks.
Employment
The district's employment picture is considerably improved from a
year ago. The fourth-quarter unemployment rate of 5.2 percent (based
on October-November data) is more than a full percentage point below
last year's 6.3 percent. Improvement is reported throughout the
district, including the chronically high unemployment area of
Michigan's Upper Peninsula. Even in that region, unemployment in a
few counties is less than 5 percent.
Reserve Bank directors generally see a favorable employment outlook for the first half of 1978, ranging from "very strong" to "very stable." Areas expecting continued strength include western Wisconsin, South Dakota (except for some weakness in ag-related industries), portions of the Upper Peninsula, and central Minnesota. "Stable" areas include metropolitan Minnesota, North Dakota, and eastern Montana. A banker sums up the outlook for the large industrial areas by suggesting that unemployment will continue to decline but at a somewhat slower pace as the economic recovery progresses. Only two areas in the district may have employment problems: western Montana, where public employment is being reduced and the wood product industries are softening, and Sault Ste. Marie, Michigan, where the closing of an air base is having a severe impact on the local economy.
Retail Sales
Retail sales were strong throughout the district in the last quarter
of 1977, according to our directors. All directors report that
Christmas sales met or exceeded retailers' high expectations. A few
directors describe seasonal sales as "strong," "pretty good," and
"remarkably good." Severe weather in North Dakota reduced sales from
what they otherwise would have been, but even there, retailers are
described as "happy."
Our surveys are consistent with these observations. Some retailers are reporting sales for December as 10 to 30 percent over a year ago. Retailers with outlets in rural areas found sales gains there about the same as in the metropolitan area.
Neither our directors nor our surveys uncovered any significant retail inventory problems.
Residential Construction
Homebuilding has remained well above the record annual pace set in
1972. For the first ten months of 1977 cumulative housing permits
were 31 percent higher than the year-earlier level, which was 34
percent higher than in 1975. Data through October do not yet
indicate a slowdown, although some directors have previously
suggested this might happen. In any event, loan commitments
outstanding at district S&Ls rose steadily throughout 1977 and in
November were 25 percent above the year-ago level. Consequently, we
expect homebuilding to remain strong in the district, at least
during the first quarter of 1978.
Agriculture
According to Reserve Bank directors, there is little evidence to
suggest that the farm strike has done anything more than generate
some publicity. In Montana, some small marginal crop farmers
apparently are participating, but ranchers are not. A director
representing the food industry notes that his firm has been buying
corn from farmers throughout December, which does not represent a
withholding action. One director described the farm strike as a "nonevent."
With the dramatic turnaround in weather conditions, total crop production in 1977 easily exceeded that of 1976. Soybeans were up 80 percent and corn 75 percent. Wheat production declined about 10 percent but only because of a 13 percent reduction in plantings. The resulting low commodity prices not only have depressed current farm receipts but also have built up a large carryover of grain which will continue to exert downward pressure on market prices.
In general, our directors have observed that government crop deficiency payments are improving liquidity situations at rural banks, but how much is still hard to say. Apparently, some of the payments are lower than anticipated and are coming in a little slower than expected, so directors have yet to form any judgments. Several directors note that there might be some complaints about ag bank liquidity or that loan-to-deposit ratios might be high in historical terms, but they are not aware of any serious liquidity problems.