Beige Book Report: Minneapolis
February 21, 1978
Homebuilding broke records and was a major spur to the Ninth District's economic recovery in 1977, but our Bank's directors don't think it will be quite that strong in 1978. Even though disintermediation is not expected to affect credit terms much soon, small upward shifts in the mortgage funds supply curve and rising materials and labor costs are expected to slow new homebuilding somewhat. This probable slowdown hasn't dimmed directors' 1978 outlook for most labor force groups. But they are concerned about continuing high unemployment among minorities and women and about the longer-term impact of recent legislation on the composition and growth of employment.
1977's homebuilding record won't be matched this year Homebuilding in the Ninth District set a new record in 1977, and it's likely to stand through 1978. Last year's rate beat the 1972 record by 4 percent and the 1976 rate by 17 percent. Although directors generally expect this year to be pretty good for homebuilding, they expect more moderate growth than in 1977. The most pessimistic outlook, based on a projection by the National Association of Homebuilders, is that housing starts in the district will fall as much as 20 percent.
Directors believe supply shifts will cause most of this slowdown. Some are particularly concerned about rising building costs making new housing units "unaffordable." Most also think upward shifts in the supply curve for mortgage funds will push up the price of housing services.
The reason the supply curve for mortgage funds is expected to shift up is that deposit growth at district thrift institutions has been slowing and can be expected to continue to slow as incentives for disintermediation persist. An official of the Federal Home Loan Bank of Des Moines estimates that net savings inflows in January were 60 percent less than a year ago in the Des Moines district (which includes Minnesota and the Dakotas). One large thrift institution in the Minneapolis/St. Paul area reports a 50 percent reduction in net inflows in January, while another reports a net outflow. Directors suggest that disintermediation is a factor in this reduced deposit growth and that continued or widening differences in market and Regulation Q rates will exaggerate it.
Despite this deposit situation, directors observe that thrift institutions are currently augmenting traditional deposit sources with alternative sources, including borrowings from the Federal Home Loan Bank. As a result, they expect the impact of disintermediation on mortgage supply to be small in the near future.
The employment outlook is good—for some Directors don't seem to think the homebuilding slowdown will reduce district employment much. District construction employment increased 4 percent during 1977, contributing a lot to the 3 percent increase in total employment. By December the district's overall unemployment rate had fallen to 5.2 percent, its lowest level in three years. Despite the expected homebuilding slowdown, directors do not expect any employment changes in the next few months, and the current high level of help wanted ads supports their view.
However, directors indicate that unemployment among some labor force groups is still very high. For example, minority youth unemployment in the Twin Cities is said to be about 40 percent. Native Americans are having particular difficulty finding jobs. And job opportunities in Minnesota recently appear to have been greater for men than for women.
Moreover, directors believe that the higher minimum wage could cut opportunities further for those having the most trouble finding work. Some think the higher wage will reduce youth and summer employment in their areas. Others think it will reduce job entries in the trade and service sectors, which traditionally have provided the most opportunities for those having problems finding employment.
Directors also believe the social security tax increases will hurt total employment growth here in the next few years. Since these increases will boost employers' costs and reduce take-home pay, some directors think business investment outlays may suffer, retarding employment growth in capital goods industries. Others suggest that these taxes will raise per unit labor costs which will induce business to substitute capital for labor. This substitution might improve employment in capital goods industries but would reduce employment in final goods industries.