Beige Book Report: Minneapolis
April 12, 1978
Economic activity in the Ninth District continues to improve, but there is a growing uneasiness over wage and price increases. The encouraging economic signals evident last month still show up in retail spending, labor market conditions, and loan demand. However, directors believe inflationary expectations have been revised upward, although no significant changes in inventory accumulation, investment plans, or capital goods sales have occurred yet. Most directors think that the coal settlement will set the tone for subsequent labor negotiations here.
According to our recent surveys, retail sales are doing well, and retailers are fairly optimistic. Most auto distributors in the region report that sales in March were ahead of last year, with full-size and subcompact models both selling briskly. Dealer inventories are adequate but could become tight for certain "hot-sellers" by summer. Retailers of other goods also are pleased with current sales, report no serious inventory difficulties, and expect a good summer season. Resort owners report that inquiries and reservations are up from last year; they expect an excellent summer too. No gasoline shortages are showing up; in fact, prices have dropped in Montana and South Dakota.
Reflecting strength in manufacturing and homebuilding, the district's unemployment rate has improved dramatically in recent months. Seasonally adjusted unemployment for the first two months of the year averaged 4.5 percent, compared to 5.2 percent in the fourth quarter of 1977 and 5.6 percent a year ago. Although the labor force increased 4 percent over the past twelve months, jobs increased at a 5.5 percent rate. As a result, the number of people looking for work declined 17 percent. Substantial increases in the help wanted advertising index and reductions in initial claims for unemployment compensation both suggest no deterioration in joblessness in the next few months.
District loan demand has been strong again this year, and banks have been responding in several ways. Some apparently are selling off some loans; others are raising interest rates and tightening other credit terms. Large city banks, however, which are experiencing strong business borrowing, seem to be slightly easing price and nonprice terms on those loans.
Heavy demand is expected for all types of loans this year, according to directors. Agricultural bankers who may have been reluctant to lend last year expect ag lending to pick up this year in response to recent improvements in grain and livestock prices.
One large regional bank in the Twin Cities is currently showing good increases in all major loan categories but expects some slowing this year in two types of loans. It thinks consumer loan growth may slow as consumer's debt repayment schedules become more burdensome and real estate loan growth may slow as interest rates rise and mortgage credit tightens.
The major concern in the district right now is inflation. Almost all respondents report that businesses have revised inflationary expectations upward. Food price increases, higher import costs due to a weakened dollar, and increased unit labor costs are all cited as reasons for this revision.
The revised inflation expectations have not yet shown up in business actions, however. A few isolated examples of inventory accumulation exist, but there is no evidence of widespread attempts to increase inventories in order to beat future price increases. In fact, several respondents noted that businesses, apparently fearing a slowdown later this year, are very cautious about increasing inventories now. Similarly, inflation has not caused cautious businesses to change investment plans, although one respondent suggested that business spending plans appear to have been revised upward because of economic strength in the fourth quarter.
Most respondents believe that general price increases plus the coal settlement and the increase in the minimum wage will push up wage demands in this area. They think governmental pleas for voluntary restraint will probably be disregarded since the Administration had a major role in the coal settlement. Those who do not see any immediate wage consequences from the coal settlement expect it to set a pattern for wage negotiations in future years.