May 10, 1978
The Ninth District's economy is showing general improvement midway through the second quarter, according to most indicators. Retail sales, which were somewhat disappointing earlier this year, are picking up. Farm receipts are improving, and livestock producers in particular are expecting better cash flows this year. As a result, agricultural bankers are noticing fewer farm debt repayment problems and are actively seeking new loan accounts. Labor markets have tightened as district economic activity has advanced, but no serious labor shortages have emerged. Homebuilding has been strong in most areas, though increasing costs and mortgage rates have raised some concerns that housing activity may slow later this year.
Retail sales pick up
Although retailers probably will not make up all the sales postponed
due to poor weather in the first quarter, directors now report that
sales are good to normal in most areas. Auto sales are said to be
increasing at about the normal seasonal rate after fears that even
this increase would not materialize. The good demand for used cars
provides some evidence of consumer resistance to high new car
prices, however.
With the advent of warmer weather and improving farm income, our directors unanimously report that retailers are optimistic about the coming months. One director expects summer tourist spending to be especially good in his area.
Directors also report that most district retailers are satisfied with their inventory positions. Only auto dealers appear to be somewhat overstocked.
Farm earnings improve
District farm cash receipts came in 10 percent above a year ago in
the early months of 1978 because of subsidy payments and improved
commodity prices. Hog, beef, and dairy operations have become
profitable, and farmers who had been holding personal and operating
expenditures to a minimum now seem to be spending more as a result.
Parenthetically, the government set-aside program will probably not have a significant impact on crop production in the district. According to directors, the percentage of farmers signing up for set-asides varies from 25 percent in some areas to 80 percent in others. However, directors note that farmers can still withdraw from the program and are likely to do so if market prices continue to rise.
Ag bankers optimistic
Rural bankers responding to our April survey report that due to
better farm earnings farm debt repayments have picked up.
Consequently, loan-to-deposit ratios at these banks have not
increased in the last two quarters, and most are making fewer loan
referrals to their correspondents or to nonbank credit agencies. Few
bankers currently expect problems meeting loan demands, and most are
actively seeking good loan accounts.
Labor markets tighten
As the regional economy has improved, labor markets have tightened.
The district's seasonally adjusted unemployment rate has declined
each month this year, averaging 4.4 percent in the first quarter.
Directors report that the demand for skilled workers is particularly
strong relative to supply throughout the district, but most areas
have not yet had serious hiring problems.
Housing remains strong despite uncertainties
Homebuilding has been quite good so far this year. Housing permit
activity seems to have picked up again from the January lull, and
loan commitments at S&Ls are running at a seasonally adjusted annual
rate of 17 percent above the fourth quarter.
Directors disagree about whether this pace will continue the rest of the year.
Several directors are very concerned that increased home prices, rising mortgage interest rates, and funds shortages will temper homebuilding activity. For example, several financial institutions in the Duluth area claim to have stopped accepting mortgage applications due to reduced deposit inflows. A few directors expect a slowdown in homebuilding in their areas because the current supply of new housing is somewhat excessive.
But other directors are confident that homebuilding will continue at a relatively high pace. One director cites the example of a modular homebuilder in his area who is experiencing very strong demand. A metro area banker thinks high lumber costs and rising mortgage rates will affect homebuilding later this year but not seriously because many builders have already obtained the necessary financing to get through 1978.