Beige Book Report: Minneapolis
June 14, 1978
Our district's economic news has been good lately, and most observers think it will stay that way in spite of tightness in a few input markets. Business has been brisk and should remain so for manufacturers, farmers, retailers, and builders throughout the district. But growing rightness in skilled labor and home mortgage markets threatens to put the squeeze on some area businesspeople, most notably homebuilders. The seriousness of that threat is difficult to assess, though, as the impact of recent Regulation Q changes on the supply of credit is still doubtful.
Good Economic News
Reviews of recent manufacturing activity are all good. Our Bank's
directors report vigorous industrial activity throughout the
district. Their reports are supported by our Bank's survey of
industrial expectations which reveals that first-quarter sales by
Ninth District manufacturers were up 17.5 percent from their year-
earlier levels. These manufacturers thought their second-quarter
sales were running 14 percent above a year ago.
Sales by farmers have also been higher than last year. Cash crop receipts for our district through April were about 17 percent higher than the corresponding period last year. Cash livestock receipts were up 15 percent.
Rural retailers serving those farmers as well as the retailers serving their city cousins have enjoyed strong sales activity. Directors indicated that rural consumer spending has been strongest in western Montana, western South Dakota, and Wisconsin, where the profitable livestock and dairy businesses are concentrated. Retail sales outlets in urban areas throughout the district have posted very good sales figures in recent weeks.
Durable goods have been particularly big sellers. Automobile sales have been unusually good. And home buying has continued to be a favorite pastime of our district's consumers.
Homebuilding has picked up too. It was off to a slow start in January and February, but recent reports suggest this industry has resumed last year's record pace. This resurgence together with mounting commercial building demand has pushed construction employment in the district to an all-time high.
Good Economic Outlook ...
These high levels of economic activity are expected to persist. For
example, manufacturers responding to our industrial expectations
survey predict continued strong year-over-year growth through the
rest of 1978. And they consider their inventory and capacity
adequate for that projected growth.
In addition, farmers have gotten their crops in on time, and recent weather has been favorable. So most observers are predicting good harvests in the district. Furthermore, since the majority of district farmers have signed up for the government acreage set-aside program, they will be eligible for federal crop price supports. And livestock producers, though disappointed over the relaxation of meat import barriers, still expect a good year.
Our directors also project continued high levels of retail sales through the summer.
... Despite Input Shortages
All this optimism exists in spite of concern over some input
shortages. Skilled labor markets are much tighter than they were a
year ago. And financial institutions are straining to keep up with
the heavy loan demand.
Homebuilders are bearing the brunt of the higher prices generated in these tightening markets. Construction costs are rising rapidly, and mortgage interest rates are poised to pierce the 10 percent barrier.
Our Bank's directors fear a substantial slide in the quantity of new homes demanded as these factors continue to push monthly home-ownership payments higher.
It's not clear how much the tight credit situation will be eased by the recent changes in Regulation Q, either. While most district banks and thrifts offered the new six-month CDs at the ceiling rates, less than half of those surveyed (almost all located in urban areas) were actively promoting sales of these instruments. And while promotion of the CDs increased their sales, most banks and thrifts thought little net deposit gain would result from those sales. The high state income tax rate in Minnesota and exemption of T-bill interest from those taxes led some bankers to suggest that banks and thrifts in that state would continue to find it hard to compete with government debt instruments for investor funds.