Beige Book Report: Minneapolis
November 14, 1979
Lending has been curbed by usury ceilings and by customers' reluctance to pay higher interest rates. Reduced lending, though, has not changed our Bank directors' assessment of district economic activity. Due to strong industrial activity and generally favorable agricultural conditions, the region's economy is still growing.
High Interest Rates Have Reduced Bank Lending
District banks are having to pay higher rates to attract funds. As
money market rates go up, for example, banks have had to sell more
money market certificates in order to retain deposits. In fact, one
director reports that his area's bank customers are cashing in
lower-yielding certificates and taking interest penalties in order
to take advantage of the more favorable rates on money market
certificates.
These higher interest costs are curbing bank lending. In areas and markets where banks' interest costs are approaching or exceeding usury ceilings, lending is no longer profitable. Directors indicate usury ceilings have recently dried up mortgage credit in South Dakota and Wisconsin with their 12 percent usury ceilings. Consumer and agricultural lending in some areas has also been curtailed by usury laws.
And where higher interest costs can be passed on, bank customers are becoming hesitant to borrow. Directors report that commercial loan requests have slackened in response to recent interest rate increases. Many merchants, auto dealers, and farm implement dealers would now rather pare inventories than pay higher interest costs.
But District Economic Activity Has Not Felt the Effects Yet
This letup in lending activity has yet to change our directors'
assessment of the district economy. This Bank's previous Redbooks
reported that the district economy was not in a recession, despite
problem areas. Industrial activity had been strong, and agricultural
conditions had been generally good, despite troubling weather and
transportation bottlenecks. Our reports, however, did indicate some
softness in consumer spending, especially for automobiles and
housing. This assessment is still valid in early November. District
industrial output is expanding. Directors from the Upper Peninsula
of Michigan, Minnesota, and Wisconsin state that manufacturing in
their areas is expanding briskly. While in Montana, industrial
production related to energy supplies is increasing.
This greater production is reflected in the region's strong demand for workers. Several directors indicate that employers in their areas are seeking additional workers. One large Minneapolis/St. Paul manufacturer, for example, is trying to hire 180 production workers. These observations are confirmed by the district's recent high volume of help wanted advertising.
Complementing the district's strong industrial activity are the region's generally good agricultural conditions. According to our latest Agricultural Credit Conditions Survey, most agricultural producers' current incomes are either the same as or greater than they were last year.
Some developments, however, are troubling two sectors of the district economy. First, poor weather and transportation bottlenecks are restricting some farmers' incomes. Wet October weather is retarding the corn harvest. In southwest Minnesota, for example, about 89 percent of the corn crop is still in the fields. But even if farmers could have completed the harvest, a lack of rail transportation would have made getting it to market difficult. Second, some difficulties are being experienced by retailers. Modest October sales are reported by a large Minneapolis/St. Paul area retailer. Also, directors describe their area's recent retail sales as "soft," "mixed," or "spotty." And they describe their area's home and automobile sales as "weak."