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Beige Book Report: Minneapolis

August 11, 1981

The economy of the Ninth District was sluggish in June and July. Most developments were disappointing or at best neutral. Several strikes curtailed economic activity; the recovery in district manufacturing orders apparently stalled; excess moisture curbed crop production and harvests. Farm prices continued to be weak; auto and home sales continued to be low; mining and lumbering production continued to be weak. Although the increasing foreign exchange value of the dollar affected different sectors in different ways, it does not appear to have contributed substantially to the general weakness of the economy. The one promising sign was that general merchandise sales expanded modestly.

The overall sluggishness of the district's economy was reflected in the continuing weakness in bank lending.

Consumer Spending
The improvement in general merchandise sales which began last spring continued at a modest pace this summer. Two major Minneapolis-St. Paul retailers stated that their sales rose in June and July, but not as rapidly as in April and May. Similarly, bank directors reported moderate gains in general merchandise sales this summer. These sales gains were helped by the dollar's increasing value. One large retailer said that the dollar's increasing value has held down the costs of imports, thus enabling his firm to offer more attractive prices in its discount stores.

While general merchandise sales have improved, auto and home sales have remained in the doldrums. According to regional sales managers for domestic automobile manufacturers, auto sales in June and July remained at last spring's depressed level, and according to a director from the Upper Peninsula of Michigan, several new car dealers have gone out of business. Home sales have not improved either; mortgage loan applications at Minneapolis-St. Paul S&Ls did not budge from last spring's low level.

Industrial Activity and Inventories
Industrial activity has also been sluggish this summer. Many district manufacturers continued to operate well below capacity, and the recovery in manufacturing orders noted in our last Redbook report now appears to have stalled. One large Minneapolis-St. Paul manufacturer which supplies construction inputs reported that its orders declined in June and July and were below expectations and that its customers were holding excess inventories. Other manufacturers and directors also indicated that no pickup in manufacturing activity occurred this summer.

The sluggishness in manufacturing orders cannot be attributed to the dollar's increasing value. Several Minneapolis-St. Paul manufacturers indicated that if the dollar remained high, it could eventually have an adverse effect on their overseas sales, but so far, it has not substantially affected them. Because most of these firms export specialized products that are not available elsewhere, the crucial factor influencing their sales is economic conditions in other countries, not the value of the dollar.

Like manufacturing, mining and lumbering have remained lackluster. Directors reported that coal and oil production and exploration in the western end of the district were still increasing, but that low iron ore production at the eastern end of the district canceled these gains. In addition, weak residential building continued to depress the forest products industry at both ends of the district.

Agricultural Conditions
Growing conditions and farm prices have not improved much since our last Redbook report. Last spring drought was a big worry, but many farmers in the eastern half of the district are now worried that too much moisture will slow crop development and harvests. Although a North Dakota director in early July was anticipating excellent crop yields, he now only looks for good yields because of excess moisture.

Most prices have remained below last year's highs, and cash grain and livestock prices at Minneapolis and South St. Paul either remained the same or declined between May and July. The one exception was hog prices, which rose 22 percent during this period.

The higher value of the dollar, by depressing international demand for the district's crops, has helped keep farm prices down. An economist with a large railroad indicates that grain shipments from our district to ports for export have not been as strong as his firm anticipated. He partially attributes these smaller shipments to the dollar's higher value making U.S. grain and soybeans less competitive in foreign markets.

Labor Disputes
The sluggishness in various sectors of the district economy has recently been complicated by strikes. The district, like the rest of the country, is experiencing slower deliveries and less travel- related business because of the air traffic controllers' strike. The district is also being adversely affected by several other labor disputes. Since mid-July, 14,000 State of Minnesota workers have been on strike, reducing state services. In addition, labor disputes between residential builders and carpenters and between foundries and workers have been slowing down construction and manufacturing activity in the Minneapolis-St. Paul metropolitan area.

Financial Activity
The sluggishness in the district's economy is manifested in weak bank lending. Loans at Minneapolis-St. Paul area banks in June and July were essentially unchanged from their lackluster level this past spring. According to directors, bank lending outside the Twin Cities also continued to be weak.