Beige Book Report: Minneapolis
September 29, 1982
The Ninth District economy has remained depressed. The construction industry continued in the doldrums, with the only signs of revival appearing in nonbuilding construction (work on highways, bridges, sewer and water facilities, and energy projects). The weak manufacturing, mining, and lumbering industries reported in the last Redbook did not improve in August or early September. Consumer spending remained weak. Farmers were still troubled by falling crop prices, and an early frost could substantially reduce their crop yields. As a result of these continued weaknesses in the real sectors, bank lending in the district remained sluggish.
Construction
District construction activity remained depressed. In the second
quarter, for example, construction employment, which accounts for
approximately 5 percent of district nonagricultural employment, was
down 3 percent from a year earlier and 22 percent from the second
quarter of 1979, construction's last good year. Nonbuilding
construction has started to revive, but its impact has not been
sufficient to offset the decline in the other sectors.
Nonresidential Building
Weak commercial and industrial building has
been holding down nonresidential building. Commercial and industrial
building accounts for about 60 percent of the district's
nonresidential building. According to F. W. Dodge, during the first
seven months of this year, the dollar value of district
nonresidential contract awards was down 8 percent from a year
earlier and 13 percent from the first seven months of 1979.
Conversations with builders, industrial developers and realtors from
throughout the district confirm the shrinkage in contract awards.
Most of them describe commercial and industrial building as slow.
For example, the marketing director of a large Minneapolis builder
says that his firm's business this year is down about 50 percent
from a year ago. Commercial and industrial building activity is
still considered good, however, in Billings, Montana, and in St.
Cloud and Rochester, Minnesota.
An immediate pickup in commercial and industrial building is not likely because excess space exists and interest rates are still too high. Our contacts think that many businesses do need additional space and that now is a good time to obtain it; new commercial and industrial building prices are presently very attractive. But interest rates, they believe, are still too high for businesses to take advantage of favorable construction prices. Two executives with large Minneapolis builders indicate that long-term interest rates would have to drop another two percentage points and stay down for several months for any significant pickup in commercial and industrial building to occur. Also, for certain types of commercial and industrial building, excess space is a problem. The current vacancy rate for office buildings in the Minneapolis-St. Paul suburbs, for example, is 15 percent, more than twice the 6 to 7 percent rate that realtors consider normal.
Residential Building
Residential building has also been very weak,
and recent home sales suggest no immediate improvement. The number
of district housing units authorized by building permits during the
first six months of this year was 23 percent below the number
authorized a year earlier and 56 percent below the number authorized
in the first half of 1979. Homebuilding is not likely to pick up
soon, because consumers have simply not been buying homes. According
to the Minneapolis Board of Realtors, August home sales in
Minneapolis and its suburbs were down 28 percent from a year ago.
Although no immediate rebound is likely, homebuilding could pick up
in several months. Our Bank directors and district realtors indicate
that the recent interest rate declines have substantially increased
shopping, if not buying.
Nonbuilding
In contrast to residential and nonresidential
construction, nonbuilding construction, although still depressed,
has shown signs of reviving. During the first eight months of this
year, contracts for highways, bridges, and sewer and water
facilities in Minnesota and the Dakotas were still 21 percent below
their level in the first eight months of 1979, but they were 11
percent above their level in those months last year. This component
got an additional boost when contracts were let earlier this year
for a $1.2 billion coal gasification plant in North Dakota.
Other Industrial Activity
The weak manufacturing, mining, and lumbering industries reported in
our last Redbook have yet to show any evidence of recovery. The
slowdown in manufacturing orders and production appears to have
continued, and district firms have still been curtailing operations
and laying off workers. For example, the district's only auto
assembly plant closed for a week in mid-September, and a large
Wisconsin manufacturer of heating and cooling equipment recently
laid off 250 workers. Also, lumber production remained depressed in
August and early September, and although some iron mines have
resumed production, others have extended previously announced
shutdowns.
The district was fortunate that the recent rail strike disrupted very little industrial activity. Minneapolis-St. Paul business executives have actually been more upset by the prospect of lost revenues due to the NFL players' strike. In Minneapolis, this strike could prevent a planned reduction in a hotel and liquor tax which was imposed to pay for our new $55 million domed stadium.
Consumer Spending
Consumers' reluctance to spend has slowed the recovery of auto and
other retail sales. Major Minneapolis-St. Paul retailers and our
Bank directors report that back-to-school sales were disappointing.
Furthermore, the recent declines in interest rates and increases in
stock prices have not relieved the previously reported sluggishness
in furniture and automobile sales. One major Twin Cities retailer
calls August furniture sales "lousy." And a regional sales manager
for a large domestic automobile manufacturer indicates that recent
developments have not spurred car sales. In fact, his firm's sales
in Minnesota and the Dakotas declined more than seasonally between
July and September.
Agriculture
Declining crop prices have continued to trouble district farmers. An
announcement in August by the USDA, that corn and soybean harvests
would be larger than expected, pushed down already weak crop prices.
Between July and September, cash prices for soybeans, corn, and
wheat in Minneapolis declined 12, 8, and 5 percent, respectively.
Livestock prices have exhibited a mixed pattern. Lower crop prices increased the attractiveness of feeding livestock, which has helped to keep feeder cattle prices at their midsummer levels. Also, hog prices have remained at the high level reached this summer. Increased slaughter cattle supplies, however, have pushed the prices of these livestock down; and in mid-September in South St. Paul, they reached their lowest level in 18 months.
In addition to price problems, district corn and soybean farmers also have major concerns about the weather. Due to wet weather delaying spring planting, district crops are maturing later than usual. Normally, for example, about 50 percent of Minnesota's corn crop is mature by mid-September. This year only 23 percent is ready for harvest. A frost in the next few weeks (a distinct possibility) could substantially reduce yields. Although reduced yields in the district would ease the storage problem discussed in our last Redbook, they would not significantly affect prices because the district's share of total U.S. production of corn and soybeans is small. Thus, until crops are harvested, district farmers are faced with the possibility of a bleak scenario: low crop prices, which are virtually certain, and poor crop yields which will depend on the vagaries of the weather.
Bank Lending
As reported in our last Redbook, these weaknesses in the district
economy continued to be reflected in sluggish bank lending. In mid-September, lending at district member banks did not increase from
its weak level of early August.