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Beige Book Report: Minneapolis

November 16, 1982

Since July, open market interest rates have declined substantially and equity values have made record gains. So far, the effects of these national developments on the Ninth District have been restricted primarily to financial variables. District commercial, consumer, and mortgage loan rates have fallen, and some local corporations have begun taking advantage of improved market conditions to clean up their balance sheets.

Some sketchy evidence has emerged, however, that interest rate and wealth effects have started to carry over into the real sector. In particular, auto sales have shown some responsiveness to improved financing terms, and more would-be home buyers have been actively shopping (if not buying, as yet). Nevertheless, October home, auto, and general merchandise sales remained weak by historical standards. District manufacturing, metal mining, and lumbering continued in the same depressed condition reported in the last several Redbooks. On district farms, falling commodity prices and poor weather still were causing distress.

Financial Developments
Borrowing costs for district businesses and consumers have declined this fall, and the well-publicized reductions in the prime rate have been matched by most district banks. Local mortgage bankers and officials of the district's two largest banks and its largest S&L indicate that their rates on mortgage and consumer installment loans dropped 200 to 300 basis points in the last three months. In addition, one of the district's largest bank holding companies reduced its interest rate on outstanding credit card balances from 22 to 19.8 percent in October. Not all local firms have cut their loan rates, though. For example, at a consumer finance company, headquartered in the district and with operations in 31 states, rates are still at usury ceilings in most of the states in which it operates.

Interest rate declines have not increased business borrowing from district banks, but rather, district corporations have stepped up their borrowing in primary securities markets. The lackluster business borrowing from banks reported in recent Redbooks seems to have continued in October. However, representatives of two major investment banking firms say that local firms have recently increased their offerings of debt and equity. A large district leasing and rental company, for example, floated a $100 million debt issue, and equity issues were made by a large retailer and by a food processing company. The investment bankers indicate that the proceeds of these issues will be used primarily to refinance short- term debt, not to fund new plant and equipment expenditures. Furthermore, they say that many other local firms are planning to offer more debt and equity if market conditions remain favorable.

The decline in interest rates also seems to have increased consumer borrowing somewhat. An official of the nation's third largest mortgage banker, headquartered in this district, says that its residential mortgage applications rose 6 percent between July and August and 16 percent between August and September. The district's largest S&L reports that, in the week ending October 25, it received 54 applications for fixed rate mortgage loans as compared to 16 in the week ending a month earlier. This S&L has been heavily advertising for consumer loans and reports a doubling in the number of such loans extended over the last 30 days. The district's two largest banks report that consumer lending has not risen much in the last month or so, but that inquiries are up significantly.

Consumer Spending
Home and auto sales have remained weak in the district, although better financing terms have produced some hints that sales will pick up soon. Our contacts indicate that much of the recent increase in mortgage lending has been to refinance existing mortgages and contracts for deed; home sales, they say, have yet to improve. The Minneapolis Board of Realtors, for example, says that October home sales in Minneapolis and surrounding suburbs matched the weak sales reported in recent Redbooks. But future sales seem likely to be stronger because more people were reportedly shopping for homes in October than in earlier months. Similarly, regional sales managers for the nation's two largest auto manufacturers call recent auto sales "weak." But one has been more aggressive than the other in improving terms of financing and has been doing relatively better here.

General merchandise sales also have remained weak in the Ninth District, according to this Bank's directors and Minneapolis-St. Paul retailers. However, two Twin Cities retailers indicate that furniture and appliances (reported weak in previous Redbooks) showed some signs of improvement in October. This improvement is attributed to price cutting and heavy advertising, though, not to reduced finance charges.

Industrial Activity
Recent layoffs and plant closings suggest that district manufacturers have continued to retrench. In computer manufacturing, a large Minneapolis company recently announced that its work force will be reduced by 1,850, and another plans temporary fourth quarter shutdowns affecting 9,000 workers. In heavy equipment manufacturing, a construction equipment firm permanently closed a plant in Minnesota, and a North Dakota tractor manufacturer laid off 80 people. In consumer products manufacturing, an apparel firm permanently closed a plant in Minnesota, and a major microwave oven manufacturer recently shut down its South Dakota plant for three or four weeks.

The metal mining and lumbering industries generally have continued to operate at low production levels. Minnesota's largest taconite plant, shut down in June, was supposed to resume operations later this year. It recently announced, however, that it will not reopen until "sometime in 1983." Reflecting the continuing weakness in lumbering, a large district railroad reports that in September, forest product shipments were 31 percent below those a year ago. One hopeful sign for the lumber industry is a Minnesota director's report that the state's production of wafer board (an inexpensive substitute for plywood) increased in September and October.

Agricultural Conditions
Declining commodity prices and poor weather conditions have continued to plague district farmers. Due to declines in both crop and livestock prices, the index of prices received by Minnesota farmers dropped in October—2 percent from September and 3 percent from a year ago. While the threat of early frost reported in our last Redbook did not materialize, farmers worry that wet weather may interfere with the harvest, which is late already. In Minnesota, for example, only 25 percent of the corn had been picked by November 1, less than half the 63 percent usually picked by that date.