Beige Book Report: Minneapolis
December 15, 1982
After many months of waiting, the Ninth District economy has finally begun showing a few definite signs of recovery. In response to lower interest rates, district home and auto sales increased in November. General merchandise sales improved also, and orders of some manufacturers increased. These positive signs are admittedly tenuous, however, and much of the district economy remained depressed. The district had less excess capacity in manufacturing than the nation, but orders continued to decline at many local manufacturers. Although most district farmers were able to complete the fall harvest, poor prices continued to trouble them. Lending at district banks remained weak, and most district financial institutions were slow to formulate plans for the new Money Market Deposit Accounts (MMDAs).
Consumer Spending
Home and auto sales have picked up in the Ninth District. Our last
Redbook report indicated that, in October, reduced mortgage rates
had increased the number of people looking at homes--but not the
number buying. In November, home sales actually picked up. According
to the Minneapolis Board of Realtors, home sales in Minneapolis and
its suburbs increased 20 percent between October and November, a
period during which home sales normally decline. Also, regional
sales managers for domestic auto manufacturers indicate that in
November district car sales improved. One says that last month his
company's 10.9 percent finance rate helped reduce inventories of
1982 models 50 percent. A director reports that, thanks to the
pickup in car sales, most Montana car dealers showed a profit in
November, for the first time in many months.
General merchandise sales have also improved somewhat. Two Minneapolis-St. Paul retailers report that their sales increased modestly between October and November, but that post-Thanksgiving shopping was slower than normal. They attribute this to changed shopping habits; consumers are now delaying purchases until retailers cut prices just before Christmas. Thus, these retailers are planning pre-Christmas sales and expect this December to be better than last year's. Directors, however, report that many retailers outside the Twin Cities hope to just match last year's holiday sales. This glum outlook in many parts of the district is directly due to the long- depressed iron mining and farming industries.
Industrial Activity
The pickup in consumer spending has started to carry over to a few
manufacturers. Reflecting the recent improvement in retail sales,
new orders of microwave ovens increased markedly at one
manufacturer. A spokesperson for a large meat packing company in
southern Minnesota, which recently opened a new plant, reports that
business has been better lately than expected. This firm plans to
hire additional people. Due to the upturn in home sales, orders
increased at a large manufacturer of windows and doors and another
of ceiling tiles.
Most district manufacturing concerns, however, have remained in the doldrums. Eleven of the 23 largest manufacturers headquartered in the district report third quarter sales below those a year ago. Particularly hard hit have been producers of industrial equipment. A firm making construction and material handling equipment reports that its order backlog shrank from $150 million at the beginning of the year to $50 million in early December. A representative for a company producing industrial controls and painting equipment indicates that an anticipated pickup in new orders has not yet materialized. In fact, new orders have declined, leaving its current inventories at higher than desired levels. Growth rates have slowed even at computer and other high technology firms, where sales are generally increasing, according to a Minneapolis security analyst who follows this industry group.
Capacity utilization data can provide some insight on the performance of the manufacturing sector. These data aren't available at the district level, but we can infer some information from differences in the structure of manufacturing between the district and nation and from anecdotal evidence. Approximately 45 percent of district manufacturing is concentrated in two industries—machinery and food processing—compared to 30 percent in these industries nationally. Moreover, within the machinery group, computer manufacturing is about three times more important to the district than to the nation.
According to our recent conversations with industry spokespeople, the district's capacity utilization rates are currently well above the nation's in both the machinery and food processing industries. In machinery manufacturing, where the national utilization rate is 67 percent, the district rate is higher; our contacts indicate that most district computer manufacturers lately have been operating at near capacity. Conversations with representatives of large district food processors indicate that their capacity utilization rates are also above the nation's 80 percent capacity utilization rate for the industry. The district's remaining manufacturing industries are a diverse group, and for them, capacity utilization rates my not be too different than the national rates, at least not on average. Therefore, based on the structural differences between the district and nation and on the anecdotal evidence, the district's current capacity utilization rate for manufacturing is almost surely above the nation's 68 percent.
This same approach may be used to examine capacity utilization in metal mining. Iron mining accounts for 75 percent of metal mining locally, compared to 20 percent nationally, and copper mining accounts for much of the rest of Ninth District metal mining. In September, capacity utilization for district iron mining was around 10 percent, when only two or three out of eleven mines were producing. Utilization is somewhat higher now because several additional iron ore mines resumed partial operation in October. And two more Minnesota iron mines plan to resume operation in early 1983. Even so, an industry official reportedly expects capacity utilization in iron mining next year to average only 55 percent.
Current capacity utilization in district copper mining is also very low. The one mine in the Upper Peninsula of Michigan was indefinitely shut down in early October. And, in Montana, only a small amount of copper is being produced, because the state's one large mine was closed permanently earlier this year. Based on the local mining industry's heavy concentration in iron and copper (especially iron) and on the extremely low output levels for both metals, it is virtually certain that the district's capacity utilization rate in metal mining is well below the nation's 40 percent rate. Moreover, it seems likely that this situation will continue well into 1983.
Agricultural Conditions
Although recent weather conditions were favorable, agriculture has
remained depressed. Our last Redbook report said farmers were
concerned that wet weather would interfere with the harvest.
recently, however, the weather has been good for harvesting, and as
of November 28, the USDA reports, 84 percent of the corn and 97
percent of the soybeans were harvested in Minnesota. But
agricultural prices remain troubling. In November, Minneapolis cash
prices for corn and soybeans were, respectively, 4 and 9 percent
below levels a year ago; and South St. Paul cash prices for feeder
and slaughter cattle in November were down 5 and 1 percent,
respectively. Hogs remain a bright spot in district agriculture: in
late November their price was up 25 percent from a year earlier.
Dairy farms have been doing relatively well also. According to an
industry analyst, however, the federal government's assessment of 50
cents per hundredweight of milk produced has put a "good dent" in
dairy farmers' income. This assessment began December 1.
Financial Developments
Bank lending has remained weak. In November loans at district banks
and S&Ls were essentially unchanged from their lackluster October
level. Part of the reason for this sluggishness is that district
corporations have increased their use of the primary securities
markets, and in some instances, they have been using these funds to
reduce bank debt.
Sluggish loan demand may explain the response of local firms to the new MMDAs: most have not been aggressively promoting them. Another explanation, according to our telephone survey of district banks and S&Ls, is that they are waiting for the DIDC's directive on the Super NOW account. They are also frustrated with the short implementation period for the new MMDAs. In fact, most of the banks and S&Ls say they haven't decided yet about the new MMDAs or are "waiting to see what the competition will do."