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Beige Book Report: Minneapolis

February 2, 1983

Signs off recovery continue to appear in the Ninth District. In December and January, consumers increased their spending on homes, autos, and general merchandise and were willing to spend on winter recreation. This spending sustained the revival in lumbering and in some manufacturing industries. In addition, good prospects are now reported for some district computer manufacturers, and other manufacturers seem to think the worst is behind them. Unfortunately, significant parts of the district economy have yet to get any relief. In January, manufacturers supplying industrial goods still were cutting back operations, and metal mining continued to totter from another round of layoffs and shutdowns. The Administration's new farm program might bolster farm income in the future, but at year-end it was reportedly down from a year earlier in most of the district. Furthermore, bank lending remained weak in January, which indicates that, overall, the district economy has not yet begun to recover.

Consumer Spending
The most convincing signs of recovery in our last Redbook report were pickups in home and auto sales, and these sales have continued to expand. According to the Minneapolis Board of Realtors, home sales in Minneapolis and its suburbs were up 16 percent from a year earlier in the fourth quarter and remained better than a year ago in early January. Likewise, regional sales managers for the nation's two largest auto manufacturers report that their December sales were up around 35 percent from a year earlier and their early January sales were greater than a year ago. This Bank's directors confirm these sales gains; they say that home and auto sales in their communities have been good recently.

General merchandise sales also have continued to improve. After sales revived in October, a post-Thanksgiving slump threatened the recovery, and retailers hoped that a late December sales spurt would let them better their 1981 holiday sales. They were not disappointed. Two large Minneapolis-St. Paul department stores report that their December sales were up about 7 percent from a year earlier. In addition, both retailers are pleased with their early January sales. According to a Montana director, sales of general merchandise have been good recently in his state too.

Consumers have been spending on winter recreation as well. In Montana, where snow arrived early, the last really good ski season was in 1974-75, and according to the Montana Department of Tourism, the 1982-83 season should top it. In Minnesota, northwestern Wisconsin, and the Upper Peninsula of Michigan, snow didn't arrive in many areas until late December, so the ski season got off to a late start. But where there is snow, ski area operators report brisk business in January, and they expect it to remain good. In late February, for example, the Birkebeiner cross-country ski race in northwestern Wisconsin is expected to draw a record 8,000 participants, and all available lodging within two hours of the race site is already reserved.

Industrial Activity
Our last Redbook report noted that the pickup in consumer spending had just started to carry over into the industrial sector, and this transfer has continued. Reflecting recent increases in home sales, several lumber mills have either resumed or stepped up their operations, a Montana labor market analyst reports. And large manufacturers of residential temperature controls and windows report that their recent orders have been about 15 percent ahead of a year earlier.

Prospects appear to be good for some other district manufacturers too. Due primarily to increases in defense orders, a large Minneapolis-St. Paul computer manufacturer plans to hire an additional 1,200 people this year. Due to increases in commercial orders, another computer manufacturer plans to expand its work force 8 to 10 percent this year. The district's largest computer manufacturer, whose sales of computer accessories suffered last year, reports that a turnaround looks near: its sales have stopped declining but have not yet begun to increase. A large manufacturer of housewares and another of adhesives and packaging materials voice similar views.

District manufacturers supplying industrial goods, however, report declining business. A Minneapolis-St. Paul manufacturer of industrial filters says business has been soft lately, and this firm has continued to lay off workers. A southern Minnesota manufacturer of electric generators laid off 71 workers in January. In Michigan's Upper Peninsula, a manufacturer of heavy construction equipment, which once employed 2,000 workers, laid off its remaining 200 workers when it permanently shut down in January.

Recent developments in metal mining have not been hopeful either. Our last Redbook report noted that two iron mining companies were planning to recall workers in early 1983, but these recalls have been largely offset by recent layoffs. The closing of Bethlehem Steel's Lackawanna, New York, facilities resulted in 900 Minnesota iron miners being laid off for eleven weeks. In the Upper Peninsula of Michigan, another 700 iron miners were laid off in January. Also, the Upper Peninsula's one large copper mine remained shut down, and the Anaconda Company announced that it would permanently cease all copper mining in Montana by June 30, which will idle 700 workers.

Agricultural Conditions
The recovery has continued to evade the farm sector too. Of the bankers responding to our late December Agricultural Credit Conditions Survey, 81 percent said that farm income in their communities was less than a year earlier in the fourth quarter of 1982.

The new payment-in-kind (PIK) program., however, should bring some relief to district farmers. Much of the farm income decline stems from large stocks of farm commodities depressing prices. In Minnesota, for example, corn stocks currently are at a record level and are up 27 percent from a year ago. The PIK program is designed to reduce stocks by decreasing plantings and paying farmers in commodities. The program may not raise prices much until 1984, but the grain that farmers will receive and the production expenses they will save should boost their 1983 income. PIK, however, could reduce farmers' purchases of seed, fertilizer, and other production inputs this year.

The more farmers participate in it, the more the PIK program will reduce stocks and eventually raise prices, and participation in the district may be quite high. In Minnesota's second largest corn- producing county, for example, officials estimate that farmers controlling 80 to 90 percent of the corn acreage will be enrolled in the PIK program. This is about twice the participation in last year's program, which was only 43 percent.

Financial Conditions
Although signs of recovery continue to appear, bank lending has yet to reflect any overall recovery in the district economy. In January, bank loans at both city and country banks were essentially unchanged from their weak December levels. At city banks, this weakness stemmed from the slack in overall business activity, and at country banks it resulted from poor agricultural conditions. Forty-four percent of the bankers responding to our latest Agricultural Credit Conditions Survey considered their year-end loan-to-deposit ratio low. Furthermore, much of the recent loan demand at rural banks has not been for new credit, but rather to refinance debt that farmers can't repay. Seventy-eight percent of the survey's respondents indicated that demand for farm debt refinancing was greater than normal in the fourth quarter.