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Beige Book Report: Minneapolis

May 18, 1983

The previously reported upswing in Ninth District consumer spending and agriculture has continued, but the recovery in industrial activity has slackened. General merchandise and home sales were still improving in April and early May, and auto sales have begun to expand again. In addition, as expected, the Payment-In-Kind Program appears to have started to provide some relief for district farmers. The recovery in manufacturing, however, appears to have softened this spring after a spurt in early 1983. Rail and truck shipments showed only modest increases, confirming this slackening in industrial activity, and increases in airline passenger travel were also weak. Finally, lending remains sluggish at Ninth District banks.

Consumer Spending
District consumers continue to spearhead the recovery. The improvement in Minneapolis/St. Paul department-discount store sales, which began last fall, continued in April and early May, according to two major Twin Cities retailers. They say that clothing and electronics have been the best selling items. Bank directors report that outside Minneapolis/St. Paul, general merchandise sales have also continued to improve since last fall, particularly at large shopping centers.

District home sales have continued to improve as well and have sparked an increase in homebuilding. A South Dakota director indicates that home sales in Sioux Falls doubled between January and April, and other directors report increased home sales in their communities. Rising home sales, in turn, have led to a pickup in homebuilding. The executive secretary of the Minneapolis Association of Homebuilders, for example, reports a marked increase in homebuilding this spring. District residential building permits in March were up 18 percent from a year ago. Many of the homes being built, however, are the low-priced or starter homes (costing less than $80,000).

District auto sales rebounded in April, after pausing in the first quarter. A regional sales manager for one of the nation's largest auto manufacturers states that his firm's sales in April increased 20 percent from a year ago after decreasing 8 percent in early 1983. Another sales manager reports a noticeable pickup in medium-sized car sales. The directors' generally positive remarks about April auto sales in their communities confirm these upbeat sales reports.

Agricultural Conditions
The faint signs of recovery in agriculture, which were reported previously, have intensified. The upswing in corn and wheat prices, which began in January with the announcement of the Payment-In-Kind (PIK) Program, continued in April. The Minneapolis cash corn price, for example, rose 8 percent, from $2.87 to $3.09 per bushel, between March and April; it has increased 33 percent since January. The Minneapolis cash wheat price rose 7 percent, from $4.0l to $4.3l per bushel, between March and April and has increased 13 percent since January. These increases, according to bank directors, have boosted farmers' confidence, which has resulted in some increase in farm spending. In North Dakota, for example, some implement dealers have reported increasing implement sales, while in western Wisconsin, prices have risen at farm auctions.

Although district agriculture appears to have started to recover, corn planting is behind schedule. Due to excess moisture in Minnesota, only 14 percent of this year's corn acreage had been planted by May 10; normally, 33 percent has been planted by this time. Because of PIK, however, farmers will plant only about two-thirds of their normal corn acreage. Therefore, they are less worried than usual about catching up once the fields dry out or about a late crop that might reduce yields. In contrast to corn, district spring wheat planting is on schedule.

Industrial Activity
In contrast to the further strengthening in consumer spending and agriculture, the advance in manufacturing, which began last fall, appears to have slackened in April and early May. Paper and building inputs are the only areas where directors report a continued pickup. One director, for example, reports that paper and wafer board plants in Minnesota have recently been running at capacity. Prices for these commodities have risen modestly as well, reflecting some strengthening in demand. In addition, in southern Minnesota, a manufacturer of heavy construction equipment recently recalled three-fourths of its previously laid-off workers. But even in these areas, some signs of softening have emerged. A Montana director, associated with a national forest products company, reports some letup in lumber sales in April. A large Minneapolis manufacturer of residential temperature controls recently laid off 100 of its 4,000 local employees because recent sales haven't been up to expectations. In both instances, this softening was attributed to worries about excess inventories.

Transportation
The recent softening in district manufacturing is reflected in transportation activity. This industry, which employs around 90,000 people in the district and accounts for 5 percent of district personal income, is a good coincidental indicator because it moves the goods produced by the district's major industries. An economist with a large district railroad says that this movement has recently been lackluster and that he believes the region is experiencing a "spit and sputter" recovery. His firm's rail shipments rose sharply in January, then sagged in February, March and early April, before picking up a bit in late April. Shipments of lumber products and other manufactured goods have not been as good as expected. He attributes this to business concerns about excess inventories and believes businesses are ordering smaller amounts and relying more on trucks than usual.

Trucking firms, however, have yet to see a major pickup in their business. The total truck tonnage shipped by general freight carriers from Minneapolis/St. Paul businesses has only increased modestly since early January. A trucking executive with a large general freight carrier, like the railroad economist, believes concerns about inventories are curbing shipments and says that building input shipments have been increasing faster than other shipments.

Like the transportation of goods, the transportation of people has increased only modestly. The number of people arriving and departing from the Minneapolis/St. Paul International Airport in the first quarter was up 1.1 percent from a year ago. But it was still down 10.7 percent from the high reached in 1980.

Financial Developments
Lending continues to be soft at Ninth District banks. Sixty percent of the respondents to our Agricultural Credit Conditions Survey in early April, for example, indicated that their loan to deposit ratios were lower than desired. Directors' comments about weak loan demand in their communities confirm this survey.