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Beige Book Report: Minneapolis

December 5, 1985

While employment growth has slowed in the Ninth District this fall, several positive developments have occurred in the labor market. Consumer spending generally fell in October, but it my be rebounding in November. Sharp increases in cattle and hog prices are the main bright spots in the agricultural sector, where future farm finance remains a major concern.

Employment
The most recent available data indicate slow job growth throughout the Ninth District. Minnesota's seasonally adjusted unemployment rate increased to 6.2 percent in September, marking the fourth consecutive month it has risen. In Montana, the seasonally adjusted unemployment rate also rose this fall and is now hovering around 8 percent. Despite a 3.5 percent increase in nonfarm employment, South Dakota's unemployment rate rose a bit during the second quarter.

Major labor market developments in the district included the long- awaited reopening of the old White Pine mine in the Upper Peninsula of Michigan. Also, a Bank director notes that a preliminary agreement was signed to build and operate a big paper mill in the hard-pressed area around Duluth, Minnesota. In Sioux Falls, South Dakota, a large, divisive strike at a meat-packing plant was settled. But in Livingston, Montana, a railroad closed its repair operation, causing that area to lose 350 jobs.

Consumer Spending
Spending for general merchandise in the district slowed some in October, but it my be accelerating in November. One diversified retailer notes that menswear and accessories sales had particularly lagged in October. Another large retail chain notes that sales so far in November exceeded their generally lackluster level in October. Due to the large increase in consumer indebtedness, retailers are closely watching customer credit lines to detect a deterioration in creditworthiness. Careful planning of inventories have helped the two retailers maintain good profit margins. Retailers around the district generally aren't expecting land-rush holiday business and are fearful of accumulating excessive inventories.

Motor vehicle ales have slowed, following an avalanche of September orders. Regional offices of domestic manufacturers report that car and truck sales were lower during this October than during last October. Inventories, which were very low earlier this fall, have now increased to more comfortable levels. The Bank's directors from North and South Dakota report that vehicle sales in their vicinities were still slow in November.

Housing activity continued to pick up in the Minneapolis-St. Paul area, but activity was spotty elsewhere in the district. In the Twin Cities, home sales were 12 percent higher during this September and October than they were during these months last year. Residential construction contracts in Minnesota were substantially higher this September than last. But while Bank directors find that housing starts were up in the area around Great Falls, Montana, they also note that activity was down around Bismarck, North Dakota, and in western North Dakota.

In general, tourist expenditures in both summer and fall appeared to have increased from 1984. levels. In the Upper Peninsula of Michigan, the increase appeared to be about 5 percent. Good tourism activity in both northwestern Wisconsin and western Montana was also noted by the Bank's Advisory Council.

Agriculture
Because of a sharp rise in cattle and hog prices, Minnesota's farm price index rose in October for the first time since last December. However, major crop prices continued to fall, with both corn and soybean prices dropping-the latter to their lowest level since April 1976. In Minnesota and South Dakota, the corn and soybean harvest looks bountiful, promising large government crop payments. Also, a drop in the cattle supply bodes well for future cattle prices and could help ranchers recover their summer losses. Turkey prices are also higher than they were a year ago, which will brighten Thanksgiving for growers in Minnesota, one of the largest turkey- producing states.

Farm Finance
Farm finance issues were once again in the forefront of district concerns. About one-third of the bankers responding to our late- September survey of rural bankers in the district said they referred an abnormally high number of poor farm-credit risks to nonbank lenders, such as the Farmers Home Administration. A Bank director thinks that from 5 to 10 percent of his farm borrowers won't obtain refinancing for next year.