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Beige Book Report: Minneapolis

October 23, 1986

The Ninth District economy appears to be poised for improvement this fall. Labor markets have tightened a bit. Major types of consumer spending have increased. Mining and manufacturing conditions have improved slightly. Government payments and big crops are expected to help agriculture. And the financial sector has adequate liquidity to finance expansion.

Employment
The most recent available data indicate that Ninth District labor market conditions are holding firm. The seasonally adjusted unemployment rate for the district fell a bit to 5.6 percent in August. At the same time, unemployment rates fell in both the state of Minnesota and its Minneapolis-St. Paul metro area, with the latter's rate falling to just 3.7 percent. In South Dakota, nonfarm wage and salary employment exceeded its previous high for August.

Consumer Spending Major district retailers have experienced good sales levels early this fall. One retail chain notes an acceleration of activity and expects that October will prove to be its best month of the year. While another retail chain's sales slackened in October, its August and September sales were good. Neither chain reports any serious inventory problems.

District managers for domestic manufactures of motor vehicles report "fantastic" results for September. One of them tabulates that truck sales rose 46 percent over their September 1985 level and says that its dealers already have a backlog of orders for 1987 model trucks. Another reports record monthly sales for both trucks and cars. Both manufacturers' inventory levels are low. A director of this Bank notes that used car inventories are also low in some parts of western Wisconsin.

Housing activity seems strong as well. Home sales in the Minneapolis-St. Paul area have been quite good. Sales then were 60 percent higher in September than a year earlier, making year-to-date sales more than 35 percent higher than during the same period in 1985. Multifamily housing permits in that area were 115 percent higher this August than last, and residential building contracts in the state of Minnesota grew 51 percent over that period. Bank directors also note some pickup of housing activity in the Iron Mountain area of Michigan's Upper Peninsula and in Bismarck, North Dakota.

Mining and Manufacturing
Overall, mining and manufacturing conditions have improved somewhat. A Bank director reports a little more activity in the stagnant oil and gas fields of North Dakota. Also, a big iron mine in the Upper Peninsula of Michigan is still expected to reopen in November after temporarily closing in August. The lumber and wood products sectors are benefiting from good demand, strike settlements in Montana, and a favorable trade ruling from the U.S. Commerce Department. But manufacturing employment continues to fall—dropping 1.5 percent in Minnesota between August 1985 and August 1986. Yet, some encouraging signs of manufacturing recovery have appeared. A troubled maker of tractors announced a recall of some production workers in Fargo, North Dakota. And in economically stressed Motley, Minnesota, a planned new plant employing around 140 additional workers will produce a crabmeat substitute based on surimi, which is a Japanese- invented product using Pacific whitefish.

Agriculture
Despite increased prices for hogs and cattle, the Minnesota farm price index fell 2 percent between August and September, as federal efforts continued to lower crop export prices while cushioning the blow to participating farmers. Meat animal prices were up 31 percent from year-earlier levels, though. Recent dry weather has helped the fall harvest in Minnesota. Bank directors note that the big wheat crop in northern Montana should help a lot of farmers there and that some Wisconsin farmers will benefit from one of the best cranberry crops in years. This Bank's latest survey of Ninth District agricultural lenders indicates that farmland values didn't fall as fast in the third quarter as they did earlier this year and that fewer financially stressed farmers left farming this year.

Finance
At large commercial banks in the Ninth District, total deposits grew 8.1 percent while loans grew 11.4 percent between October 1985 and October 1986. Several bankers at smaller institutions note that demand for refinancing of home and consumer loans has been strong. They report no liquidity problems, which is consistent with the slack borrowing at the district discount window. Second quarter earnings at nine of the district's largest financial service companies rose a composite 26.9 percent over the second quarter of 1985.