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Beige Book Report: Minneapolis

January 28, 1987

Economic growth in the Ninth District may have picked up a bit late in 1986. Consumer spending was somewhat stronger than expected in December. Ongoing commercial projects have kept contractors busy. Major resource sectors have not deteriorated, and some may pick up. A few scattered bright spots have appeared in agriculture. But district states are still struggling with projected budget deficits.

Consumer Spending
A late buying rush helped keep 1986 holiday sales of general merchandise moderately above 1985's. One general retailer says its planned promotions did quite well. Another says its December sales were higher than a year earlier, with most of the increase coming during the holiday week. Both retailers were left with only normal levels of inventories. Reports from this Bank's directors and the district's newspaper editors indicate that holiday sales followed the dichotomy of weaker sales at small town, Main Street retailers and stronger sales at regional shopping centers and in larger, diversified cities.

In accord with the national trend, district sales of motor vehicles were also strong in December, as buyers rushed to take advantage or their last chance to deduct sales taxes from their federal taxable income. During the last 10 days of December, district sales of domestic manufacturers were 50.4 percent ahead of the comparable period in 1985. Due to this rush, one domestic manufacturer reports, its total sales for the whole month of December were "great," and it had low inventories of both cars and trucks left for January.

Lower interest rates have continued to fuel housing activity. Home sales in the Minneapolis/St. Paul area registered big gains late last year: They were 23 percent higher during November and December than during those months a year ago. Homebuilders contacted in Minnesota report statewide gains during 1986, but think a recent tariff on Canadian lumber may raise home prices a bit in 1987.

Tourist spending at district ski resorts has been spotty lately, due to scattered snowfall. Fortunately, the hard-pressed Upper Peninsula of Michigan has had a strong season so far, according to a Bank director. Resorts in Montana with adequate snow have benefited from Idaho's lack of snow.

Nonresidential Construction
The geographic pattern of nonresidential construction has also been varied lately. Despite moderately high vacancy rates, contractors in the Minneapolis/St. Paul metro area have been kept busy into 1987 by commercial construction. Several large downtown office projects are under way there, and some large new office and retail complexes have been planned in the area's southern suburbs. Contractors in Duluth, Minnesota, are looking forward to over $700 million of nonresidential construction lasting through 1988. A Pierre, South Dakota, booster notes that two-thirds of the work on its new convention center and hotel still remains. But a Montana contractor says construction sector activity is "all but nonexistent" in that state, due to a slow economy and a state budget crunch.

Resources
Resource-related industries have continued their mixed performance, although some improvement is foreseen. Wood products sectors have continued to do well. A recently established plywood operation may add 50 more workers. Gold mines in Montana and the Upper Peninsula of Michigan are one of the few bright spots in the mining industry. But the oil and gas sector is still nearly idle, with only 28 rigs working in the district. The recent increase in crude oil prices should help that sector some.

Agriculture
Signs of stability for some farmers in some parts of the district have appeared recently. Wheat prices rose somewhat in December, and corn and soybean prices were up a bit as well. One Bank director notes that federal government payments have helped struggling Montana wheat farmers. Livestock operations have continued to be aided by low feed prices, good market prices, and mild weather. Two surveys of district agricultural bankers indicate some improvement. One of then suggests that bankers thought fourth quarter farm earnings were higher than a year earlier; the other, only that general conditions deteriorated at a slower rate in 1986 than in 1985. Better-than-expected demand materialized during some recent land sales. Still, many district farmers are still struggling, with little prospect for dramatic improvement.

Public Finance
A big cause for concern recently has been the fiscal health of state governments. District states are struggling to balance their budgets. North Dakota's governor has called for a special session to deal with the issue, and voters may be faced with increases in sales or income taxes. Montana, stung in part by lower mineral taxes, has had to plan cutbacks in its higher education spending. And Minnesota, though partly aided by higher-than-expected tax collections in December, still must plan for a potential shortfall next biennium.