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Beige Book Report: Minneapolis

August 2, 1988

General economic conditions have held firm in the Ninth District. Employment demand has remained high, and consumer spending has continued to grow moderately. Recent rains should eventually help some drought-stricken crop, livestock, and dairy operations. And agricultural bank conditions, while not improving, have not yet deteriorated either.

Labor Markets
The most recent statistics indicate that district labor markets have experienced some additional tightening. During May, Minnesota's unemployment rate dropped to 3.2 percent, its lowest level in 9 years. The unemployment rate in its Minneapolis-St. Paul metropolitan area fell to just 2.8 percent. In that area, temporary help agencies report some spot labor shortages and rising wages paid to clerical workers. Both the labor force and total employment reached record highs during May in South Dakota; its unemployment rate was only 3 percent. Also, North Dakota's unemployment rate dropped to 3.7 percent during May, almost one full percentage point below its level a year earlier. During past years, the Upper Peninsula of Michigan has experienced very high unemployment; this has eased in the 12 months ending in May: from 10.6 to 7.7 percent.

Consumer Spending
Retail spending has continued to grow moderately in the district. One chain reports that its department store sales were 7 percent higher this June than last. One chain plans to significantly expand two of its stores in the Minneapolis-St. Paul metro area. A chain with stores throughout the district reports much stronger growth during this period, but a higher market share probably accounts for much of that strength. Neither chain reports any inventory or credit problems.

District sales of motor vehicles have continued to hold up well. One domestic manufacturer reports that its car sales during June rose 17 percent over their level a year earlier. A district manager for a popular domestic line reports that car sales during June were strong at virtually all its dealers. A recent arena sale in Sioux Falls, South Dakota, went quite well. But district truck sales have slowed relative to car sales, perhaps due to drought-induced buying resistance in farm-dependent areas. Still, vehicle inventories haven't risen above normal levels.

Housing activity has held firm. Home sales in the Minneapolis-St. Paul area during May and June were 13 percent ahead of a year earlier. Residential building contracts In Minnesota were up 5 percent during May. But as has been true for some time, housing activity was stagnant in many cities and towns of Montana and North Dakota.

District tourist spending has increased sharply this summer. Despite burning bans at campgrounds, all tourism industry representatives contacted report increased activity. For example, Independence Day weekend business was way above the expectations of industry sources in Michigan's Upper Peninsula. A source in northern Wisconsin says that tourism there has beers running 10 percent ahead of last year. And the Black Hills area of South Dakota has also done well.

Agriculture
Rain during July came too late to significantly help some of the district's wheat, barley, and oats crops but has helped its soybean and corn crops. For example, during the third week in July, the Minnesota Commissioner of Agriculture estimated that 80 percent of' Minnesota's soybean crop would survive. Soybeans are Minnesota's second-largest cash crop. Its largest crop, corn, is not expected to do so well: only 60 percent may survive.

Crop insurance will help district farmers cover part of the lost output. Compared to last year, federally sponsored multiperil coverage is up 83 percent in South Dakota, 77 percent in North Dakota, 41 percent in Montana, and 31 percent in Minnesota.

More help has come from prices of farm products, which have continued to rise. Mid-July products of corn and soybeans on the cash markets were over 70 percent higher than a year earlier, while barley and wheat prices were up around 50 percent. These high prices imply lower government deficiency payments to farmers under current law, but some form of disaster relief might be enacted to replace that loss. Furthermore, farmers with stored crops carried over from last year will benefit from sales at these high prices.

Livestock and dairy operations have been significantly hampered by higher feed prices and a shortage of pasture growth. As a result, more stock has been sold than normal, which has lowered its price as much as 20 percent. Recent rains should help stimulate grass growth, though, and slow the sell-off in some parts of the district.

Financial Conditions
The safety and soundness of district banks do not seem to have been hurt by the drought yet. Members of this Bank's Advisory Council on Small Business, Agriculture, and Labor report that banks are still liquid and looking for good lending opportunities. A prominent banker in Sioux Falls, South Dakota, says that most serious farm debt problems won't be noticed until next year. This Bank's latest survey of district agricultural bankers does indicate that many bankers are expecting low farm income and slow repayment of farm debt during the third quarter. Still, the condition of district agricultural banks substantially improved during 1987, which should help them weather the drought.