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Beige Book Report: Minneapolis

March 14, 1990

Ninth District conditions are moderately good, and the general tone here is one of cautious optimism. Labor markets are still tight but manageable. Wage and price increases remain moderate in most district markets. Spending on general merchandise has been fairly strong during the first two months of this year, but car sales and construction activity has been generally lackluster. Resource- related industries have been doing quite well generally. However, concern about a lack of moisture is widespread. Unless spring brings precipitation across the Upper Midwest, another serious drought is possible.

Employment, Wages, and Prices
Labor markets remain fairly tight through most of the district, as they have been for some time. The unemployment rate in Minnesota was 4.3 percent in January, down from 5 percent a year earlier. Between December 1989 and a year earlier, unemployment declined in Montana, North Dakota, and South Dakota, but it rose in Wisconsin and the Upper Peninsula of Michigan. The Minneapolis-St. Paul area has continued to feel some effects of cutbacks in the computer and electronics industries, and districtwide December 1989 employment in manufacturing was slightly below a year ago.

Wage and price increases remain moderate. Wage increases in the 3 - 5 percent range are reported in most district industries. However, sharp increases in health care costs are prevalent. In some recent settlements, these costs have almost entirely absorbed employee compensation gains. High gasoline costs are causing problems for some district truckers and loggers, but gas prices appear to have peaked in mid-1989; they have modestly declined since then. This Bank's directors note that capital equipment price hikes are running in the 3-6 percent range, except in the paper industry, where they are a bit higher. One director reports modest increases in material costs.

Consumer Spending
Retailers report that recent sales levels have been "OK" to "moderately good." One large retailer notes that inventories are well under control and expectations for Easter shopping are bright. Regional centers within 100 miles of the northern U.S. border are benefiting from brisk sales to Canadian shoppers. New car sales are reported as soft in much of the district, with used cars moving considerably better. Some dealers have been struggling in recent months, and modest consolidation in the auto dealership industry is possible in 1990. Housing sales have been generally flat overall, but with considerable variation around the district. Weakness is noted in most of North Dakota and the Upper Peninsula of Michigan, but moderate strength is reported in western Wisconsin. In Minnesota's Twin Cities, unusually warm weather is cited as the reason January 1990 home sales exceeded those a year ago by about 20 percent. Tourist activity has varied widely around the district, depending on the amount of snow. An excellent early snowfall has helped ski resorts in western Montana, and the Upper Peninsula of Michigan is enjoying good snow cover; resorts there are generally busy. Most parts of western Wisconsin, however, have had limited snowfall, and tourism has suffered. In several district states, dogsled racing is attracting crowds and media attention.

Construction
Construction activity in the Ninth District is generally flat, and industry respondents are not optimistic for the rest of 1990- particularly not for commercial real estate. Although less affected than some parts of the United States, the Twin Cities suffer from excess capacity, with still more coming on line this year. Minnesota contracts for new construction declined throughout the second half of last year and by December were about 40 percent below midyear levels. A notable exception to weakness in commercial construction is the Upper Peninsula of Michigan, which will benefit from pipeline construction and several large public projects.

Resource-Related Industries
Mining remains ore of the strongest sectors of the Upper Midwest economy. This is true in the Upper Peninsula of Michigan, where iron mines are profitable and expanding capacity. It is also true in Montana, where precious metal mines are running at full capacity and expanding. The drilling rig count in Montana, however, is down to about five, which is low by virtually any standard. The district's forest product industries are generally strong, with fiberboard plants running at full capacity and paper plants making substantial capital investments to expand capacity. Increasingly, however, environmental concerns are affecting capital spending plans in some industries, including mining, logging, and paper.

The agricultural sector has one or two bright spots in the Ninth District. Dairy prices dropped sharply in February, but until then had been running at record highs. A director reports that Wisconsin dairy operators are investing in equipment improvement. Cattle ranchers in Montana have benefited from excellent prices, good grass, and generally benign weather conditions.

Still, there is great concern in much of the district about a lack of soil moisture. The effects, so far, have been limited. Winter wheat losses due to lack of snow cover have been less than feared, thanks to relatively mild weather. However, most areas report below- normal precipitation. Since most areas are still recovering from drought, groundwater levels are typically very low. In parts of Minnesota, shallow wells have gone dry, and the state has recently reconvened its task force on drought. Many district lakes are at extremely low levels, and fishing, which is a major summer tourist attraction, is likely to suffer.

In sum, most of the Ninth District needs water badly. If precipitation comes when farmers need it and the weather cooperates thereafter (which is what happened last year), the agricultural sector could still do quite well. However, the risk of significant drought problems in 1990 cannot be ignored.