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Beige Book Report: Minneapolis

August 3, 1994

Growth in the Ninth Federal Reserve District continues to gain momentum. Manufacturing firms apparently have expanding orders and there is increased spending on capital goods. Metal mining prospects are brighter and output is increasing. New residential housing starts slowed slightly from earlier in the spring, but construction remains very robust. Crop conditions are excellent in most areas. Reports on tourist activity are strong from all areas of the Ninth District. Outlays on general merchandise continue to expand and motor vehicle sales remain strong.

Labor markets show increasing signs of tightness, especially in metropolitan areas across the district. Some firms report difficulty hiring skilled workers. However, there is little evidence of increasing labor costs. And while prices of a few materials, such as non-ferrous metals, have increased, some supply bottlenecks have apparently eased.

Manufacturing and capital goods
Manufacturing is generally robust and orders apparently are increasing. Firms producing building supplies or auto components report particularly strong sales. Manufacturers of medical supplies, electronic devices and commercial cabinets also indicate that business is very good. An electronic controls manufacturer reports "We are still well above plan in spite of the interest rate increases."

Increased capital investment is apparently responsible for some of the impetus in manufacturing. One manufacturer of industrial painting equipment had second-quarter sales 18 percent above a year earlier. Moreover, farmers are increasing their capital spending: North Dakota reports that first-quarter sales tax revenues on farm machinery sales were 28 percent above 1993 and other sources indicate that such sales have continued to increase as crop prospects become increasingly optimistic.

Natural resource industries
Natural resource-related industries are strong. An iron ore mine that has been closed for nearly a year will reportedly open by fall. Furthermore, shipments from existing iron mines are running above 1993 levels and above industry projections made earlier in the year. Copper prices remain 30 percent above year-earlier prices and production is strong.

In the forest products sector, plants manufacturing plywood substitutes in Minnesota and Wisconsin are reportedly running at capacity and lumber mills in that region have good business. But in South Dakota and Montana, output of lumber is reportedly below 1993 levels due to cutting restrictions. In the paper industry, which continues to suffer from overbuilding in the 1980s, there are some glimmers of improvement. A new plant to de-ink and re-pulp used paper reports good business, and a spokesman for a firm with two mills in Minnesota said, "We expect 1994 to be better than 1993." But another Minnesota mill laid off 220 workers.

Construction
Despite interest rate increases earlier in the year, the construction sector remains robust in most areas of the district. But residential building may have reached a plateau. For Minneapolis-St. Paul, June single-family permits dropped slightly from May, but remained I percent above the high levels attained a year earlier. Residential construction reportedly remains very strong in such regional centers as Eau Claire, Wis., Sioux Falls, S.D., and Fargo, N.D. Commercial and heavy construction in Minnesota and the Dakotas through June was about 2 percent above 1993 and 28 percent above 1992.

Agriculture
Crops in most areas of the Ninth District are in excellent condition. Development of corn, soybeans and wheat is substantially ahead of normal. While hail damage is somewhat more widespread than normal and excess rainfall caused some crop damage in the Dakotas and northwestern Minnesota, . overall prospects are for an excellent crop. Harvest of winter wheat has begun. There is some concern that plant diseases may again cut wheat yields and quality in eastern North Dakota and northwestern Minnesota, but no hard information is yet available.

Although crop prospects are much better than a year ago, livestock numbers and output show little change. While cattle and hogs both seem to be moving toward contractionary phases of their respective cycles, industry sources and extension economists anticipate current high slaughter levels and low prices will continue into 1995.

Consumer spending and tourism
Sales of all classes of retail merchandise continue strong across the district. A representative of a regional department store chain indicates that second quarter business was excellent, as do reports from a large national chain based in Minneapolis. Mall managers in Minneapolis-St Paul and other metropolitan areas also report expanding sales.

Motor vehicle sales continue to add impetus in many areas. The pace of automobile sales slowed slightly in Minnesota, with monthly sales for June about 2 percentage points below a year earlier. But 1994 year-to-date sales lead 1993's already strong sales levels by 2 percentage points. And South Dakota's pace quickened: June sales were 13 percent and year-to-date sales 12 percent ahead of the corresponding period in 1993.

Pleasant weather is keeping tourist attractions busy. Hotel occupancy in the Upper Peninsula of Michigan is up for July over 1993, after staying even during June. June crossings at the Mackinac Bridge are up 9 percent over year-earlier levels, reportedly due in part to nearby casinos. A chamber of commerce official in northern Wisconsin reports "the best summer ever." And a Duluth, Minn., official estimates about an 8 percent increase in tourism traffic for June and July over the same months last year. Campsite occupancy in South Dakota in June is up 47 percent over 1993, the highest level in five years. Montana reports for June were up slightly from last year's record levels.

Employment, wages and prices
Labor markets reflect a strengthening district economy. Late spring employment numbers continued to climb in all Ninth District states and unemployment rates dropped. Employment numbers are running 2 percent to 3 percent above year earlier levels in Minnesota and both Dakotas. In these states unemployment rates are at 3.2 percent or less, down a point or more from 1993 The Minneapolis-St Paul unemployment rate is down to 2.5 percent while Sioux Falls and Aberdeen S. D., Fargo N D., and La Crosse, Wis., are even lower. Firms in many sectors report difficulty in securing qualified help. A personnel manager for a western North Dakota manufacturer said, "It is much more difficult to get help than a year ago." News media report shortages of over-the-road truck drivers, mold and die makers and electronics technicians.

Neither vigorous business conditions nor tightening labor markets have yet translated into significant upward pressure on wages or prices. Few sources report wage pressures. Hourly earnings in manufacturing for Minneapolis-St. Paul are about 1percent above year-earlier levels. Shortages of steel and wood particle board reported in June have apparently eased. Non-ferrous metals have increased in price, and petroleum fuels have risen back to summer 1993 levels.