December 7, 1994
The economy of the Ninth District continues to grow briskly, but is apparently beginning to encounter some problems. On the positive side, manufacturers report strong orders. Overall mining and forest product output remains high. Agricultural production is at or near record levels. Non-residential construction remains robust. Retail sales of general merchandise are strong and vehicles generally continue to sell well. Fall tourism was excellent as are prospects for winter activities.
However, some problems are emerging. Residential building clearly is slackening. In agriculture, unfavorable prices are limiting farm household and capital spending. Urban labor markets have tightened to a point where many businesses encounter difficulty in securing employees. Reported wage increases are larger and more widespread than earlier in the year. Price hikes for raw materials and intermediate goods are becoming common, and a survey shows increasing expectations that such increases in business costs will eventually be passed along to consumers.
Manufacturing
"Manufacturing is very good." reported an advisory council member
from north-central Wisconsin. and other sources indicate that this
is true across the district. News media report that some firms have
such strong orders that they have difficulty meeting promised
shipping dates. Auto and machine components, builders' hardware, and
commercial printing businesses are all described as having full
order books. Publicly traded manufacturing firms continue to
announce strong revenue increases over the previous year. Moreover,
industrial sales of electricity continue to grow substantially
faster than long-run averages.
Natural resource industries
Mining and forestry are responding to strong demand and favorable
prices by increasing output wherever possible. A previously idled
iron mine in Minnesota that was brought back into production in late
summer is already outstripping production expectations, and an
industry spokesman stated that Minnesota's 1995 iron shipments will
be the highest in over a decade. Copper producers and an aluminum
processor face especially favorable prices and are described as
producing at capacity. Paper mills are reportedly increasing output
as strengthening national and international demand for many types of
paper allow them to bring underutilized capacity back into use. Oil
and gas drilling remains higher than earlier in the year. Lumber and
building board production remains strong. Sawmills in Montana
reportedly are having a better year than anticipated as timber sales
from private lands have increased to partially fill the gap caused
by reduced federal sales.
Construction
"Housing activity is starting to level off," said one advisory
council member from Wisconsin, noting the effects of higher mortgage
interest rates. His comments were also echoed by colleagues from
Montana. Single-family home permits issued in October in the
Minneapolis-St. Paul area were about 9 percent below year earlier
figures. And while building activity in the eastern Dakotas remains
strong, advisory council members and directors indicate that fewer
new jobs are in the pipeline and that the 1995 building season will
be down somewhat from 1994. These views were confirmed by a
Minneapolis Fed mid-November poll of business people who reported a
marked softening of their expectations for housing starts in their
communities, compared to responses to the same question six months
and a year ago.
Commercial and heavy construction, however, continues to outpace year-earlier levels, and the number of projects already initiated should ensure that the 1995 season will also be a busy one, according to one industry source. Publicly let contracts in Minnesota and the Dakotas for 1994 through October were 13 percent above 1993 levels.
Agriculture
Ninth District agriculture is celebrating its best crop ever, but
mourning the lowest combination of crop and livestock prices in many
years. Corn, soybean and sugar crops were the best ever for the
district and wheat yields were excellent in most areas. Grain prices
have generally stabilized at levels 15 percent to 30 percent below
1993 harvest prices after dropping nearly continuously from February
into early fall. Favorable yields will offset the drop in prices and
crop incomes will be substantially above 1993 in all areas except
Montana and western North Dakota. But 1993 was an unusually bad year
and 1994 crop income is likely to be only slightly above longer run
averages.
Livestock prices, particularly for hogs, is where the farmer's shoe is pinching. In early November slaughter hog prices hit the lowest point in more than two decades in current dollars and in constant terms approached 20th century lows set in 1933. Cattle prices are also down substantially, with the greatest impact felt by cow-calf operators in Montana and in western South Dakota.
The upshot of this pattern of good crops but unfavorable prices for both grains and livestock is that farm household and capital spending are expected to be muted this year. Bankers responding to a Minneapolis Fed third quarter survey of agricultural credit conditions indicated that while farmers are generally able to service debt, few are expected to make major capital expenditures. Exceptions are crop-dependent eastern North Dakota, where farm machinery sales are particularly strong. At the other extreme, Montana bankers in areas where no crops are grown have begun to express concern about the ability of less well capitalized ranchers to weather the slump.
Consumer spending and tourism
General merchandise sales reportedly improved through the fall.
Traffic in malls and sales figures for national chains, regional
retailers, and specialty "category killer" merchandisers all point
to strong consumer spending as the year closes. Although a snowstorm
slowed shopping at the end of the Thanksgiving weekend, store
operators reported very good sales before the storm hit and
expressed optimism about holiday season sales. But there are some
signs of slackening demand; a few advisory council members described
increasing consumer caution in their communities. And a director who
operates a trucking business noted a distinct drop in furniture
shipments into the region.
Vehicle sales continue to generally be robust, with reports from Wisconsin to Montana of dealers who are unable to get certain popular models. One industry source, however, noted a plateauing in sales of sedans, station wagons and minivans. Pickups and sport utility vehicles continue to sell well.
Tourism and recreation businesses are doing well. South Dakota had an excellent pheasant hunting season with optimal weather conditions and record spending by out-of-state hunters. The warm, late fall delayed ski and snowmobile recreation, but expectations for such winter business are very good. However, Canadian cross-border tourist traffic reportedly is down from previous years.
Employment, wages and prices
"It is hard to hire anyone to do anything," is how one advisory
council member from eastern North Dakota described labor markets in
his area. There are many other indications that labor markets
continue to tighten. Help wanted signs are ubiquitous in most urban
areas. Employment applications commonly are placed at sales counters
in retail establishments, Minneapolis-St Paul school bus operators
reportedly are short over 300 drivers, while retailers in these and
other cities are having extreme difficulty finding seasonal workers
for the holiday rush. Some firms offer employees bonuses for new
recruits.
"Labor shortage raises wages in region," was the headline in one central Wisconsin newspaper, but that headline would accurately characterize wage tendencies in many other areas of the Ninth District. One director from North Dakota described wage increases of 4 percent to 10 percent in manufacturing firms he had contacted. News reports and advisory council members also note that substantial wage increases are becoming more common, One Minnesota manufacturer reportedly raised its starting wages from $6 to $7 per hour to attract needed workers.
Many sources report price increases in raw materials or intermediate goods. Both steel and non-ferrous metals continue to rise in price, as have hardware items. Adhesives and plastic laminate prices have increased by 6 percent to 10 percent in recent months. And a Minneapolis Fed survey of business, people showed a marked increase in expectations that consumer prices would increase at an above- trend rate, compared to responses to the same question six and 12 months earlier.