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Beige Book Report: Minneapolis

March 15, 1995

In late winter, the economy of the Ninth District remains strong, but consumers show increasing caution, particularly in regard to home and vehicle purchases. Manufacturers remain active as do construction firms. Iron and copper mining is strong. Paper production is going full steam. Weather and soil moisture conditions are excellent going into the new crop season and the mild winter has been beneficial for livestock producers. Office and commercial real estate rental markets are tight.

On the other side of the coin, sales of general merchandise are reportedly slack and auto dealers across the district describe mild to sharp drops in sales. Some tourist businesses suffered from lack of snow. Residential construction is slower than the previous two seasons.

Labor markets in most cities remain tight and skilled manufacturing workers are particularly hard to get. However, reported wage increases are only marginally higher than those in the preceding three years. Some raw material and intermediate goods prices continue to rise, although reports of delays in delivery have moderated from last fall. Lumber prices have declined.

Manufacturing
Manufacturing is now the economy's bellwether. Directors, news media, advisory council members, electrical utilization figures and industry sources all describe the strongest manufacturing sector in recent years. Labor shortages are most pronounced in this sector, and the most common reports of price increases concern purchased inputs for manufacturers.

Natural Resource Industries
The paper industry is coursing ahead with full sails after spending three or more years in the doldrums. Sales of all grades of paper from coated magazine stock to newsprint and packaging are reportedly very strong and most mills are running at capacity. One mill in Michigan's Upper Peninsula is investing over $100 million in a new paper machine and related plant expansion. Other mills reportedly are making improvements to eliminate bottlenecks. Lumber prices have softened somewhat from 1994 levels, reportedly due to some slackening in demand for residential construction and to higher than anticipated production in the Northwest.

Strong demand from the steel industry and high copper prices have been a boon to the two major components of Ninth District mining. Iron mines on both shores of Lake Superior are running at capacity and at much higher levels of productivity than prevailed before painful restructuring that occurred in the 1980s. One Minnesota mine expects to produce 14.5 million tons in 1995 with less than 1,500 workers, beating its previous record of 14.1 million tons set in 1981 with 4,200 workers. A new copper mine in Wisconsin is producing at a higher rate than anticipated and older mines are reportedly working at capacity.

Commercial and Real Estate
Commercial construction continues to outpace residential work in many areas of the district. Warehouse construction is particularly good, in part as a result of changing structural patterns in wholesale-retail distribution, but also due to growing general demand. One Minneapolis-St. Paul manufacturer noted that warehouse lease rates have increased by nearly 50 percent since last year. Commercial construction is reportedly strong in Fargo, N.D., Sioux Falls, S.D., and other urban areas. A Minnesota plumbing wholesaler said that requests for quotes for bidded projects were setting records.

Residential construction is apparently at a plateau, which building association officials describe as good, but is clearly below the levels achieved in the preceding two seasons. Fargo, N.D., and Sioux Falls, S.D., are areas of particular strength while western North Dakota is one area where residential work is reportedly much stronger than commercial. One Montana source noted a shift from retail and commercial work to government and industrial projects. Reports on sales of existing housing vary between localities but on balance such sales appear depressed from normal levels. Higher mortgage interest rates are cited by both builders and realtors as the principal cause of slowing in their businesses.

Agriculture
Fine weather and moderately stronger prices are setting a mood of cautious optimism as farmers approach the 1995 spring planting season. Livestock prices remain well below year-earlier levels but above the troughs reached in late 1994. Cattle numbers on January 1 were generally 1 percent to 2 percent above 1994's already high levels, thus promising no early price relief. Crop prices are similarly below early 1994 levels but up from levels prevailing earlier in the winter.

The Minneapolis Fed quarterly survey of farm bankers reveals demand for all types of loans, together with farm income and spending, as slightly below normal levels. Few bankers report customers having problems with debt service, and feeder livestock and machinery loan volumes are described as below usual levels.

Consumer Spending and Tourism
The most marked turn in the economy appears to be in retail sales. After a good holiday season, sales by general merchandisers in January and February were barely above year-earlier levels and news reports describe a retail slump. One North Dakota regional mall manager described traffic as "so-so." Another in South Dakota described business as "a bit slow" but noted that increased competition due to retail sector overbuilding might be the cause rather than consumer reluctance.

"Auto sales are very soft," says a South Dakota dealers' association representative, citing higher interest rates and caution by farmers as the principal reasons. After a strong showing through most of 1994, auto sales have declined in all parts of the district. During February, registrations of new passenger cars and light trucks in Minnesota were down about 6 percent compared to year earlier levels. Similar contractions are reported in the Dakotas and Wisconsin dealers confirm slowness in their region.

Winter tourism has generally suffered from sparse snow cover over much of the district. Snowmobiling and cross country skiing are down from last year in many areas. However, the Upper Peninsula of Michigan and areas of northern Minnesota with good snow conditions report very good business. South Dakota and Minnesota officials report steady traffic to downhill ski areas and in Montana most ski resorts have good snow and good business. Cuts in Amtrak service will dampen activity in North Dakota and Montana, according to a resort executive.

Employment, Wages and Prices
Labor markets remain tight as unemployment rates in several metropolitan areas are below 4 percent. Involuntary overtime has become an issue for some manufacturing and mining firms. Grievances have been filed at one Minnesota mine where many workers have been putting in 60 hour weeks on a regular basis. Some Minneapolis-St Paul machine shops have foregone bidding on some jobs because of their inability to hire new machinists. Plumbers, pipefitters and other skilled building tradespersons are also reportedly in short supply. In spite of such apparent tightness, few sources report sharp wage increases.

Prices have risen sharply for paper products of all types, packaging materials and commodity chemicals such as chlorine, caustic soda and methanol. Prices of intermediate goods including hardware, machined assemblies and plastic components also are up, but delivery delays for steel and other materials have abated. Nor is there much evidence of price increases at the final goods level. Petroleum product prices are essentially unchanged from a year ago.