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Beige Book Report: Minneapolis

November 1, 1995

The economy of the Ninth District continues to roll right along as moderate growth prevails in most sectors and regions. A late summer upswing in residential building stoked the fires for the construction sector. Oil exploration, leasing and drilling is giving a big boost to western North Dakota and business remains good for metal mining and forest products firms. The 1995 crop is better than expected and most prices, with the exception of beef cattle, are favorable to producers. Interest rates are falling for farm borrowers. Manufacturers report moderate to strong sales. Auto sales are somewhat below year-earlier levels, but other retail sales are growing moderately. Fall foliage attracted tourists in many regions. Labor markets remain very tight. Increases in a few prices contrast to declines in many others including steel and gasoline.

Construction
Single-family home building gained its second wind in late summer as new permits in Minnesota reached 18 percent above August 1994 levels and 12 percent above the building boom of 1993. Small multi-family units also posted substantial gains. Similarly, a Ninth District director describes home building in western Wisconsin as very strong. Active building continues in eastern North Dakota cities such as Fargo and Grand Forks, and is spreading to west-central areas of the state such as Bismarck and Dickinson. Western Montana builders reportedly are having a good season, although below the boom levels of the previous two years.

"Suburban office and warehouse building remains very strong," says a Minnesota director, "but retail building has passed its peak." Commercial building is described as strong in most other urban areas of the district with the exception of Michigan's Upper Peninsula. Publicly-let construction projects in the Dakotas and Minnesota continue slightly above 1994 levels.

Natural resource industries
Booming oil exploration, leasing and drilling in western North Dakota continues as the most dynamic aspect of natural resource industries. Reflecting industry-wide interest in these new developments, the Oil and Gas Journal featured the Lodgepole oil formation in recent articles. Exploration and leasing radiate into Canada and Montana from initial wells near Dickinson.

Iron ore mining continues to have a good season with shipments generally running ahead of 1994. Existing copper mines in Montana and Wisconsin are running at capacity, and a large mining firm is advancing in permitting a new mine southeast of Eau Claire. Lumber and building board producers report sales down somewhat for the year-to-date compared to 1994, but note late summer improvement. High paper prices continue to fuel strong output.

Agriculture
1995 is turning out to be a much better year than expected for most farmers in the district. Farmers in east central South Dakota who experienced excessive rainfall in the spring, an early killing frost, and excess rainfall during the harvest are one exception. Cow-calf producers, particularly in South Dakota and Montana, are the other.

While 1995 yields are below 1994's record levels for most crops, harvests are much better than expected in late spring or even midsummer, especially for corn, durum wheat, sunflowers, and soybeans in most areas. Prices for all the grains are well above year-ago levels. One concern is that rail and barge capacity is lagging output and localized shortages of storage are appearing.

Higher hog prices have cheered producers from a year ago when inflation adjusted prices reached historic lows. While increased feed costs continue to crimp profits, prices in the high $40 per cwt. range mean that most producers are at least recovering all costs. This increase in prices is apparently due largely to increased exports rather than changes in domestic demand or in output. Cattle producers, particularly those with breeding herds, continue to experience severely adverse prices. While well- capitalized producers who experienced favorable prices earlier in the decade should be able to weather the cycle trough, bankers in ranching areas expressed concern about recent entrants and highly leveraged operators.

The Ninth District third quarter survey of agricultural credit conditions showed a 10 to 40 basis point reduction in various categories of farm interest rates and adequate supplies of loanable funds. Most bankers noted increases in observed farm income and spending, which are confirmed by implement manufacturers' reports of good sales. But bankers in ranching areas report large increases in the proportion of their borrowers up against their credit limits.

Manufacturing
"Sales are good, but not great," is one Minnesota food processor's characterization of business conditions, noting that export sales of breakfast cereals is one area of strong growth. But computer component manufacturers are opening new plants in a Minneapolis suburb and in Eau Claire, Wisc. "This year is as good as 1994, which was outstanding," says one manager of a North Dakota construction machinery manufacturer. Sales of electricity to manufacturers continue above 5-year trends.

Consumer spending
"Business is good, but not booming." "An O.K. year so far, with some improvement in late summer." Such remarks are typical for retailers of general merchandise. But one experienced retail analyst notes that perceptions of sluggish sales by store managers may be due largely to overcapacity in the sector after three years of fevered expansion rather than from weak consumer demand. Sales tax collections tend to confirm this view. Minnesota, North Dakota and Wisconsin all report tax receipts well above 1994 and prior projections.

Auto dealers continue to ride a roller coaster, with highly variable sales generally running somewhat below 1994 levels. But there are areas of strength, North Dakota dealers report good sales of pickups resulting from oil sector activity and improved earnings for farmers.

Tourism
Despite seasonal slowness, tourism officials in the Ninth District report moderate growth. Visitations at major tourism sites for September were up 5 to 10 percent in Montana compared to a year earlier. A tourism official in Duluth, Minn., reports a 6 to 8 percent increase in tourism activity for September, while a town in northwest Wisconsin has steady car traffic and 3 to 5 percent increase in business, according to a Chamber of Commerce official. But one source in northern Minnesota described the season as "so-so" and some North Dakotans report a decline in visits to regional attractions.

Employment, wages and prices
"Its becoming harder and harder to attract and keep good workers," is how a western Wisconsin director describes the labor market in his region. Labor markets are tight in most areas of the district, with unemployment rates below 3 percent for the states of Minnesota, North Dakota and South Dakota and near 2 percent in many urban areas. Ubiquitous help wanted signs and bulging employment ad sections in newspapers continue despite employment growth over 1994 above 2 percent across the district. Skilled technical specialties remain in shortest supply.

Reported increases in compensation levels are generally modest. One construction equipment manufacturer in North Dakota signed a 4-year contract with its union providing for a 3 percent per year increase in wages and another concluded an agreement for 1996 with no increase in wages. But some firms apparently are increasing benefits to attract and keep employees. An employee benefit plan firm reports a sharp increase in the number of restaurants and fast-food franchisees who are offering insurance packages and 401k plans.

Agricultural commodities have risen in price, and non-ferrous metals and paper remain high. But price declines are reported for a number of intermediate goods including most grades of steel and particle board. Declines are also reported for property and casualty insurance premiums, technology products, advertising specialties, and some trucking rates. Petroleum product prices continue to decline, and gasoline is advertised at less than $1 per gallon for the first time in years at some Minneapolis-St. Paul gas stations.