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Beige Book Report: Minneapolis

December 6, 1995

Moderate growth with few problem. continues as the watchword for the Ninth District economy. Construction, which caught a second wind in late summer, is busy right into the winter. Most natural resource industries have strong output and some firms plan new investment in plants or equipment. With the exception of cattle producers. most farmers had a reasonably good year in 1995 and are investing carefully in machinery. The holiday shopping season began with strong Thanksgiving weekend sales, but in general consumer spending on automobiles and general merchandise is cautious. The winter tourism season is off to a good start. On balance, manufacturing orders are slowing somewhat, particularly in firms related to vehicle production, but other firms continue to report strong sales. Tightness continues in most labor markets, but few increases in wages or prices are apparent.

Construction
Residential construction hit its second wind in the fall and continued to dash for the finish line as winter approached. Minnesota's September building permit numbers outpaced one- and two- year earlier numbers in all residential categories. Most builders reportedly have enough starts to keep them busy through the winter. Residential building is similarly strong in cities in North Dakota, South Dakota, western Montana and northwestern Wisconsin. "Fargo is taking on a boom town atmosphere," according to a Ninth District director describing both construction and manufacturing in that city. "Building in western Wisconsin is very strong, up about 28 percent from last year," echoed a colleague.

Commercial building, particularly offices and warehouses in Minneapolis-St. Paul suburbs and in other regional cities, continues active into early winter. Publicly-let heavy construction ends the year as it began, slightly ahead of robust year-earlier figures.

Natural resource industries
Most natural resource industries are in fine fettle as the winter begins. North Dakota's oil boomlet has rig counts nearly double those of a year ago and continued seismic exploration and leasing hold some promise that development may continue. "Total shipments will meet or exceed our projections. It is the best year in a long time," is how an iron ore industry spokesman characterizes business in 1995. A large Minnesota producer of oriented-strand board, a plywood substitute, has applied for permits to double its capacity. Paper mills continue to run at capacity, and many are reportedly investing in new ancillary equipment to remove bottlenecks, although no major plant expansions or paper machine purchases are reported.

Agriculture
As 1995 ends, most farmers, except for beef producers, are in better financial shape than they anticipated in the spring. While wet weather dragged out harvesting in several areas, most farmers have completed fall work and yields were generally pleasing, although somewhat below 1994 levels. Prices for 1996 can be locked in at favorable levels for producers. Farmers are responding by cautiously investing in machinery. While implement dealers do not report a boom, many say sales are stronger than earlier in the year and, in some cases, better than a year ago.

Hog producers continue to face prices that are above late 1994 levels and generally adequate to cover costs. Beef producers, on the other hand, continue in their slow financial hemorrhage. For many producers, the value of calf sales in 1995 was about half that of 1993, the last year of good prices. Dairy farmers are being squeezed by higher feed costs resulting from increased grain prices, but their financial situations are generally reported as stable. Many farmers express concern with continuing uncertainty about the outcome of the 1995 farm bill, particularly its dairy and Conservation Reserve Program provisions.

Manufacturing
"I don't think the economy is as good as some people think," says the CEO of a Minnesota industrial equipment manufacturer, who notes that sales of some of his firm's lines are below plan and 1994 levels. A colleague, who heads a manufacturer of components for trucks and construction equipment agrees, pointing to shrinking sales to truck manufacturers. But other firms, notably farm implement and construction equipment manufacturers in North Dakota and medical device and electronic equipment builders in Minnesota, report continuing strong sales. On balance, manufacturing output apparently is slowing mildly. While industrial electrical usage growth in Minnesota and South Dakota continues somewhat above trend, the margin is narrower than earlier in the year.

Consumer spending
Initial reports on Thanksgiving weekend shopping are positive with area malls reporting strong traffic. Nevertheless, district consumers are repeatedly described as cautious. Many retailers say they are having to increase advertising and promotions to maintain sales that are below plan. Apparel seems to be one category on which consumer spending has dropped. But electronic equipment, including home computers, reportedly continues to sell well.

"It is not that people don't have money, it is just that they are being very careful about how they spend it," is how a dealers' representative describes auto sales in South Dakota. His description is applicable to most areas of the district. Vehicle sales generally continue slightly below 1994 levels, with great variation between different regions. North Dakota, with good crops, strong construction, and oil activity, generally has good sales, particularly of pickup trucks. South Dakota, with a poorer crop and low cattle prices, reportedly has good sales in its larger cities, but slow ones in farm and ranch areas.

Tourism While the summer season was disappointing at major national parks and attractions in the western part of the district, fall and early winter tourism and recreation activities appear strong. The pheasant hunting season in South Dakota and the deer season in Wisconsin and the Upper Peninsula of Michigan were excellent and hospitality businesses reportedly had robust sales. Snow cover in northern regions came earlier than in 1994, and winter recreation, principally snowmobiling and cross-country skiing is off to a strong start. Some tourist officials in the Upper Peninsula of Michigan, Wisconsin and northern Minnesota expect a record year for such activity.

Employment, wages and prices
"Entry level workers are hard to come by," complains one Minneapolis CEO, and he is echoed by colleagues across the district. Labor markets are tight as a drum in many areas with unemployment rates two percentage points below the national average for most of the district. Wage increases apparently remain modest, with employers sweetening the benefit pot or extending such benefits to previously uncovered workers.

Paper continues to head the list of products with price increases. Agricultural commodities follow and non-ferrous metal prices continue high. But there the list runs out, and reports of price decreases continue for some types of steel and other intermediate goods.