At midyear, prospects good for much of district economy

Mid-Year Ninth District Economic Forecast

David S. Dahl | Regional Economist
Edward Lotterman | Agricultural Economist
Heidi Taylor Aggeler

Published July 1, 1997  | July 1997 issue

Despite harsh winter weather and severe spring flooding in the Red River Valley and elsewhere, much of the Ninth District economy followed the lead of the national economy in early 1997 and grew beyond expectation.

The nation's economy, as measured by real gross domestic product (GDP), grew at a 5.8 percent annual rate in the first quarter, well above the 2 percent gain forecasters were expecting last fall. This pace was matched by Minnesota, North Dakota and Wisconsin in early 1997, but Montana and South Dakota were noticeably below the nation's growth. Low livestock prices and sluggish tourism and travel spending have hurt those two states more than the rest of region, but manufacturing employment in South Dakota—as well as in Minnesota and North Dakota—was recently stronger than in the nation. Plus, construction jobs in Minnesota, Montana and Wisconsin matched or exceeded the nation's strong increase in early 1997. Numbers, however, are not yet available to assess the impact of the flooding on the area's economy.

Recent declines in housing units authorized, both in the nation and in district states, suggest that the big gains in construction employment may be over; according to the Minneapolis Fed's regional forecasting models, this downward trend is expected to continue into 1998.

While the demand for goods and services of selected district industries and areas may be softening, probably the biggest constraint to the district's growth is tight labor markets. Except for the Upper Peninsula of Michigan and Montana, unemployment rates in the district are well below the nation's, and the Minneapolis Fed's forecasting models indicate that labor markets will continue to tighten in the district.

Wage increases have recently accompanied this tightening in labor markets. Average hourly earnings in manufacturing were up about 4.3 percent from a year-ago April. These gains have been increasing steadily for about the last year. With the region's unemployment rates much lower than in the nation, it is not surprising that wage increases have been stronger in the region—than in the nation.

Chart: Average Hourly Earnings in Manufacturing

Model forecast: At midyear, even though labor markets are tight, most of the region's economy should keep expanding, with much of the impetus coming from the national economy's continued growth. Although real GDP is foreseen slowing from its torrid first quarter pace of 5.8 percent, forecasters expect it to expand at a moderate pace into 1998. The Minneapolis Fed's regional model's forecasts for nonfarm employment and personal income also point toward continued growth in the district.

These forecasts, especially for North Dakota, do not reflect the aftermath of last spring's flooding, which is difficult to determine. The flooding undoubtedly reduced the affected areas' ability to produce goods and services. But the rebuilding effort currently under way in these communities should provide an economic lift in coming months.

Growth in the South Dakota and Montana economies is expected to remain below high rates set earlier in the decade and to continue to grow slower than the national economy.

Agriculture marked by weather, price extremes

The year was ushered in by some of the most violent winter weather the district had experienced in decades, and as1997 wears on, extremes continue to dominate the news for farmers and ranchers. Record snow levels led to extensive flooding in the Red, Minnesota and James river valleys in April and May. But in many other areas, lack of rain had become a pressing problem for crops by early June. Dry conditions continue to prevail in some areas, while others, such as Lyon County, Minn., had hail or harsh thunderstorms. And in many areas winter damage and dry conditions prior to first cutting have put hay into very short supply, with cash markets hitting record high prices for quality alfalfa.

Weather is not the only element buffeting farmers. Prices have been volatile also, with soybean and other oilseed prices rising dramatically in late spring, while spring wheat and durum prices sank into a miasmal swamp. Cattle prices are increasing moderately after three years of financial stress for ranchers, while hog prices and demand for hogs rose so rapidly in early June that a major packer in Sioux Falls, S.D., shut down one shift for some weeks because of a professed inability to get enough animals to keep it going. Unexpected export demand from Asia in the wake of a hoof-and-mouth disease (aftosa) outbreak in Taiwan is credited for this unexpected runup.

Agriculture outlook: Overall, crops are in moderately good condition, and Ninth District farmers and ranchers could have a pretty good year if weather over the rest of the season is favorable. But it has been a wild ride so far, and there is no guarantee that the ups and downs are over.

Banks enjoy best year in over a decade

High quality loans, increased fee and service charge income, and reduced overhead expenses all played a part in making 1996 a record-setting year for Ninth District banks. The bottom line: District banks enjoyed the highest levels of profitability in more than a decade. This performance mirrored that of U.S. banks, which boasted the highest levels of profitability in more than 25 years.

Increased income from fees and service charges was the biggest reason for higher profits in 1996. Slight decreases in personnel and occupancy expense also helped profits remain high. In addition, the quality of loans at district banks continued to be quite good. The quality of a bank's portfolio is measured by the level of defaulted loans and loans with overdue payments, compared to total loans. Losses from loans on which borrowers defaulted were at their second lowest level in a decade for district banks. However, there was a slight but noticeable weakening of loan quality in 1996. The level of defaulted loans increased for the first time in 10 years, from a low of 0.11 percent in 1995 to 0.21 percent in 1996. And past-due loans went up for the second straight year after more than a decade of decline, rising to 1.07 percent in 1996 from 0.99 percent in 1995.

The threat for banks that received the most attention in 1996 was the declining quality of consumer loans, especially that of credit cards. Banks nationwide reported historically high delinquencies and defaults on consumer loans, while personal bankruptcies reached record numbers. District banks were not materially affected by the decline, however, since they do not hold a large number of such loans. While credit card banks in the district did experience some losses from consumer loans, the losses were easily absorbed through strong earnings.

Banking outlook: The good economic conditions in 1996 helped produce healthy banks in the region and nationwide, and the conditions of banks moving forward will depend on the economy. Locally, the spring floods may affect some banks' performance during the year, but only time will reveal the impact. Increased losses from loan defaults may also result if the trend toward declining loan quality continues.