Good news continues for Ninth District economy

Ninth District Economic Forecast

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

Published January 1, 1998  | January 1998 issue

District business leaders are upbeat. Eighty-six percent of the 265 district business leaders polled in late 1997 are optimistic about their community's prospects in 1998 and expect increases in consumer spending, employment, housing and investment. Moreover, the Minneapolis Fed's regional forecasting models indicate that the pace of nonfarm employment growth will increase in 1998 (see district economic forecast).

However, considerable uncertainty surrounds these employment forecasts, and they may be on the high side as employers may have difficulty finding enough workers to hire. The district's unemployment rate is expected to drop to 2.9 percent in fourth quarter 1998 from an estimated 3.5 percent in fourth quarter 1997. These rates are well below the 5.7 percent joblessness the region averaged between 1977 and 1996. Fifty-seven percent of the respondents to the bank's business conditions poll term securing workers a challenge in 1998, but they do not consider it any more daunting than implementing new technology or complying with government regulation.

Even though employers will be scrambling to hire workers, large wage increases are not foreseen. Sixty-one percent of business poll respondents see wages and salaries in their communities increasing about 2 percent to 3 percent in 1998, with only 29 percent expecting a gain of 4 percent or more. Few employers, however, expect to pass these wage increases on in the form of higher prices: 31 percent see the prices their organization charges declining between 1997 and 1998, 39 percent see no change and only 30 percent anticipate increases.

The turmoil in East Asia could also put a damper on district growth. Exports account for about 5 percent to 10 percent of district economic employment. The large decline in the value of East Asia currencies relative to the dollar could reduce district exports to that region, which are a small but growing component of district exports.

Ag outlook positive, but uncertain

1997 came in like a lion but went out like a lamb. A twist on the old adage about March sums up the year for Ninth District agriculture. The year started with some of the roughest winter weather in memory—extreme cold and successive blizzards that doubled normal snowfall in many areas of Minnesota and the Dakotas.

The hard winter weather was followed by historic, disastrous flooding in several areas and a cool damp spring that delayed planting well past usual dates in many areas. By mid-May, farmers and farm business people were pessimistic about their chances in the rest of the season.

But by late May and early June, warm, favorable weather buoyed many spirits. Crop emergence and development were generally good, and as the summer wore on favorable moisture and heat conditions allowed crops to catch up, particularly in corn-soybean regions.

The summer also saw renewed strength in prices for feeder cattle as rising fat cattle prices and moderate feed grain costs improved profitability prospects for feeders. These developments also gave some respite to hard-pressed ranchers, who had weathered three successive years of low prices.

Favorable weather continued through fall allowing full crop maturation even where planting had been late and favoring harvesting. With days of 40-degree temperatures common through November, more fall tillage than usual took place, giving farmers a jump on the 1998 crop year.

As the new year begins, the outlook for 1998 is generally positive. Soil moisture conditions are excellent in many areas. Warm weather has allowed farmers to use less hay and feed than last year. Prices for most farm products except wheat and milk are moderately favorable for producers. Bankers report that interest rates continue to drift down and that loanable funds are ample.

Two factors, however, cause some uncertainty for the farm sector. One is the economic situation in Asia, which now takes about 50 percent of the value of all U.S. ag exports. Market analysts estimate that expectations of lower incomes and foreign exchange shortages in countries such as Korea, Thailand and Indonesia may lower prices for corn, soybeans and pork by 5 percent to 10 percent.

Weather for the 1998 crop is also of concern. The unusually mild winter through December is ascribed to the climatological phenomenon of El Nino. But weather analysts are uncertain about what this portends for the 1998 crop in the Ninth District and globally. Mark Seeley, climatologist at the University of Minnesota, says that a relatively warm April and May are likely, based on historic patterns and the weather through December 1997. "But after that, it isn't clear. There are no real statistical associations evident for seasons following the 23 El Nino events so far this century," he says. "It could go either way in terms of rainfall and temperature."

Bank earnings soar as loan losses also rise

Earnings of Ninth District banks soared to a record high during third quarter 1997, despite a continued increase in loan losses. District banks benefited from a strong economy and healthy agricultural conditions in most of the district. Loan losses have increased during the last year, though loan quality remains quite good. Overall, district banks are entering 1998 in sound condition.

Return on average assets, the most common measure of bank earnings, reached the highest level in 16 years during third quarter 1997. Higher interest income from loan growth was the main reason that profits rose during 1997, as income from fees and service charges dropped slightly from 1996 levels. In addition, the cost of obtaining deposits and other funds for loans—interest expense—increased, but at a rate slower than the growth of interest income. A steady drop in overhead expenses during the year also improved banks' bottom lines.

Loans in district banks grew by more than 15 percent during 1997, fueled by strong demand from both consumers and businesses. Residential real estate loans—both mortgages and home equity lines—have led the growth. Credit card lending also increased, while commercial and industrial loans have remained at the same level as in 1996.

Losses from defaulted loans increased steadily during the year, to reach the highest level in five years during third quarter 1997. Losses from credit card and installment loans have increased the most during 1997, consistent with nationwide trends. Residential real estate and agricultural production loan losses also rose during the year. However, the level of losses remains quite low relative to that experienced in the 1980s and early 1990s. Furthermore, the level of past due loans, which may be related to future loan losses, has remained relatively stable since 1996.

The combination of strong loan growth and declining deposits has led to concerns about the lack of funds for loans. Traditionally, loan-to-deposit ratios are the most common measure of liquidity and give a rough idea of a bank's cash on hand to loan. Indeed, this ratio has increased considerably for U.S. commercial banks nationwide and in the district during the 1990s. However, the ratio has remained relatively stable for district banks during the past year. Anecdotal evidence of funds availability is mixed: small community banks are reporting funding shortages, though many district banks report that liquidity is adequate.

Precent Share
  U.S. Exports U.S. Exports
to Asia
District Exports
to Asia
Machinery and Computer Equipment
Transportation Equipment
Electrical Equipment
Chemicals and Allied Products
Measuring Instruments and Medical Goods
Food and Kindred Products

Source: Massachusetts Institute for Social and Economic Research