Ninth District advisers give mixed review of economy, with some signs of recovery

Minneapolis Fed's Advisory Council on Small Business, Agriculture and Labor report on the state of the Ninth District's economy.

Published January 1, 1992  | January 1992 issue

Three times annually, the Minneapolis Fed's Advisory Council on Small Business, Agriculture and Labor meet with President Gary Stern and bank staff to report on the state of the Ninth District's economy. The following article summarizes the advisers' November comments.

The Minneapolis Fed's Advisory Council, similar to others formed in 1985 at each of the 12 Federal Reserve district banks, consists of 12 members serving three-year terms. Advisers are selected to represent geographic, economic and gender/racial sectors in the Ninth District.

If the observations of the Minneapolis Fed's Advisory Council on Small Business, Agriculture and Labor are any indication, then the bank's economic forecast is probably on target: The recession's over but the recovery will likely be mild.

Some of the 10 advisers who met at the Minneapolis Fed Nov. 20 were decidedly optimistic about prospects for the coming year, while others were mostly concerned about a lack of confidence. According to the advisers' reports, the biggest hope for recovery in the region lies with an upswing in housing construction due to lower interest rates and to continued strength in the tourism industry.

Local spots get hotter as economy cools

One sector of the economy that is strong across the Ninth District is tourism, and the national recession gets some of the credit for those gains, according to Susanne Boxer, president and CEO of Houghton National Bank, Houghton, Mich. She says tourists have been traveling closer to home this year and staying in family hotels. She expects a good winter season for skiing and snowmobiling in the Upper Peninsula.

In South Dakota, Wessington farmer Robert Duxbury says the tourism industry has been very profitable for the state, exceeding even last year's success during the statewide centennial celebration. He is also optimistic about the current winter sports season and credits the state's gambling casinos for some of the increase in tourism.

Marjorie King, secretary-treasurer of the Montana ranch of Joe C. King & Sons, reports that Montana's tourism industry is also doing well, with spillover from a record-setting year at Yellowstone National Park and increased visits from Canadian shoppers.

Canadian shopping has also boosted retail sales in North Dakota, according to Douglas Burgum, president of Great Plains Software in Fargo, N.D., so much so that additional motels have been constructed along the Red River Valley to accommodate the influx.

'Blues' turn to green in housing industry

Roger Scherer, president of Scherer Bros. Lumber Co. in Brooklyn Park, Minn., says his company had its best October in its history this fall. "Last year I was crying the blues, but business started to get better in May," Scherer says, citing lower interest rates as the primary incentive for a housing revival. "The growth we have now is sustainable."

Part of Scherer's success, he concedes, stems from the problems the construction and building materials industries have had this year—he says about 20 percent of his competition was lost over the past year, either through mergers or closings.

Duane Dingmann, chairman of the Advisory Council and president of Trubilt Auto Body Inc. of Eau Claire, Wis., reports that the residential construction industry is also in good shape in northwestern Wisconsin. Other Fed sources indicate that construction is also strong in North and South Dakota.

The backlog of construction projects continues fairly strong in the Upper Peninsula, according to William Verrette, president of Champion Inc. of Iron Mountain, Mich. He says there are a number of construction projects for cities, schools, the federal government and several Indian communities. Verrette also reports that taconite production is expected to increase approximately 5 percent next year in the Upper Peninsula and northern Minnesota, in part because less production is anticipated from Canada.

Also doing well in a sluggish economy is Trend Enterprises Inc. of New Brighton, Minn., a maker of education materials, according to Kay Fredericks, president and CEO. "We've done well because we're aggressive. Aggressiveness in a soft market pays its dividends," she says.

Consumer confidence worries advisers

The area that posed the greatest concern for the Advisory Council was consumer confidence. "There's a lack of confidence in people about the economy," says Duxbury of South Dakota.

Bernard Brommer, president of the Minnesota AFL-CIO, told of workers' worries about the national economy: "Construction people are not very optimistic. There's not much going on, especially in heavy industrial construction; people are worried about the national economy."

One of the primary indicators of weakened consumer confidence comes from auto sales, the advisers report. Dingmann's northwestern Wisconsin auto repair company is doing better business because people are keeping their current cars longer. Another indicator of weak consumer confidence is that many people are either not repairing or only partially repairing their collision damages, he says.

"Foreclosures and bankruptcies are up in the Upper Peninsula—the most bankruptcies I've ever seen," says Boxer of the Upper Peninsula. Unemployment ranges from 9 to 20 percent in some areas of the U.P., and Boxer is not optimistic about the near future. "We're looking at some tough years ahead."

Even the Upper Peninsula's Verrette, whose own business is doing well, cites the "attitude of the people" as the economy's main stumbling block. Some of that "attitude" has even shifted to his own company, he admits: Rather than purchase new software that will improve his company's efficiency now, he says he is willing to wait another year when he hopes the price will be lower and the product improved.

On the subject of prices, the advisers see little inflationary pressure for the coming year except for one sector—the health care industry. Labor leader Brommer also sees little upcoming pressure on wage costs except, once again, from the ubiquitous health care sector.

Weather tempers drought, yields up as prices drop

Agricultural advisers generally had good reports regarding crop yields this year, with most of the credit going to the weather. But perfect weather is an unlikely occurrence, and South Dakota's Duxbury doesn't expect conditions to be as favorable next year—meaning pressure will be on prices. Wheat prices have improved this fall, but sunflowers and oil seeds are down, he says.

Willis Anthony, a southern Minnesota farmer, notes that current domestic grain supplies are low and wheat prices have strengthened. Oilseed prices are down, and Southern Hemisphere crops now being planted will begin to supply more of the world market by spring, putting downward pressure on prices. Economic and political developments in the Soviet Union have put added uncertainty in the grain markets. Milk prices have improved substantially, but the market is down for livestock, including hogs, cattle and sheep. "A recession translates into softer red meat demand," Anthony says.

Montana's King concurs on the prospect for livestock: "A year ago when we sold our calves, the buyer stood in the kitchen door and offered us $1 for this year's calves. This year the buyer said he wouldn't make any offer for next year's calves."

Others worry about regulation, credit availability and state budgets

Regulation of environmental issues, says Montana's King, is a growing concern for farmers, ranchers and miners. She worries that increased regulation will limit economic growth, a view shared by Duxbury of South Dakota.

Regulation may also ultimately affect credit availability in 1992, the U.P.'s Boxer warns, as insurance premiums are expected to rise in order to recharge the bank insurance fund. Boxer also says that banks are scrutinizing prospective loans more carefully than in the past. "We're making it a little tougher to borrow money."

South Dakota's Duxbury, a member of a bank's board of directors, says banks are willing to make loans, but "the competition for good loans has been fierce."

Fredericks, president, Trend Enterprises Inc., gives first-hand testimony of the competition for good loans. She says that she has had an easy time with lending institutions. Nationally, however, she says that many small- to medium-sized businesses are having trouble obtaining financing.

Finally, like many states in the nation, some Ninth District states are facing budget cutbacks and/or tax increases. In the Upper Peninsula, state cutbacks have hit Michigan Technological University in Houghton particularly hard. The university is facing a $9 million shortfall, salaries have been cut 4 percent and 50 jobs have been lost. In Montana, some are worried that a proposed special session of the Legislature may result in tax increases; while in Minnesota, a revenue shortfall of $300 million, or 4 percent of the state's budget, is expected over the next year and a half.