April 6, 1971
The general feeling among area businessmen and bank Directors is that consumer confidence in the ninth district is still at a low ebb, and there are few indications that it has improved over the last month or so. Business loan demand continues to be very strong while consumer loan demand is still weak. Price shading at both the wholesale and retail level does not seem to be any more prevalent than it was a few months ago, but there are some indications that firms are determining their prices more carefully.
There is little to suggest that consumer confidence in this district has changed over the last month. With three exceptions, the Directors of this bank were not aware of anything that would point to an imminent rise in consumer spending, two Directors who could not cite anything specific had a general feeling that consumer spending in their areas was generally better than had been anticipated. Another also felt that although there was some firming up in his area, the mix of expenditures has been changing. For example, motorcycle and snowmobile dealers have been experiencing record sales, but automobile purchases are down. Housing is the only district sector that seems to be gaining strength.
Two Directors stated that real estate loan activity in their banks was increasing and more people were contemplating home purchases in their areas. One, however, noted that most of the turnover was in existing housing and new construction had not yet begun to improve. In contrast to the generally weak business loan demand in other parts of the country, the demand for business loans in the ninth district appears to be quite strong. Conversations with three reserve city bankers revealed that the rise in their business loans is stronger than they had anticipated, and some of these people felt that the recent cuts in the prime rate were unjustified, at least for their banks. One Director, who is also the president of a reserve city bank, said that although he keeps expecting his bank's outstanding loan balances to fall, they keep rising to new highs. He feels that a possible explanation for this phenomenon is that his national customers have tended to ignore the corporate bond market as a source of debt funds and instead are relying on banks for their borrowings.
Three other Directors from rural areas in the district also felt that loan demand was picking up. Although they were not sure of the reasons for the strengthening, they were able to cite instances pointing to a rise in loan demand. One South Dakota Director said, for example, that a number of banks in his area had dropped out of participation pools because they were able to use all their loanable funds for local borrowers. Consumer loan demand, on the other hand, has not changed significantly over the past month or so and still seems to be generally weak. While three Directors felt that they have noticed some slight strengthening in their areas, for the most part they could not attribute the change to anything specific.
Despite the strength in business loan demand and the weakness in the consumer sector, most of the softening in interest rates has been in the business sector, primarily because of the reductions in the prime rate. Generally, consumer loan rates have not changed although one Director stated that his bank is shading rates to good customers.
Mortgage rates in the Twin Cities have remained relatively stable over the last month. The going rate on FHA-VA mortgages is now running at 7 percent plus 2-3 points to the seller, and the conventional mortgage rate is around 7-1/2 percent with 25 percent down and 30-year maturities. There is some talk among industry people, however, that the conventional rate will soften because of the recent reductions in mortgage rates in other parts of the country and the strong liquidity positions of district thrift institutions.
Price shading does not seem to be more prevalent in this area, but wholesalers and retailers appear to be watching their prices more carefully. Only one Director was aware of any changes in mark-offs during the past few months, and these were generally limited to office machines. Another commented that he has noticed some firms raising prices but then selectively making concessions. On the other hand, a number of cases of more aggressive pricing and merchandising emerged. In the utility industry, some suppliers have cut prices on transformers and aluminum wire, while several announced price increases have been rescinded because others refused to follow the rise. In addition, retailers are merchandising their wares more aggressively in an attempt to get people into the stores. According to one Director, at least, this practice has been successful in his area, and retail sales have been picking up.