June 13, 1973
Ninth District manufacturing activity has expanded vigorously in recent months, and District retailers have enjoyed sizable sales gains. However, reports disclose that some slowing may occur in both areas during the last half of 1973. Transportation problems continue to plague the District and several materials are in short supply. Interest rates have generally not risen at rural, agriculturally oriented banks but have moved up at large urban banks. Business loan demand is characterized as strong throughout the District. If real estate tax shelters are eliminated, District construction activity will be curbed.
According to our latest industrial expectations survey, first quarter District manufacturing sales exceeded year-earlier levels by 21.8 percent, and a 17.2 percent second quarter sales increase is anticipated. These record-breaking sales gains noticeably exceed both durable and nondurable goods respondents' last February's sales expectations. During the last half of 1973, however, District manufacturers look for a marked slowdown in their sales growth. District manufacturing sales are expected to be up 12.5 percent in the third quarter and increase 8.1 percent in the fourth quarter.
Further evidence of the recent acceleration in District manufacturing activity is manifested in survey respondents' attitudes about their inventories and plant and equipment. In the current survey, 33 percent
of the respondents indicated that their inventories are low in relation to their sales outlook. This compares with 20 percent a year ago and 13 percent two years earlier. Furthermore, 24 percent of the respondents
consider their current plant and equipment inadequate to meet their expected sales while 15 percent voiced this opinion twelve months ago, and 10 percent in May 1971.
Bank Directors disclose that District retailers generally have been recording quite strong sales gains and attribute these increases to favorable economic conditions rather than to consumers' desires to avoid future price increases. However, one Director associated with the retail trade industry indicates that the anticipated slowdown in consumer spending may be occurring already: his firm's May sales growth was down markedly from the prior four months. Several other Twin Cities area retailers reveal that they expect their sales growth to soften this fall and some anticipate relative sales gains in the last half of 1973 to be below comparable 1972 sales advances. Outside the Minneapolis/St. Paul metropolitan area, Directors report that retailers generally look for continued strong sales growth and that much of this optimism stems from the favorable outlook for District farm income this year.
Due to the heavy demand placed on transportation facilities by grain shipments, transportation bottlenecks have emerged in the District. Several Twin Cities users of rail cars and barges are operating on a day-to-day basis and others have found that the flooding on the lower Mississippi has hampered their barge shipments to the Gulf. A Director from the Upper Peninsula of Michigan reports a shortage of gondola cars; a shortage of railroad cars is also a problem in Northeastern Minnesota. A South Dakota Director voices concern that part of the 1972 crop is still awaiting shipment in his state and fears that facilities will not be available to handle the 1973 crop.
With the District's fuel supply situation remaining tight, other material shortages have emerged as well. Cement shortages were reported in the Minneapolis/St. Paul metropolitan area as a result of transportation problems among other difficulties. Although the transportation situation has improved, cement is expected to remain in tight supply throughout the summer. Reinforcing steel used in construction is also becoming very difficult to obtain. Printers and paper distributors in the Sioux Falls SMSA are experiencing the tightest squeeze on paper supplies since World War II. Fertilizer is in very short supply in the District, and a South Dakota Director reports that since the 15th of April only a third of the demand for fertilizer has been met in his state. A Montana Director, however, indicated that the fertilizer situation has started to improve in his state. Also, Directors from South Dakota and Montana indicate that farmers and ranchers are having difficulty obtaining agricultural supplies and in South Dakota, major seed corn companies are completely sold out of seed.
Directors' reports generally indicate that commercial bank interest rates have risen at larger urban banks but have changed very little in rural areas. One Director from a rural area, however, revealed that interest rates have risen 0.5 percent in his area. Loan demand was characterized as vigorous throughout the District. One large urban bank, for example, termed loan demand "strong" in spite of a marked rise in interest rates.
The proposed changes in real estate tax shelters, if enacted, would undoubtedly curb District construction activity. Following the announcement of the proposed tax changes, a major Minneapolis/St. Paul
area bank revealed that four planned apartment projects which would have involved this bank were dropped. A representative of a firm selling tax shelters indicated that immediately following the release of the proposed tax changes considerable confusion existed, but he expects the tax shelter business in 1973 to be good, especially after the announcement that tax shelters would not be eliminated in 1973. A trade association spokesman for Twin Cities area builders states that the proposed changes would not curb building activity in 1973. Builders, however, are aware of the proposed tax shelters, and he feels that the elimination of tax shelters would dampen future Twin Cities construction activity.