Beige Book Report: Minneapolis
May 14, 1975
Although the district continues to fare better than many parts of the nation, directors' comments indicate that the recession has dampened business activity and that the prospects are for only modest improvement this spring and summer. District consumers have curbed their spending, and no large gains in retail sales are expected in the near future. In the district, as in the nation, automobile sales have been slow. The increase in the investment tax credit is not expected to boost district capital spending, but it may have prevented some cuts in plant and equipment outlays. One encouraging development is that some improvement has recently occurred in the outlook for district residential construction. Also, credit conditions have eased at district agricultural banks.
District consumers have been hesitant to spend so far this year, and little improvement is expected for this spring and summer. The softening in retail sales has been most pronounced in the Minneapolis/St. Paul metropolitan area, which is now only slightly better off than the nation. On the other hand, several directors from outside the Minneapolis/St. Paul area indicate that consumer spending has held up quite well in their areas. A director associated with the retail trade industry believes that the decline in retail spending has bottomed out, but he does not look for any strong recovery in the near future. Another director reports that food product sales have recently improved and that business in that industry is expected to continue to strengthen this spring and summer.
District automobile sales are generally described by directors as being slow. Minneapolis/St. Paul area dealers, however, report that a moderate pickup occurred in late April. The most encouraging results, as expected, appear to be concentrated on the models which combine fuel economy and a low price, while the weakest sales area is still concentrated on standard car models. Top-of-the-line cars continue to sell very well in the Twin Cities area. Outside of the Minneapolis/St. Paul area, most directors term automobile sales as slow; however, a Montana director indicates that automobile sales have been excellent in his area.
Directors in general indicate that the two-year increase in the investment tax credit is not expected to raise district capital spending this year. One director expresses the view that the recent increase in the investment tax credit is nice but that it was not considered a significant factor when his firm's capital spending plans were assessed. On the other hand, three directors express the opinion that the investment tax credit may have been helpful in preventing some cuts in plant and equipment spending. One director, however, reports that a firm in his area had increased its capital spending in response to the rise in the investment tax credit. If the economic outlook is favorable for 1976, according to another director, some businessmen may be prompted to take advantage of the investment tax credit next year.
Some improvement in residential construction is anticipated by bank directors. In the Minneapolis/St. Paul metropolitan area, there has been moderate improvement in the outlook for res-idential construction. The activity is concentrated in the $25,000$55,000 price range where FHA and VA loans can be made. Because of Minnesota's 8 percent usury ceiling few conventional loans are being made. Several directors from outside the Minneapolis/St. Paul metropolitan area also indicate that their area's residential building outlook is encouraging. Much of the apparent improvement in the housing construction outlook can be traced to recent increases in savings inflows to district thrift institutions. In a number of cases, Minneapolis/St. Paul area thrift institutions describe April savings inflows as "fantastic." However, there is some concern that these funds may not be invested in Minnesota because of the state's 8 percent usury ceiling.
The April survey of Ninth District agricultural banks indicates that credit conditions eased somewhat between January and April. Both supply and demand factors have contributed to the easier credit situation. The recession in the nonfarm sector of the economy and the cutbacks in farm spending on capital inputs have resulted in a slowdown in loan growth at rural banks, thereby helping to alleviate credit shortages at rural banks. On the supply side, declining interest rates on nonfarm loans have probably increased the aggregate amount of funds available for farm lending. However, despite this recent easing, credit at district agricultural banks remains tight relative to a year ago. Interest rates are still above the rates of last year, and loan-to-deposit ratios, while below the high levels of April 1974, are still high relative to historical second-quarter rates.