November 9, 1977
While still fairly strong, economic activity here shows some signs of slowing. Consumers are still spending well in areas not hurt by the iron ore strike or agriculture's problems. And farmers' income outlook has actually improved somewhat recently. But some directors are not concerned about excessive business inventories and an apparent slowdown in homebuilding.
Consumer spending still strong
The district's strength and its two major weaknesses are still
reflected in reports about consumer spending. Overall, retail sales
have been very good and are expected to remain so through the
holiday season. But the three-month-old iron ore workers' strike is
depressing income and spending in northeastern Minnesota and the
Upper Peninsula of Michigan. People in areas dependent on
agriculture have not had much to spend either: directors from North
and South Dakota say farm-related retail sales there have been only
fair or "spotty," and about half of the rural bankers responding to
our October survey of ag credit conditions said farmers were
spending less than last year.
Ag outlook improved
Spending in rural areas may increase somewhat because farmers'
income prospects improved recently. Rain and insects did not hurt
crops as much as expected so farmers have more to sell than they
thought. They are getting more for their crops too: because of
rumors of better demand here and abroad, grain prices have stopped
falling and some have actually turned up. Further price improvement
is likely since the Russians' poorer-than-expected wheat harvest has
been officially confirmed. More money will also be available from
the government; the new farm bill's target price on wheat could
bring district farmers as much as $300-350 million in subsidies this
December. Including government payments, farm receipts from crops
this year are now expected to at least match last year's level.
Directors see these developments—especially the subsidies—as helping rural banks' current liquidity problems. Because farmers have so far had little money to repay loans or save, rural bank liquidity is tighter than usual. In our October survey of rural bankers, 35 percent called their loan-to-deposit ratio "high," more than the 29 percent in July. The share with 70 percent or more of their deposits loaned out increased from 36 to 42 percent. And in October a quarter of the bankers were referring more than the usual number of loans to nonbank credit agencies.
Concern about inventories and homebuilding
The weak ag sector looks a little better this month, but some
directors see signs of slowing in the district's relatively strong
business activity.
Although not yet indicating a widespread sales slowdown, directors report some unexpected business inventory buildup. Directors say the demand for pulp and paper in eastern Montana has weakened enough to put inventories 25 percent above a year ago. And excess copper inventories are depressing activity in Upper Michigan. Several other directors report inventories somewhat high but not yet a problem. One says customers of his major manufacturing firm are cutting orders at the slightest sign of weaker sales.
Housing activity appears to be slowing here too. Total residential building permits in the district are still far above last year and the 1972 record level. And directors see strong homebuilding in Montana, South Dakota, southwestern Wisconsin, and Minneapolis-St. Paul. But Minneapolis-St. Paul realtors say the demand for housing there has weakened recently. And directors note less building in North Dakota, parts of Upper Michigan, and central Minnesota.
Some directors think homebuilding will slow further because less mortgage money will be available. Though right now funds are still generally adequate throughout the district, directors in Montana and South Dakota are concerned about high short-term interest rates drying up funds in their states. A Minnesota director associated with the housing industry actually expects disintermediation to cut this region's residential construction 15 percent next year.