July 12, 1978
Business remains brisk in the Ninth District. Manufacturing, building, farming, and retailing sectors have maintained their heady pace of the past few months. And according to our Bank's directors the near-term outlook is marred only by a likely homebuilding slowdown brought on by sharply rising homeownership costs. The severity of that slowdown should be tempered by growing sales, of the money market CD introduced in June.
In last month's Redbook summary we reported good news for just about every sector of our district's economy. Since that time little has changed. Our Bank's directors tell us that manufacturers, builders, farmers, and retailers across the Ninth District are doing well.
Manufacturing employment is up a healthy 5 percent from last year. And directors characterize industrial activity as being either "good" or "strong" in every district state.
Among the busiest manufacturers are those producing building supplies. They have been straining to keep up with the demands of the district's construction sector. Both residential and nonresidential builders have shared in that sector's hectic pace.
Farm businesses have also had their share of good tidings. Livestock prices remain quite high. And with the exception of some rain-damaged corn fields in southern Minnesota, crops are growing well throughout the district.
Directors from Montana and North Dakota report that the improved farm situation has spurred sales of high-priced farm implements. And "big ticket" items are selling well off the farm too as low real rates of interest make consumer durables among the best investments available to most households.
Retailers have pursued cautious inventory policies in the face of this strong demand. They apparently have been concerned about the sustainability of the current brisk sales pace.
But currently available data does not lend support to the view that a slowdown is imminent. Econometric analysis of the region's economy carried out at this Bank indicates that retail sales will maintain steady growth through the remainder of the year. Manufacturers surveyed by our Bank expect year-over-year sales growth of around 15 percent in the third and fourth quarters. Crop farmers look for bumper harvests and price supports to boost this year's income well above last year's. And livestock prices are expected to remain relatively high through the remainder of the year so ranchers are in pretty good shape despite the recent relaxation of beef import quotas.
But observers aren't optimistic about every sector. It is feared that high building costs and rising interest rates will choke off the currently high rate of construction activity. Directors have mixed opinions regarding the near-term outlook for commercial building. Most say it is picking up but one Wisconsin director sees signs of a slowdown. They are unanimous in predicting a slowing of residential construction activity though.
This vulnerability of homebuilding is at least partly due to government-imposed market imperfections. For example, South Dakota has a 10 percent usury ceiling which is starting to interfere with the operation of mortgage markets there. And the lure of high nominal rates of return on non-Regulation Q limited investments has slowed the flow of funds into banks and thrifts.
The T-bill rate six-month CD introduced in June has helped staunch a funds outflow though. Bankers in the region report that sales of these certificates have picked up substantially during June and early July.