September 13, 1978
Developments in the real sector indicate that the Ninth District's economy may be somewhat stronger than the nation's as the third quarter draws to a close. However, continued high farm loan demand plus low seasonal deposit inflows are contributing to tightness in district money markets.
According to this Bank's August survey of district manufacturers, sales in the second quarter averaged 15 percent more than a year ago, with most of the gain coming in durable goods. Durables producers expect their sales growth to be nearly 20 percent in the last half of the year, while nondurables manufacturers are looking towards 10 percent gains. This would mean that district sales of nondurables will increase about 11 percent for the year, compared to an expected growth rate of 9 percent nationally (reported in McGraw-Hill's May survey). And durables sales here should increase about 19 percent in 1978, compared to the national expectation of 11 percent.
Construction activity, including mining and energy projects in Michigan, North Dakota, and Montana, has been very strong this year. Residential building continues at a record pace despite rising mortgage rates, and commercial construction is doing very well according to several sources. Low commercial vacancy rates have encouraged this activity and should sustain commercial building.
However, shortages of cement are producing some spot reports of job shutdowns or slowdowns. Major cement plants in the region have had maintenance problems and have been operating below capacity. Contractors have been placed on allotments, causing them to look for additional supplies from other parts of the U.S. and from Canada. A secondary market for cement is said to have developed.
The generally good picture in construction and manufacturing has kept the district's unemployment rate well below the national average. The July rate was 4.6 percent. Tight labor markets were reported by several Reserve Bank directors, and even the chronically high unemployment area of upper Michigan is having problems finding skilled labor.
Excellent crops, improved prices, and government programs have greatly benefited the district's agricultural sector. Dairy farming in central Minnesota is said to be as profitable as it has been in the last five years. Dairy observers expect a robust picture for the next two years. High prices are holding in the livestock sector, where profitable operations are once again expected.
The resulting higher farm income is showing up in improved spending as many farmers upgrade their operations after several years of low (or negative) profits. Implement dealers are enjoying good sales, and Minnesota farmers are also investing in irrigation equipment and crop storage facilities.
Retail sales, especially for durables, are generally good throughout the district. But several of our sources reported some easing of soft goods sales. Very warm weather has delayed purchases of fall clothes, and retailers seem to be in a cautious mood. Although fall sales are expected to pick up, retailers are keeping inventory positions at lean, manageable levels.
Financial sector developments are not much different than in the nation. A generally tight money situation is having the predicted impact on mortgage funds. About 25 to 50 percent of the "Treasury bill" CDs are said to represent new deposits.
Seasonal factors are affecting rural banks, however. Deposit growth at ag banks has been flat during summer months but should improve as cash flow from harvesting steps up this month.
The upgrading of farm operations has resulted in heavy loan demand at banks and production credit associations. So rural bankers are experiencing a tight money situation for factors in addition to national phenomena. Apparently this tightness has produced many requests for loan participations, and daily average borrowing from the Reserve Bank was three times higher than in August 1977.
This situation has left district ag banks with limited but adequate liquidity. Rural banks are still accepting reasonable loan requests.
However, a major banker in the region expects strong loan demand to exceed deposit growth at many rural banks next year. Higher operating costs, equipment upgrading, and rebuilding of livestock herds are expected to fuel loan demand. As a result, this banker expects increased use of "outside funds," that is, correspondent borrowing, Federal Reserve discount window activity, and referral to the Farm Credit System.