November 15, 1978
Business is generally good in the Ninth District, but the outlook is clouded by uncertainty regarding the likely impact of government moves to combat inflation. Overall retail sales have been brisk, even though some recent slackening in soft good demand has been reported in a few communities. Area industrial, construction, and agricultural enterprises have been busy. Except for grain farmers, most businesspeople have been keeping a tight rein on inventories. And demand for credit remains strong even as interest rates soar. But despite the general vigor of the district economy few observers are sanguine about the future as the economic ramifications of recently announced wage-price guidelines and financial market actions are difficult to predict.
Retail sales activity is holding up fairly well throughout most of our district. Retailers located in agricultural communities have enjoyed particularly strong sales according to our Bank's quarterly survey of agricultural lenders. Consumer durables have been selling better than nondurables in these areas as well as in the rest of the district. In fact, two Bank directors report that nondurables sales have slackened noticeably in some parts of Minnesota and Michigan's Upper Peninsula.
There has been no slackening in the district's manufacturing sectors. One of our district's largest manufacturers in the nonelectric machinery industry reports production rates are up almost twenty percent from a year ago. While this increase in production is unusually large, other manufacturers are busy too—the most recent figures on total manufacturing employment for our district are up almost five percent over last year.
Construction employment gains have been even more impressive—a nine percent increase during the past year. Our Bank's directors report very tight construction labor markets throughout most of the district. In a few areas residential construction activity has weakened, but so far vigorous commercial building has made up for that weakness.
Farmers are enjoying good times as well. Eighty percent of the Montana bankers responding to our most recent Ag Credit Survey report their farmer customers are making more money this year than last. Higher livestock prices are cited as the primary reason. Furthermore, grain harvests throughout most of the district have been abundant. And grain prices have held up well, making for record crop values in many parts of the Upper Midwest. Farmers have been storing much of the harvest and reports from around the district indicate grain inventories have nearly exhausted existing storage capacity.
Large inventories are unusual in other sectors of the economy. A survey conducted by a large manufacturing concern headquartered in our region, revealed that eighty-five percent of its business customers placed their current inventory levels in the low to normal range. There was some undesired inventory buildup by the Minnesota retailers faced with slackening soft good demand, but these businesses were the exception to the districtwide rule of low to moderate inventory positions.
With the exception of cement and credit markets, low inventories are not viewed with concern either. Cement shortages have continued to inconvenience some builders. But, as winter moves in, short supplies of cement are becoming less and less of a problem.
In contrast to the cement market, demand has remained strong in the credit market. Bankers throughout the district report that they are having to strain to keep up with loan demand. As elsewhere, nonregulated interest rates are climbing rapidly and the nonprice terms on loans subject to usury limits are becoming more and more restrictive. Furthermore, several of our Bank's directors voiced concern over the detrimental effects of Regulation Q limits and other regulation on the ability of banks and thrifts to compete with credit unions for funds.
Directors noted that while many banks had begun offering automatic transfer plans, low customer interest suggested the new service would do little to attract funds from other intermediaries. The main plus seen for the automatic transfer plans was that they might usher in pricing for checking services.
Other recent Federal Reserve and Administration policy actions got much more attention than the legalization of automatic transfers. Some observers welcomed the jump in the discount rate and increase in reserve requirements on large CDs as a signal of new resolve in the fight against inflation. Others feared these moves together with the President's wage-price guidelines would harm the real economy.