May 16, 1979
The Ninth District economy is currently very strong, but this Bank's directors see signs of weakening ahead. Poor weather might cut crop production and produce excess inventories at retail stores. Government regulations could disrupt economic activity. And larger loan requests combined with lackluster deposit growth point toward rising interest rates.
Directors report recent sizable gains in district business activity. In the region's large urban areas, commercial and industrial activity is expanding vigorously. The northeastern part of the district is enjoying a strong demand for iron ore and forest products. High livestock prices are propelling farm income above last year's high level in central and western areas. And throughout the district, auto and consumer hard goods are selling well.
Prosperity Threatened by Bad Weather...
Directors say, however, that recent developments in three areas are
threatening this prosperity.
One is bad weather, which they think could hurt farm production especially. A dry fall and a severe winter have destroyed half of the winter wheat crop in South Dakota and up to 70 percent of it in parts of Montana. The wet and unseasonably cold spring is preventing farmers from reseeding this acreage or planting their spring crops. In Minnesota by early May, just 6 percent of the spring wheat, 15 percent of the oats, and 1 percent of the barley and corn were planted; the 1974-78 averages range from 30 to 60 percent. This planting delay has substantially shortened the growing season, which increases the likelihood of reduced yields.
The colder-than-normal weather has already reduced sales at the district's retailers. Last month directors reported that retailers were hoping better weather would boost their soft goods sales. But the weather did not improve, and merchants are still reporting poor soft good sales. Unless these sales pick up soon, unwanted inventories will start accumulating.
...Government Regulations...
Another threat to the district's prosperity comes from government
regulations—one in force and one being considered.
The wage and price guidelines can disrupt businesses, as a current labor dispute illustrates. Early this month 2,700 workers walked off their jobs at a large district computer manufacturer. These strikers are demanding a 10 percent salary increase, but their employer is a large government contractor and claims the 7 percent wage guideline prohibits it from meeting the strikers' demand. If this company exceeded the guideline, it could be barred from obtaining government contracts.
If enacted, a federal gasoline rationing program could also disrupt the district's economy. So far, gasoline shortages have caused little trouble in this area, and supplies are available for farmers' spring planting. But directors fear that the market won't be allowed to ration available supplies this summer. A government-mandated rationing program could seriously cut back the district's tourist business.
...and Demand/Supply Problems at Financial Firms
The third disturbing development directors report is in the
financial market, where further interest rate increases seem likely.
Rapidly rising prices have inflated loan requests in the district. A
Montana director says that at his bank a rancher borrowed $25,000
last year and $50,000 this year to buy the same number of cattle.
Other directors indicate that rising prices have boosted requests
for business and consumer loans too. At the same time, deposit
growth has been sluggish, especially at commercial banks. Interest
rate ceilings are no doubt partly responsible for this, since money
market certificates are the only accounts which have been growing.
If loan growth continues to outpace deposit growth, district
consumers and businesses can expect to be paying higher interest
rates.