Beige Book Report: Minneapolis
March 11, 1980
The Ninth District is not in a recession yet, but district business activity seems to be softening further. Manufacturing shipments and employment continue to expand, and agricultural conditions remain quite good. However, interest rates have been increasing lately and cutting back loan requests. Lending has also been restricted where interest rates have not been allowed to rise.
The district is not yet in a recession...
Industrial output and employment are still expanding in the
district. Manufacturers responding to our latest survey expect their
first-quarter shipments to be up 15 percent from a year earlier.
Rising prices undoubtedly account for much of this gain. But
manufacturers do still seem to be adding to their work forces:
Minnesota manufacturing employment is up about 14 percent from a
year ago. And directors say hiring and industrial activity generally
are growing in their areas.
Agricultural conditions also continue to help keep the district out of a recession. Our last Redbook report indicated that despite the embargo on grain sales to the Soviet Union, crops and prices were quite high in the district, so farm income prospects were pretty good. This assessment hasn't changed, as recent grain prices continue to approximate their preembargo levels.
...but higher interest rates have further softened business activity Real interest rates have risen further since the last Redbook, though. After being adjusted for inflation, interest rates rose in late 1979. They have risen even higher lately, as nominal rates have been accelerating much faster than inflation.
This rise in real interest rates appears to be causing further cutbacks in lending. Our last Redbook report said that lending was softening. According to Minneapolis/St. Paul banks, the recent rise in real interest rates has resulted in another drop in loan requests from all types of small businesses. Bank directors also report a further letup in mortgage loan requests in their areas.
Where some nominal interest rates haven't been allowed to rise, lending activity has been further reduced too. Usury ceilings have for some time been curtailing private borrowing and now are also curtailing government borrowing. Municipal bond yields recently have exceeded the 7 percent limit that Minnesota has imposed on local government borrowing costs, and in late February the Minneapolis School District and the city of St. Paul canceled two bond offerings.
This recent letup in lending is another blow to home sales. Our last Redbook report indicated that district home sales were down. A large Minneapolis/St. Paul homebuilding supplier reports that less mortgage lending is further depressing home sales.
Not only are district consumers now more reluctant to buy homes, but they continue to be hesitant to buy other goods. Last month directors used words like "spotty," "steady," or "down" to characterize their areas' general merchandise sales, and they haven't changed that assessment. District consumers also remain reluctant to purchase autos; in January and February new domestic auto sales in the district were down 15 percent from a year ago.
With consumers still hesitant to spend and higher interest costs discouraging borrowing, businesses continue to be reluctant to order merchandise. Directors report, as they did last month, that district businesses are striving to hold down their inventories. And new manufacturers orders continue to slacken. For example, one large Minneapolis/St. Paul manufacturer reports that its new orders are now just even with those a year earlier, whereas several months ago they were substantially above last year's level.