April 15, 1980
The long-awaited recession has not arrived in the Ninth District, but it is closer than a month ago. For it to arrive, total output must decline, and that hasn't happened yet: most district businesses are still expanding production and adding workers. Recent drops in farm income and further leaps in interest rates, however, have cut back lending and spending enough to begin to slow production and reduce employment in some district industries.
The recession is still not here...
All of our reports so far this year have said that overall district
output was still expanding, and this assessment hasn't changed.
According to our Bank directors, the main growth industries are
manufacturing and nonresidential construction in the Minneapolis-St.
Paul area and energy production and exploration in western North
Dakota and eastern Montana. Reflecting this expansion, available
first-quarter data show district employment up about 2 percent from
a year ago.
...but agriculture has been hit...
One major district industry is no longer helping keep the district
out of a recession, though. Our last report indicated that good
agricultural conditions were bolstering the district economy and
that grain prices were still at their preembargo levels. But farm
commodity prices declined in March, while farm production costs
continued to rise. Thus, of the rural bankers responding to our
survey in late March, 56 percent reported that farm earnings in
their areas were down from a year ago, nearly twice as large a share
as said this three months earlier.
While farm earnings have been falling, interest rates have been rising. In the last month, the rates that banks and S&Ls must pay for funds to lend have risen sharply as many deposits have been shifted into money market certificates. The average interest paid on these certificates rose from 13 to 15 percent between February and March.
....lending is still contracting...
These high interest rates are curbing lending in two ways.
First, where financial institutions can pass on the higher costs, borrowers are more hesitant to borrow. Our last report said loan requests were dropping off because nominal interest rates on loans had begun to rise faster than most prices, causing real interest rates to rise. In March real rates rose again, and requests for loans fell further. Farmers facing lower prices for their products became more reluctant to pay higher interest rates. So did consumers whose incomes were not keeping pace with mortgage rates. In fact, one director now says mortgage lending in his area is "dead."
Second, where usury ceilings prohibit financial institutions from passing on these higher interest costs, lenders don't find lending profitable, so even borrowers willing to pay the higher rates cannot get loans. These usury ceilings have been restricting consumer lending for quite some time. Directors report, however, that the March interest rate increases and the new System regulations have combined with the usury ceilings to reduce the supply of credit even further.
....and layoffs have begun.
Less borrowing and smaller farm incomes mean less spending, of
course, and output in some district industries is starting to be
curtailed. Directors report declines in sales of general
merchandise, autos, homes, and farm implements. They say that in
order to hold down inventories as sales continue to weaken,
retailers are buying less to sell. A director with a large Twin City
manufacturer, for example, reports that in January and February the
number of new orders his firm received was even with a year ago; in
March the number was down 20 percent. With fewer new orders being
written, unfilled orders have started to fall too, and at some firms
they have fallen enough to slow production and lay off workers. In
Minnesota during the last week of March, 65 percent more laid-off
workers filed for unemployment compensation than a year ago.