October 14, 1980
September's rise in interest rates has slowed but not stalled the district recovery we've reported for the last two months. The higher interest rates reduced home sales and inventories and discouraged some bank lending. Retail sales and manufacturing activity continued to improve, though, and auto sales started to pick up. Also, generally favorable weather and high prices cheered district farmers.
Consumer Spending
Recent interest rate increases choked off some consumer spending in
the Ninth District, but not much. Home sales have undoubtedly been
cut back. At one of the largest S&Ls in Minneapolis-St. Paul, for
example, the conventional mortgage rate jumped from 11 1/3 percent
to 13 3/4 percent between August and September. At the same time,
the firm's average weekly mortgage applications dropped from 200 to
74. However, the revival in retail spending, which began in July,
does not seem to have been slowed by the higher rates; most
directors report some increase in their areas in the last month.
Auto sales actually began to improve in September. Representatives
of regional sales offices for two large domestic auto manufacturers
say their new car sales rose modestly between August and September.
Both directors and auto sales representatives believe that so far
interest rates have had little effect on retail and auto sales.
Industrial Activity and Inventories
Industrial activity doesn't seem to have been hurt much by the
higher interest rates either. Manufacturing may have been held down
some, since the rate increases made some businesses more hesitant to
add to inventories. Auto dealers, for example, have cut back new car
orders even though their sales just picked up. But manufacturing
activity generally still seems to be expanding. Directors and the
Minnesota Department of Economic Development say that in September
manufacturers continued to recall laid-off workers and step up
production rates.
One district industry not noticeably affected by the higher interest rates is mining—but unfortunately it is still depressed for other reasons. Reduced steel demand is still holding down iron ore shipments from Minnesota and the Upper Peninsula of Michigan. Copper mining in Montana is still shut down by a strike. And 1,500 of 2,500 striking workers lost their jobs in September when the Anaconda Company closed its copper smelting operations in Anaconda and Great Falls.
Agriculture
A more fortunate industry not noticeably affected by the September
interest rate increase is agriculture. Although too little rain in
parts of South Dakota and Montana kept some winter wheat from
germinating and too much rain in North Dakota held up the durum
wheat harvest, the weather elsewhere was good and helped the corn,
sunflower, and soybean crops mature properly. Prices also looked
good for farmers in September. In Minneapolis, the average cash
prices for soybeans and corn continued to increase. Wheat prices
declined slightly but remained above last spring's levels. In St.
Paul, average cash livestock prices also remained above last
spring's levels. Feeder cattle prices rose again, while slaughter
steer and hog prices declined slightly.
Financial Developments
Higher interest rates probably did discourage some lending at
district financial firms in September, for while the economy
continued to show signs of improvement, bank lending remained
sluggish. Between August and September, loans at district member
banks did not grow as much as expected for that time of year.
Directors also report no lending pickup at commercial banks in their
areas. They believe the higher interest rates are partly to blame.