May 12, 1982
Whatever the harbingers of economic recovery are indicating at the national level, we see scant evidence of a turn-around in the Ninth District so far. Instead of recovering this spring as we had earlier hoped, the Ninth District economy has continued to atrophy. The decline in farm income persisted, and this has hurt farm-related businesses and agricultural land values. High technology manufacturing, which had been an important source of strength until recently, started slowing, and other industrial activity continued to decline. In addition, general merchandise and home sales remained poor in April. Reflecting these weaknesses was the continuing softness in bank lending. The only bright spots in the District this spring were some signs that agricultural conditions may be improving, and a continued strengthening in motor vehicle sales.
Agricultural Conditions
Agricultural income slipped further this spring. For the third
consecutive year, over 50 percent of district bankers responding to
our spring Agricultural Credit Conditions Survey indicated that
their areas' farm incomes were down from a year ago. During each of
the last three years this percentage has increased, and this spring
94 percent reported falling farm incomes.
The persistent decline in farm income has strained farm-related businesses. Rural bankers and farm suppliers indicate that many farmers are having difficulty paying their bills which, in turn, has hurt the liquidity of farm-related businesses. Consequently, many of these businesses have either reduced credit to farmers or eliminated it. Also, with incomes so low, many farmers have cut back sharply on their purchases of feed, seed, fertilizer, and machinery, which could reduce output next fall. This combination of falling sales and a liquidity squeeze has driven some farm-related firms out of business. The number of Small Business Administration (SBA) loans in South Dakota liquidated in March, for example, was up 50 percent from a year ago. An SBA official attributes a substantial part of the increase to failures of farm implement dealers.
Reduced farm income has also, not surprisingly, eroded the value of the farmer's principal asset—land. Conversation with bankers, Federal Land Bank officials, and real estate agents indicate that farm land values throughout the district are down, or at best unchanged from a year ago. An informal survey of farm real estate agents in west central Minnesota, for example, indicated that area's farm land prices were down 5 to 10 percent in the last year. This is in marked contrast to the previous five years when the average annual increase in Minnesota farm land values was about 13 percent. Farmers may be having trouble getting even the currently asked prices, for our contacts indicate that very little farm land is actually changing hands.
Despite these poor conditions, area bankers expect that most farmers will survive, and there are some indications that the situation may be improving, at least for livestock producers. A reduction in hog output began to boost livestock prices late last year, and these prices are expected to continue to rise into the summer. Combined with low feed costs, these higher prices should provide at least some temporary relief. Also, the possibility of a rapid cut in dairy price supports, which according to some Minnesota and Wisconsin bankers would have caught many dairy farmers unprepared, apparently has been postponed.
Glimmerings of near-term optimism are fainter for crop growers. Despite recent strengthening in grain and soybean prices due to seasonal factors and concern over Argentina's ability to export, these prices remain low. The best that can be said is that grain export shipments have recently firmed a bit and that the sign-up for the U.S. Department of Agriculture's set-aside acreage program was high, with farmers at least contemplating reduced seeding on 80 percent of the eligible acreage. The set-aside program will probably not reduce grain output much. However, farmers who continue to participate in the program will be able to receive government loans in return for storing their crop next fall, thereby guaranteeing their cash-flow and strengthening fall prices.
Industrial Activity
High technology manufacturing has been an important prop to the
district economy during the past three years when farm income was
shrinking. Very recently, this group began to wobble too. Declining
orders for computers and peripheral equipment caused one
manufacturer in the Minneapolis/St. Paul area (24,000 employees) to
encourage its employees to take unpaid vacations. A spokesman for
another computer manufacturer in the Twin Cities (10,500 workers)
states that his firm's business has recently "stalled." Also, a
local manufacturer of super computers recently cut the number of
computers it plans to ship this year from 16 to 14.
Along with the very recent let-up in high technology manufacturing, the decline in other manufacturing, as reported in recent Redbooks, has continued. Firms producing temperature controls, packaging materials, industrial filters, and mobile homes have all recently reported reduced orders and production. Confirming these declines, a spokesperson for a large Minneapolis/St. Paul trucking firm states that recent shipments from manufacturers have been falling.
Mining and forest products also continue in the doldrums. Shutdown iron mining operations are going to be resumed later than expected; and, except for paper mills, forest product operations have been cut back further at both ends of the district.
Consumer Spending
Consumer spending has continued to slip. Two large Minneapolis/St.
Paul retailers report weak sales in April as they have for several
months. Also, after home sales showed some signs of reviving in
February and early March, the president of the Greater Minneapolis
Board of Realtors indicates that they leveled off in April and were
down 42 percent from a year ago. In contrast to home sales, motor
vehicle sales have continued their earlier improvement into April.
Regional sales managers for two large domestic motor vehicle
manufacturers attribute this improvement to rising light truck
sales. Their companies' small truck sales in the district in April
were up about 15 percent from a year ago, and they are even worried
about the sufficiency of current inventories. Auto sales, they
report, have been substantially less strong.
Financial Developments
The slippage in the district's real economy is reflected in
continued weakness in bank lending. According to a Minneapolis/St.
Paul banker, loan demand at Twin Cities banks remained sluggish in
April. Outside the Twin Cities, 47 percent of the bankers responding
to our spring Agricultural Credit Conditions Survey termed their
loan-to-deposit ratios as "lower than desired." This was the highest
percentage of respondents expressing this view in the 17-year
history of the survey.