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Beige Book Report: Minneapolis

March 23, 1983

The Ninth District's recovery continues to gain momentum. The directors' reports at our March meeting were unanimously optimistic, probably the most optimistic in several years. Our directors do not appear to share some national analysts' view that the February statistics denote a relapse in the economy. January and February advances in retail, home, and manufacturing sales were stronger than the increases that occurred late last year. The recovery has also begun to reach the district's two weakest industries—metal mining and agriculture. Seven out of Minnesota's eight taconite plants have scheduled some production this spring, and the new Payment-in-Kind Program has engendered some optimism in agriculture. The recovery would have even more momentum if auto sales hadn't eased and falling oil prices hadn't further curbed petroleum exploration in the western part of the district. Furthermore, district state governments' struggles to balance their budgets suggest that considerable weakness persists even though the district economy has started to recuperate. Lending remains lackluster at district banks.

Consumer Spending
As noted in previous Redbooks, the district's recovery has been led by consumer spending. It continues to strengthen. The largest retailer in the Minneapolis-St. Paul area reports a definite pickup in department store sales in January and February and indicates that they were in fact better than expected. Bank directors also report improving retail sales. In South Dakota, for example, some retailers' sales have recently been up as much as 40 to 50 percent from a year ago. Home sales have also continued to gain momentum. According to the Minneapolis Board of Realtors, January and February home sales in Minneapolis and its suburbs were up 34 percent from a year ago compared with a 16 percent year-to-year gain in the fourth quarter.

In contrast to retail and home sales, auto sales appear to have weakened in early 1983. Although several bank directors report that car sales in their immediate areas have been good, regional sales managers for the nation's two largest automobile manufacturers indicate that sales in January and February were down from a year earlier (after being up in late 1982). They view this easing as temporary, however, because consumers have been showing considerable interest in purchasing cars. Early attendance at the Greater St. Paul and Minneapolis Auto Show in mid-March, for example, was at record levels.

Industrial Activity
Manufacturing, like consumer spending, has continued to gain momentum. According to a University of Minnesota survey of Minnesota manufacturers, 38 percent of the respondents reported increases in new orders in February compared with 27 percent reporting increases last November. While the percentage of manufacturers reporting increases rose, the percentage reporting declines dropped to 24 percent in February from 46 percent in November.

Much of this pickup in manufacturing has come from the forest products industries. The revival in home construction continues to result in Montana lumber mills stepping up operations and Minnesota waferboard plants adding shifts. One new waferboard plant in Minnesota, which was completed last year but never opened, now plans to start operations this spring. In addition, a director with the paper industry indicates that Minnesota paper plants are now operating continuously instead of intermittently as they were last year.

At our last writing, the recovery in industrial activity had been confined to manufacturing. It is now spreading to metal mining. Seven out of Minnesota's eight taconite plants are scheduled to be operating in April. All but one plant had been shut down for extended periods since last spring. Many of the plants' operations will remain far below historical norms, however, and their employment levels in April are projected to be down 50 percent from last April.

While metal mining has started to show signs of reviving, petroleum exploration has declined. In February, 64 oil rigs were operating in Montana and North Dakota, down from 75 in December and 159 a year ago. With the recent oil price declines, the number of active rigs is almost sure to fall further.

Agricultural Conditions
The district's farm sector has also begun to show the first distant glimmerings of recovery. Ag analysts in the district confirm our observation in the last Redbook that the new Payment-in-Kind (PIK) Program should bring some relief to district farmers. They feel that the worst may be over and report that farmers are more optimistic about the future than they were prior to PIK. Several ag bankers support that contention, stating that land prices appear to have stopped falling and, in a few isolated instances, have even increased. An economist with a farm supply company also reports that its dealers appear less worried about credit problems than several months ago. The executive secretary of the Retail Farm Equipment Association of Minnesota and South Dakota states that farmers have started to show more interest in purchasing farm equipment. Attendance at his organization's Northern Farm Show in January was up considerably from a year ago. Although these developments suggest that some relief is in sight, these individuals caution that the road back to farm prosperity could be "long and bumpy."

State Governments
Despite signs of a strengthening recovery, district state governments are struggling to obtain funds to maintain public services. The recent recession seriously eroded revenues in Minnesota, Montana, North Dakota, and South Dakota, and these states are not anticipating any marked revenue rebound during the next few years. In addition, recent declines in oil prices are expected to reduce state revenues in Montana and North Dakota during the next biennium by $24 and $35 million, respectively. To obtain revenues to fund their next biennium budgets, Minnesota and North Dakota are resorting to general tax increases. In Minnesota, the governor has asked that a temporary 10 percent income tax surcharge and a 1 percent sales tax increase be extended, and that state property tax relief be reduced. In North Dakota, the legislature has already enacted a 1 percent sales tax increase and is seeking ways to raise another $150 million. Montana and South Dakota have not had to enact any general tax increases.

In three district states, well-intentioned economic development programs are being promoted to offset the recession's severity. These initiatives will, of course, require funding—and at a time when revenues for basic public services are already tight in those states. Minnesota's governor has proposed a $75 million jobs program for those who have exhausted their unemployment benefits, a $30 million program to weatherize public buildings and develop alternative energy resources, a "New Minnesota Enterprise Fund" to finance small businesses, and a series of tax breaks to encourage small businesses to start up and stay in Minnesota. Montana's governor is pushing a "Build Montana" Program that would use 25 percent of the state's coal tax trust fund to assist local governments, build highways, increase capital assistance to business, and upgrade the state's economic development and tourist promotion efforts. South Dakota hopes to become a financial service center and has recently enacted legislation allowing outstate bank holding companies to charter South Dakota state banks so that they can go into the insurance business nationally. Governor Janklow has stated that as many as 30 outstate bank holding companies may be interested in establishing South Dakota banks for that purpose.

Financial Developments
For several months, our Redbooks have been reporting weak loan demand and this trend continues. Bank directors indicate that district bank lending has remained weak in early 1983, as it has nationally. Their comments are confirmed by loans outstanding at district county banks, which were essentially unchanged between early January and early March.