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Beige Book Report: Minneapolis

May 8, 1996

The pace of economic growth in the Ninth District is picking up somewhat after perceptible slowing in late winter. Vehicle sales are improving after a midwinter slump and there are some reports of increases for general merchandise. Manufacturers still have some slack, but a number of firms report that orders are once again increasing. Soaring grain prices are improving prospects for farmers, though optimism is tempered by a cold, late spring and depressed livestock prices. Once again, construction is very strong in most parts of the district. Metal mining and oil drilling and exploration are at the highest levels in this decade. As throughout the winter, tourist business varies by location, with eastern areas of the district fairly upbeat, but Montana and the Dakotas less so. Skilled employees remain hard to get, and unemployment rates are low. There are few reports of wage pressures. Price increases are concentrated in grains and energy-related items such as fuels and basic plastics. Inventories are reportedly normal for most firms except for paper products, some slow-moving automobile models and a few manufacturers.

Construction and real estate
"Building activity booms" and "Developers gearing up" are headlines in a Minneapolis paper describing office development in that city's central business district, but they apply equally well to Ninth District construction as a whole. Builders in most areas of the district expect a strong construction season for the third or fourth year running. "Commercial builders in Minot expect to be very busy," reports a North Dakota director. Minnesota single-family housing permits issued in February were 28 percent and 5 percent above the same month in 1995 and 1994. Home builders in Sioux Falls, S.D., and other regional centers also expect good business.

A fourth consecutive strong year for large, publicly let projects is developing in Minnesota, South Dakota and North Dakota. Contracts let through March are about 25 percent above the same period last year. State highway and bridge projects predominate, but construction of schools, municipal buildings, churches and private commercial building are all strong.

Markets for existing real estate are also active. March 1996 sales of existing homes were up nearly 13 percent over March 1995 in the Minneapolis-St. Paul metropolitan area and realtors report continued strength in listing and sales in April. Strong markets for existing housing are similarly reported in several other areas.

Natural resource industries
Ninth District resource extraction industries are feeling their oats. "With the plants already running wide open and order books full, there's little room for more downtime," is an area newspaper's recent description of the predicament of Lake Superior iron mines as they try to make up for slowdowns caused by harsh weather earlier in the year. Iron shipments from Lake Superior ports began in early April in spite of adverse weather. The principal gold mine in South Dakota reported a large addition to its known reserves, and its ratio of reserves to annual production is now the highest in two decades. Oil drilling and especially seismic exploration are at their highest level in North Dakota in 15 years, and production continues to inch upwards after having declined slowly for the decade through 1994. In contrast to strength in the minerals sectors, paper output continues to slow, with increased reports of selective downtime.

Agriculture
Unseasonably cold, wet weather has delayed tillage planting in all district states. Such spring activities are two weeks or more behind five-year averages. But soil moisture levels are as near optimal as at any time in the past four years, with few areas having either strongly surplus or strongly deficient soil moisture levels. Bankers and extension agents expect planting to progress rapidly once temperatures rise. Fall-seeded crops such as winter wheat and rye, which constitute a small fraction of total crop plantings, are in fair to good shape in contrast to the much-publicized deteriorating condition of such crops in other states.

Continuing increases in grain prices are improving farm incomes, although many rural elevators continue to report difficulty in securing railroad cars to transport grain to ports. Most observers expect higher prices to persist through harvest, and farmers reportedly are responding by planning the highest plantings of major crops in years. Supplies of inputs such as fertilizer, pesticides and seed are generally adequate, although some seed suppliers report that farmers are already trying to exchange longer-season varieties for shorter-season ones, and that short-season varieties will be extremely scarce if adverse weather persists.

Manufacturing
Manufacturing apparently is picking up, although reports vary considerably by sector and firm. "Business is pretty good," says the owner of a Minnesota chemical products firm. "Things picked up a bit after January," reports a farm machinery firm in North Dakota. Makers of some industrial machinery and metal components continue to describe soft orders, but printers and electronic equipment and medical device manufacturers note some strengthening. And one circuit board manufacturer announced plans to add 1,000 more workers by early 1997. Industrial electrical use has not grown from year- earlier levels, however. Most manufacturers report normal inventories for their own businesses and their suppliers.

Consumer spending
"Cars are selling pretty well, things picked up in February and haven't slowed down," reports a South Dakota industry spokesperson. Vehicles and farm machinery are both selling pretty good," is the word from North Dakota. "We can't get enough of the light pickups and sport/utility vehicles says a St. Paul, Minn., auto dealer. General merchandise sales also show some improvement from earlier in the year. "Traffic picked up in March and sales are excellent now," reports a South Dakota mall manager. A Minnesota department store executive notes improvements in sales for most lines since late winter. "Business is booming," says a retail spokesperson from Fargo, N.D., "but I think much of it comes from the way this town is growing." Other industry sources point to the difficulty of separating structural changes in retailing from changes in consumer spending. "Sales tax receipts at the state level from retail sales are consistently well above year-earlier levels, but our Main Street stores are dying," says a North Dakota director.

Tourism
Montana had a disappointing winter tourist season, but hopes are that warmer weather will bring a good summer season. Unseasonably cold weather hurt business in all states in late February and in March, although the late spring prolonged cross-country skiing and snowmobiling in Minnesota, Wisconsin and the Upper Peninsula of Michigan. "But even the snowmobilers are getting sick of it," says one Upper Peninsula business owner. Prolonged ice cover in lakes and cold temperatures is raising concern about spring fishing opener participation. But overall, business owners and tourist officials are optimistic about prospects for the spring and summer.

Employment, wages and prices
"First 19-year old bus driver" headed a recent article describing how the Minneapolis-St. Paul metropolitan transit system lowered its hiring age to secure desperately needed drivers. This is yet another indicator of how tight labor markets remain, especially for skilled blue collar workers. Fast-food and other service businesses employing low-skill workers have similar problems filling rosters. "I hate to see service slip the way it is," said one manager, apologizing for long checkout lines, "but we just can't get the people we need." Unemployment rates continue well below national averages. There are scattered reports of wage increases in the 4 percent to 5 percent range. One large telemarketing firm announced a layoff of nearly 600 workers, but explained that these jobs are being moved to Florida because of a need for bilingual Spanish- English workers.

Energy price increases, particularly for spot buyers of natural gas and for trucking firms, are the most widely noted price pressure. Some manufacturers who use polyethylene or polystyrene for packaging report rapid price increases from mid-February on, and low inventories by producers. "But cardboard prices are just in a freefall," reports one. Cash grain prices are soaring, and flour prices are following with only a slight lag. But a price war among breakfast cereal producers and plummeting livestock prices have thus far limited perceptible food price increases for consumers.