Upper Midwest manufacturers anticipate stronger activity for their companies and are hoping for healthier profits in the first half of the year, according to a winter survey of manufacturers conducted by the Federal Reserve Bank of Minneapolis and the Minnesota Department of Employment and Economic Development. Production and new orders are expected to jump. "To meet the expected increased demand, companies plan to aggressively hire employees and increase productivity through capital investments, which would result in an anticipated slight increase in profits," noted Toby Madden, regional economist at the Minneapolis Fed. He cautioned that price increases for raw materials and parts continue to be a concern.

Following are selected results of the expected growth in the first half of 2005 for Ninth District states:

• 73 percent of the respondents from the Upper Peninsula of Michigan forecast increased capital investment.
• 41 percent of Minnesota respondents expect production to increase. Only 14 percent expect decreases.
• 56 percent of Montana respondents see larger orders.
• 65 percent of North Dakota respondents are looking for increased productivity.
• 40 percent of South Dakota respondents forecast increased employment and only 3 percent anticipate decreases.
• 44 percent of western Wisconsin respondents expect prices on their products to increase. Only 7 percent expect decreases.

This outlook is reflective of their experiences in the second half of 2004. While manufacturers were busy during the last two quarters of 2004, the bottom line didn't have much to show for it. Survey respondents reported that new orders, production, investment in equipment, employment, productivity and prices were up during the last half of 2004. This strength appears widespread across the
six-state district and in businesses of all sizes. Profits, however, were anemic as respondents from Minnesota and Montana indicated decreases in profits and manufacturers from other district states reported only small increases.

"The recent change in the value of the dollar may be driving the increased volume of activity," Madden said. "Exports are up and imports are down, but the weak dollar has increased the price of imported materials."

The respondents also expressed their views on the overall economies of their respective states. The outlook for the state economies in the Ninth Federal Reserve District are generally positive as manufacturers expect the overall economy to grow in the first half of 2005. They predict investment, business investment and consumer spending will increase at a healthy pace, although weak overall corporate profits and a significant rise in inflation are anticipated.

The survey elicited 397 responses from 2,906 randomly selected manufacturing companies in Minnesota, Montana, North and South Dakota, northwestern Wisconsin and the Upper Peninsula of Michigan. The Minnesota Department of Employment and Economic Development conducted the Minnesota portion of the survey. See complete survey results by district state and employment size.

As one of the 12 Federal Reserve Banks, the Federal Reserve Bank of Minneapolis contributes to a variety of Federal Reserve System functions, including operation of a nationwide payments system, distribution of the nation's currency and coin, supervision and regulation of member banks and bank holding companies, and serving as a fiscal agent for the U.S. Treasury. Additionally, the president of the Minneapolis Fed serves as a member of the Federal Open Market Committee, the monetary policymaking arm of the Federal Reserve's Board of Governors.