As 1998 opens, the Ninth District economy is like a marathoner – maintaining a strong, steady stride, but not sprinting. Business people are optimistic about prospects for the new year. Construction, manufacturing and energy development are all robust. Retail sales were strong at the end of 1997, and merchandisers are generally optimistic about 1998. Banks enjoyed a very good year and anticipate another.
Agriculture varies somewhat by crop and location, but farm finances are generally strong. Due to lack of snow, tourism is weak in some areas. Difficulty in securing employees is the most widespread economic complaint. Despite reports of rising wages for many specific skills, output prices are quiescent.
General Business Conditions
"Solid growth predicted for all states," headlined the report of a December regional survey of purchasing managers. This sentiment was echoed by business leaders responding to a year-end Ninth District poll. Nearly 60 percent expect business investment to be up in their communities versus 8 percent predicting a drop. Over 54 percent expect employment to rise compared to 5 percent anticipating a drop. In terms of their own firms, 59 percent look for higher sales and 46 percent anticipate making increased investments.
Some 61 percent of Ninth District manufacturers polled in late 1997 expect 1998 sales to be up, only 4 percent expect them to slump. Over one-third anticipate increased investment by their own firm. These figures reflect a manufacturing sector that continues to enjoy robust business with continued growth in orders. Only a few firms report slackening export orders from Asia that will significantly affect their business. However, a December multi-state regional purchasing managers' survey did note some slowing of growth for the Dakotas and widespread reports of slower export orders. Computer networking products and services remain very strong, as do medical electronics and devices.
Construction and Real Estate
Construction has been strong for so long in the district that a fast pace has become the norm. Moreover, unusually warm weather favored strong activity into January. Publicly let awards in Minnesota and the Dakotas for all 1997 ended up 11 percent above 1996. Industry sources expect similar strength in the new year. A report on commercial real estate in the Minneapolis-St. Paul area detailed low vacancy rates and plans for increased construction in downtowns and suburbs.
Housing construction is strong in most urban areas. Many sources report that low interest rates are heating up buyer interest in both new and existing housing, and lenders are bracing for a spate of refinancing.
Natural Resource Industries
The mild winter has fostered energy development, with a record 35 rigs drilling for oil or gas in North Dakota and Montana at the new year. North Dakota oil production is up 11 percent over year-earlier levels. After registering strong or moderate growth in the last two years, iron ore mining officials expect essentially stable output in 1998. Output is similarly stable for most forest product producers. One small Wisconsin paper plant may be closed as a result of post-merger restructuring.
"Due to good yields we should see debt reduction for most farmers in first quarter 1998," reports a southern Minnesota banker. "Many farmers and ranchers are leaving the area due to poor prices and weather conditions," says a southwest North Dakota counterpart. These comments illustrate the mixed financial conditions in agriculture. Corn, soybean and hog farmers in eastern South Dakota, southern Minnesota and western Wisconsin are enjoying good profitability and favorable weather. Cattle ranchers and feedlot operators generally report moderate profitability after 2½ years of losses.
Wheat and dairy producers are squeezed by prices that do not allow them to cover all costs. North Dakota and northwestern Minnesota farmers continue to suffer poor cash flows due to 1997's excess moisture, plant disease and insect infestations that cut yields dramatically in many areas. Despite these problems, farm finances are described as strong by most district bankers.
Consumer Spending and Tourism
"Late rally helps retailers in holiday season," headlined a newspaper story on sales by Minnesota-based national firms. A general retailer and a music and video chain reported same-store increases of 6.4 percent and 8.7 percent respectively over the 1996 holiday season. A consumer electronics and appliance chain reported 12.6 percent year-over-year same-store gains for December. Regional firms, mall managers and individual store owners are generally upbeat on both the holidays and prospects for first quarter 1998.
Vehicle sales are mixed. Dealers and association representatives in Montana and the Dakotas describe sluggish to average sales in many areas. But sources in urban areas of Minnesota, western Wisconsin and the eastern fringes of North Dakota and South Dakota are somewhat more optimistic, reporting good, but not booming, sales.
"No white means no green," is a headline that applies to most winter recreation or tourism businesses. A tourism official reports that the lack of snow has hit some counties hard in the Upper Peninsula of Michigan, especially during the holidays. "It will take a lot to bail out the winter," he says. While snow cover is light on the lower elevations in South Dakota and Montana, there are good conditions at higher elevations. A ski resort in Montana reports a solid holiday season and projects a season on par with last year.
Banking and Financial Services
While 1997 was a very profitable year for many banks, a variety of sources describe demand for bank loans as softening, reportedly because of strong internal cash generation on the part of many businesses. Stiff competition to make loans has reportedly led to reductions in loan pricing. Bankers reportedly expect a good year in 1998, but some express concern about how long the "good times" can last.
Employment, Wages and Prices
Tight labor markets continue as a major problem for employers in most areas of the district. Nearly 83 percent of firms polled in a Ninth District survey report securing workers to be a challenge. Reported compensation increases continue to be mixed: Many firms report having to up their bids significantly to secure skilled specialists, but firmwide pay increases of 2 percent to 3 percent are also common. Several sources report that health insurance costs will be up markedly in 1998 after a three-year hiatus.
Gasoline and heating oil prices are at their lowest levels in this decade. Spot natural gas prices declined from December into the new year. The combination of lower prices and warm weather has significantly reduced heating costs for most homeowners. Manufacturers of intermediate goods continue to describe pressure from customers to lower prices. Reports of price increases for intermediate or final goods are extremely rare.