Overall, moderate to strong economic growth continues to prevail in the Ninth District. Construction, retailing and manufacturing are robust. Tourism shows increasing strength. As in the previous report, areas where agriculture, mining or forestry predominate have much slower economies than the rest of the region. Crop farmers in particular are under financial stress due to low prices, and there are fears about possible drought in wheat-growing regions. Reports of increases in wages and in nonwage compensation are becoming more prevalent. Labor markets remain extremely tight in most areas.
Real Estate and Construction
"House sale boom continues into fifth month," headlines a Minneapolis news article on sales of existing homes. In May, such sales were 23 percent above year-earlier levels. For the year to date the increase is 18 percent. One realty spokesperson comments that buyer interest in existing homes is stoked by low interest rates and the long waits facing purchasers of newly constructed homes. Home building also continues strong in many other urban areas including Sioux Falls, S.D., Eau Claire, Wis., and Fargo, N.D.
Heavy construction, including roads and bridges, continues modestly above 1997 levels. Extremely favorable weather conditions allowed excavators and road builders to begin somewhat earlier than usual and activity is brisk.
Manufacturing output shows little change from earlier reports - general strength but not spectacular growth. Publicly traded firms continue to report strong earnings. Medical devices and electronic instruments continue as an area of strength as do all products related to construction. Output of tractors and agricultural implements, important in North Dakota, is sluggish, but machines which also have construction applications such as skid-steer loaders are selling well.
A regional survey of purchasing managers indicates some slowing of exports, particularly in Minnesota and a large commodity trading firm reported reduced profits due to Asian woes.
Natural Resource Industries
"We are not going to see much improvement until oil prices pick up," comments a North Dakotan on oil drilling in that state, which has fallen to its lowest level in over two years. A somewhat more favorable market for gas has helped bolster drilling in Montana, but rig counts there are also somewhat below year-earlier levels. Forest product output is moderate to strong, with considerable variation in reports among manufacturers of different grades of paper. An iron ore industry representative says that output for 1998 should be about even with 1997.
Low crop prices and concerns about scarce rains are raising concerns in farming and ranching. Favorable weather did facilitate early completion of spring planting in most areas, and crop development is well ahead of normal. But lack of moisture is increasingly serious in the western Dakotas and in Montana. Moreover, prices for most district crop and livestock products remain low, putting stress on farm cash flows and eroding balance sheets. North Dakota farm liquidations were at their highest level in more than a decade in early spring, particularly in areas that have had repeated adverse weather and plant disease problems in the 1990s.
Farm bankers responding to a Minneapolis Fed survey report that farm incomes and capital spending are slumping, and that there is some erosion in repayment rates. However, indications such as the number of borrowers against their debt limits remain somewhat better than a year to two years ago when low cattle prices had heavy impacts on western areas of the district.
Loan growth has reportedly slowed in many areas throughout the district. One reported reason is a tightening of credit standards and terms by district banks, reportedly in response to continued increases in nonperforming loans and economic uncertainty in agriculturally dependent areas. Another respondent described banks as being "a bit more fussy" about extending credit.
Consumer Spending and Tourism
"Consumers continue spree," heads an early June report on retail sales. Minnesota-based national chains as well as regional and local retailers in cities across the district generally report very good sales for late spring and for the year to date. Mall managers in regional centers also describe brisk traffic. The exception to this positive pattern continues to be retailers in rural towns where agriculture is the primary activity.
Sales reportedly are good across most categories of merchandise. Recreational goods again are singled out as particularly strong. Auto dealers also describe sales as good, though some express concern about customers becoming "addicted" to rebates, coupons and other promotions that maintain sales but cut into profit levels. Two sources describe structural change in auto retailing and predict that the number of dealerships will drop precipitously in the next five years. Sales east of the Missouri River are markedly stronger than in Montana and the western Dakotas. As with general retailing, sales reportedly are particularly slow in rural areas.
Tourism officials report a strong spring season and good prospects for summer. Some areas in the Upper Peninsula of Michigan reported 20 percent increases for May compared to a year earlier, while inquiries at a tourism office were up 30 percent year to date. Visitations to Duluth, Minn., were up 10 percent, according to a tourism official. Tourism sites in South Dakota report steady increases for May; campgrounds were booked full for Memorial Day weekend.
Employment, Wages and Prices
"Pay rises as firms scramble," headlines a newspaper article regarding western Wisconsin, where unemployment rates are in the mid 2 percent range. The article noted that firms were having to raise wages for new and existing employees to get enough staff. But other firms reportedly are employing more targeted approaches. Participants in a special Ninth District Advisory Council meeting focused on labor markets noted that large across-the-board pay increases are still rare, but that many specialties are getting substantial raises and that nonwage compensation, including signing and retention bonuses, and broader benefits are rising sharply for some firms and that many are offering more flexible working hours and conditions. "The employee is in the driver's seat," said the personnel director for a large South Dakota based financial services firm. There are more reports of strike threats or strikes than in several years, although no strikes against major employers have occurred so far this year.
Low commodity and energy prices are helping to hold down the general price level. Fuel prices that remain below levels that prevailed for most of the decade are helping all parts of the transportation sector. One source reported price increases for some grades of steel, but another manufacturer described decreases. A few manufacturers report that delivery times on purchased inputs are dropping and that suppliers apparently have somewhat higher inventories.