August 5, 1998 Federal Reserve Districts Ninth District - Minneapolis

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Growth continues to predominate in most sectors of the Ninth District economy. But ill winds, especially from Asia, are increasingly retarding the pace of growth. General retailing, autos, tourism and construction are strong. Real estate markets are very active in both residential and commercial categories. Unemployment rates remain very low, and labor markets show continuing symptoms of tightness. Manufacturing output, while still high overall, is beginning to slacken, especially in those products or firms with substantial Asian exposure. Manufacturing exports are down on a year-over-year basis. The natural resource sectors, particularly agriculture, mining and energy development, face low prices, and drilling and mining activity is faltering. Reports of upward pressure on overall compensation are widespread, despite data showing only moderate increases in direct, cash compensation. Real Estate and Construction "Sizzling home market continues," headlines a Minneapolis article reporting double-digit increases in sales of existing homes for the first half of 1998 compared to a year ago. Realtors also report strong activity in office, commercial and light industrial space. Construction is similarly booming. Residential building permits for the Minneapolis-St. Paul area were up 38 percent in June and 22 percent for the year, again compared to the same periods in 1997. In growing regional centers such as Rochester, Minn., Sioux Falls, S.D., Eau Claire Wis., and in the Minneapolis-St. Paul metropolitan area, strong residential building is matched by robust commercial work. The downtown areas of both Minneapolis and St. Paul show the fastest pace of large office building projects in a decade. Public and private heavy construction reportedly is up 5 percent to 11 percent in Minnesota and the Dakotas through May, compared to 1997, marking a sixth consecutive season of strong growth. Manufacturing "We have the bad luck to have the wrong stuff going to the wrong places," comments one Minnesota trade expert in explaining a 9.5 percent drop in first quarter exports compared to a year earlier. The largest declines were to Japan, Canada and Thailand. A major Minnesota manufacturer also announced plans to cut 4,000 positions worldwide, largely through attrition, in response to weaker international earnings and flat domestic demand. A computer component manufacturer will close a 120-employee factory in South Dakota and move production to Mexico. A St. Paul based financial printing firm announced the closing of three plants, all located in other districts, and the layoff of 400 employees in a move unrelated to any foreign events. Nevertheless, many other manufacturers report good sales, and manufacturing employment grew through June--in Minnesota it was some 2 percent above a year ago. And a computer component manufacturer announced planned expansions for the Eau Claire area that will add more than 1,000 employees over the next two years. Moreover, publicly traded firms that are not dependent on trade with Asia continue to report generally strong revenue growth. Agriculture Farming is the most troubled sector of the district economy. In terms of output, prospects are good in most areas. Crop conditions are generally favorable, and late spring rains in Montana alleviated earlier worries about drought. Output of wheat, corn and soybeans should be at or above five-year averages for states as a whole. Specific regions face less favorable conditions. Areas of Minnesota and North Dakota which had severe plant disease problems over several years expect similar damage this year to wheat and barley. Dry conditions in grazing areas this spring reduced hay yields and will force some ranchers to buy hay sooner or later. Prices rather than crop conditions are the main concern. Wheat growers are under the greatest pressure in terms of output price relative to costs, but corn and soybean prices have also fallen to a point where many producers will find it difficult to pay all costs. Farm bankers report that increasing proportions of customers have reached debt limits. Many bankers require higher levels of collateral than a year ago. Farm implement dealers report extremely slow sales. Returns to hog raising improved somewhat in late spring, but remain unfavorable. Many cattle feeders lost money on animals fed over the past winter and spring, but may face somewhat more profitable feeder cattle and feed prices for animals put on feed this year. One area of concern is adequacy of transportation and storage facilities for the new crop. Much on-farm and commercial storage remains tied up with the 1997 crop. Principal railroads have warned that they may not be able to move as much grain as elevators think necessary to accommodate the new crop. Work on improvised storage facilities has begun in many areas. Energy and Mining Oil and gas drilling has stabilized at somewhat more than half of the rate experienced at the height of the boom two years ago. Oil output remains above the levels that prevailed throughout most of the decade as a result of the wells completed in the last 30 months. New leasing and seismic exploration are reportedly very slow. Gold mining apparently continues to contract. Iron mine output projections for 1998 remain largely unchanged and about equal to 1997 levels. Consumer Spending and Tourism "Sales in June and July have been very good," reports a Montana auto dealer who had experienced somewhat slower demand earlier in the year. Vehicle sales are strong for most district dealers with the exception of those located in agriculture-dependent areas. General consumer spending continues robust across many product lines. National and regional chains based in the district report strong sales. Mall managers describe good traffic; one comments that successful movies this year are helping business by bringing large crowds into her mall. After a long period of sluggishness, prospects of the tourist sector are positive. Summer tourism showed strong growth for June and July compared to a year earlier. According to a chamber of commerce in northern Wisconsin, tourism businesses are reporting strong sales. A tourism office in Duluth, Minn., reports about a 9 percent increase for the area. In South Dakota, attendance at Badlands and Mount Rushmore parks is up 53 percent and 16 percent respectively for June compared to a year earlier, while motel occupancy for June is up 6 percent. "All reports that we've been hearing are good," says an official in Montana where visits to Glacier and Yellowstone parks were up 22 percent and 7 percent respectively in June compared to 1997. Employment, Wages and Prices "Shortage of workers hits region hard," and "Workers Wanted," are headlines to recent stories describing the tight labor markets in west-central Wisconsin, where unemployment rates are in the mid 2 percent range. While hourly earnings in manufacturing and other available data on wages and salaries show only moderate increases in the 3 percent range over year-earlier levels, anecdotal reports of higher increases in cash and noncash compensation are extremely widespread. A major credit card processor in South Dakota announced increases in its general wage structure of up to 12 percent for some workers as well as increased flexibility in work scheduling. Total employment is up strongly in most urban areas and unemployment rates in the mid to low 2 percent range are common. Montana and Michigan's Upper Peninsula are exceptions, showing higher levels of unemployment and fewer subjective indications of worker shortages. Prices for consumer goods as well as commodities and intermediate goods show little increase. Low gasoline prices and low prices for crop and livestock products are undoubtedly helping to hold down the general price level, but manufacturers and retailers continue to report difficulty in making any price increase stick in a competitive environment. Return to top St. Louis Kansas City