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Overview
The district economy continued to grow moderately last month. Manufacturing activity remained strong, retail sales increased, and energy activity improved further. Construction activity generally held steady. In the farm economy, the corn and soybean crops were in good condition, the cattle industry benefited from favorable prices and good pasture, and hog producers continued to expand. Labor markets remained tight in much of the district, with some limited evidence of wage pressures. Prices generally held steady at the retail level and for most manufacturing and construction materials.
Retail Sales
Retailers report sales increased last month and were higher than a year ago. Sales are expected to increase moderately in the coming months. Retailers are generally satisfied with current stocks but expect to expand inventories in the next several months in anticipation of the holiday season. Automobile dealers report sales edged up last month and were generally unchanged from a year ago. Sales of light trucks, sport utility vehicles, and imported passenger cars remained particularly strong. Some dealers report shortages of popular models, and most plan to expand stocks in the next several months to meet an expected increase in sales.
Manufacturing
Manufacturers continued to operate at moderately high levels of capacity last month. Manufacturing materials were generally available, with lead times unchanged. Manufacturers have been trimming their inventories slightly, and some say they plan further reductions in the coming months. A quarterly survey of district manufacturers indicated that production, shipments, and new orders all increased modestly in July, at a pace slightly slower than earlier in the year.
Housing
Builders report housing starts held steady last month and were generally unchanged from a year ago. Builders expect construction activity to remain stable over the next several months. Sales of new homes were down slightly from the previous month and unchanged from a year ago. Most building materials were readily available and delivery times were normal. Mortgage lenders say demand edged up last month.
Banking
Bankers report that loans edged up and deposits fell last month, boosting loan-deposit ratios slightly. Home equity loans and residential construction loans both increased, while other loan categories were flat. Large CDs and small time and savings
deposits fell, outweighing increases in NOW accounts and MMDAs.
Almost all respondent banks left their prime lending rates unchanged last month, and most expect to hold rates steady in the near term. Most banks did not change their consumer lending rates and anticipate no future changes. A few banks tightened their lending standards, citing concerns over credit quality.
Energy
District energy activity continued to improve last month and remained somewhat stronger than a year ago. Crude oil prices and natural gas prices both increased but remained well below the peaks reached at the end of last year. The district rig count rose 4 percent in August to a level 24 percent higher than a year ago.
Agriculture
The district corn and soybean crops appear to be in good condition, but crop development is behind schedule. Concerns have now turned toward the possibility of an early frost, which would likely damage the corn and soybean crops substantially. However, if the weather pattern is normal, district producers should harvest a record soybean crop and an above-average corn crop.
Operators of cattle feedlots in the district have maintained slim profit margins. A
steady pace of marketings has helped support fed cattle prices, but prices could be forced down as more cattle are slaughtered this fall. Feeder cattle prices have leveled out recently after rising most of the past year. Feeder cattle prices could continue their upward trend later this year due to the small calf crop going to market this fall. With good pasture conditions throughout the district, many ranchers plan to hold calves until the spring of 1998. Many large hog producers continue to expand their operations in the district, and the increase in supply has led to lower hog prices. Still, continued growth in pork exports is keeping prices at profitable levels.
District agricultural banks report their loan portfolios are stronger than a year ago. After a downturn in the district farm economy in 1995 and 1996, many banks are optimistic about the improving financial condition of their borrowers, especially wheat and cattle producers.
Wages and Prices
Labor markets remained tight last month in much of the district, with some limited evidence of wage pressures. Retailers say qualified entry-level workers were hard to find, and manufacturers report difficulty hiring production workers and skilled craftspeople. A few companies say they raised wages more than normal to attract or retain workers, but most say wage increases were about normal. Employers report they are becoming more creative in job recruitment, and some say they are compensating workers in new ways--for example, by shortening the time it takes a new hire to reach the top of the pay scale. Prices held steady at the retail level and for most materials used in manufacturing and construction. Retailers expect no major price changes in coming months.
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Minneapolis