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As 1999 begins, the economy of the Ninth District is strong. This is reflected in business leader sentiment, which remains optimistic overall despite a few signs of caution. Construction, which is an economic locomotive with a full head of steam barreling through one record after another, is further evidence of overall optimism. Consumer spending continues very strong, as do most manufacturing operations. Labor markets remain tight and employment high. There are few signs, if any, of higher prices. On the negative side, the primary commodity sectors including agriculture, oil, mining and paper continue under financial pressure.
Business Sentiment
A statewide survey of over 400 business executives by a Minneapolis business periodical showed that 40 percent planned to add staff in 1999 and that 70 percent expected difficulty in finding employees. Fortysix percent expected sales and profits to be higher in 1999 than in 1998. Though a Minneapolis Fed district-wide poll of business leaders showed somewhat less optimism than a year earlier, a very positive outlook still predominated. Respondents generally expected increases in their own firms' investment and employment, and strong increases in sales. A somewhat more somber note was struck by a December regional survey of purchasing managers, which predicted slower growth or recession for Minnesota and the Dakotas.
Construction and Real Estate
"Local home-building reaches five-year high," headlined a St. Paul news article on the region's booming construction sector. Real estate and construction continue as a sector of extreme strength. November housing permits for the Minneapolis-St. Paul metro area ran about 30 percent above the average of the previous two years and other reports indicate that this momentum carried through the end of the year. Growing regional centers in Wisconsin, Montana, South Dakota and North Dakota also have strong home building.
Despite very active nonresidential building over several years, vacancy rates for Minneapolis-St. Paul office and retail space fell to their lowest levels thus far in the 1990s. Industrial vacancy rates also fell and are below most of the decade but still slightly above a low set in 1996. And a construction sector publication's annual survey of architects and engineers in Minnesota and the Dakotas revealed that most expected their design loads to increase or stay the same through 1999.
Consumer Spending and Tourism
"The momentum continued right through the week after Christmas," remarked one Minneapolis-based retailer in describing a widespread phenomenon. Sales before Christmas were only moderate to strong, but brisk business in the week after the holiday helped make overall holiday sales quite strong. The changing structure of retailing, including rapidly growing retail square footage and increasing catalog and internet purchases, leads many store managers to talk about difficulties, but overall spending seems quite strong. Package delivery firms reported record deliveries to homes from telephone and internet order firms. Retailers in strongly agricultural areas continue to report slow sales, especially of appliances and other durable items.
Little change is seen from late 1998 patterns in vehicle sales. Sport utility vehicles and light trucks are selling well, traditional sedans less so. Sales are strong in urban areas, but weaker in regions where agriculture predominates. Several sources noted that foreign cars were selling better than domestics. "I could have sold more if I could have gotten the product," says one Montana dealer.
Lack of snow delayed the winter tourism season in most district states, but the impact varied with location, according to tourism officials. They report improvement since snow fell in late December. One official in Michigan's Upper Peninsula reports that while the ski and snowmobile season started late, inquiries to the office were up 200 percent after snow started falling. In northern Wisconsin, traffic through tourism areas is reportedly lighter than usual. Skiing and snowmobiling started six weeks late in the Blackhills area of South Dakota, causing slack December revenues. Montana, with earlier snow than other district states, posted a good increase in December tourism compared to a year earlier.
Manufacturing
While specific firms have been hurt by reduced export sales, manufacturing output continues strong, and there was only a slight year-over-year decline in district manufacturing employment as of the end of November. Several respondents did indicate an increased sense of caution about prospects for 1999. But there are also signs of continued strength. "In Minnesota, the (manufacturing) index was up dramatically for December," said an analyst of a regional survey of purchasing managers. Referring to South Dakota, he added that "electronics manufacturing is keeping the state's growth in the positive range." One weak area is agricultural equipment, of particular importance to North Dakota.
Agriculture
"Dairy is hot and hogs are not." That statement, made at a Wisconsin ag lenders conference, accurately summarizes the salient issues in Ninth District agriculture. Dairy producers are facing the most favorable milk price to feed cost ratio in many years and dairying is strongly profitable. Hog producers are facing the lowest prices in 30 years, with little relief expected in the near future. Lenders in areas where hog production is important express concern about the solvency of some borrowers and expect increased loan losses as a result of low hog prices.
Beef and grains, in contrast, show little change from early winter. Prices for beef, corn, soybeans and wheat all remain depressed, but not as dramatically as hogs. Strong 1998 grain yields provided some cushion against low prices, but unless prices improve many farmers expect to lose money in 1999. One major Minnesota ag lender commented, "Farmers are coming in to update their financials and arrange credit lines right now. There is not a single crop enterprise in our area that will produce enough cash flow to pay fixed costs using current prices for fall futures and five-year average yields. If we had to cut off financing to everyone who cannot project positive cash flows we would close down 80 percent of our customers."
Energy and Mining
The slump in natural resource industries, particularly oil and gas drilling, continues to worsen. In the last week of 1998 the rig count for Montana was at half of year-earlier levels, that for North Dakota at a fourth. Pumping continues from existing wells, but new seismic work and leasing are at a near-standstill. Copper prices are reportedly near the shutdown price for Montana mines. Minnesota and Michigan iron mines expect to see significant drops in output in 1999 as a result of increased imports of ore and finished steel. Ironically, increased steel imports have led to increased grain and coal exports from Duluth, Minn., as freighters which have offloaded foreign steel at Lake Michigan ports search for cargo to haul back through the Seaway. Paper mills also reportedly face slack demand for many grades of their output.
Employment, Wages and Prices
Labor markets remain tight as a drum in the district's urban areas. Employers in booming Fargo, N.D., which reached a record 0.9 percent unemployment rate in October, and Sioux Falls, S.D., express frustration about the difficulty of finding workers. Unemployment rates remain low and largely stable in most parts of the district.
Price increases are rare at any level. Fuels and red meat prices continue as bargains for many consumers. Manufacturers report drops in prices of steel and nonferrous metals and in all petroleum-based chemicals or plastics.
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