December 3, 1997 Federal Reserve Districts Ninth District - Minneapolis

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As 1997 draws to a close, the Ninth District economy continues to enjoy robust, broad-based economic growth. Retail sales are strong, many manufacturers report full order books, and gas and oil development is at a high for the decade. While construction has cooled from the spirited pace seen earlier in the year, building activity remains at a high level. Crop yields and harvesting weather were generally favorable to farmers, and the financial condition of previously hard pressed ranchers continues to improve. There are few indications of price increases at any level. On the negative side, tourism firms continue to report somewhat disappointing business. Wage pressures are reported in virtually all sectors and in most geographic areas. Finding qualified workers is a near-universal problem for employers. Manufacturing and Business Services "This is turning out to be our best year, better than we expected, and next year looks even better," says a North Dakota furniture manufacturer. "Business is very strong," reports a Minnesota-based vehicle and heavy equipment component manufacturer. Reports such as these are echoed across the manufacturing sector. Computer consulting firms, particularly those which design, install or train for computer networks, or review software for year 2000 problems, are reportedly swamped with orders. Construction and Real Estate Construction of all types continues very strong in most areas of the district. In Minnesota, residential building permit numbers were especially strong in September, but in October were about 2 percent below record levels of a year earlier. Western Wisconsin and southeastern South Dakota also report strong home building. Commercial and heavy construction is not posting the sort of year-over-year increases seen in spring and summer, but contractors continue to have plenty of work. There are two large office towers under way in Minneapolis. Commercial building also reportedly is strong in several towns in eastern Montana. Builders were favored with fall weather that allowed many projects to "get out of the hole" by completing foundation work before the ground freezes. Natural Resource Industries With 32 rigs drilling in North Dakota and Montana, gas and oil development is at its hottest pace this decade. With new wells in production, North Dakota oil production is 7 percent above year earlier levels. Iron ore output is largely stable, but low gold prices have led a Montana mine to delay a permitted expansion. Little change is apparent in forest product industries, with output reportedly unchanged from earlier in the year. Agriculture "We had an ideal fall," reports a central Minnesota farm banker. "Everyone got their crops out and corn drying bills are lower than expected." Similarly favorable harvesting weather prevailed across most of the district and contributed to a general mood of optimism in the farm sector. But the price picture is mixed, and corn/soybean producers reportedly are doing better financially than wheat or barley producers, while cattle and hog raisers are doing better than dairy farmers. After more than two years in the doldrums because of low cattle prices, farm income, spending and loan repayment rates have climbed to near normal levels in the western Dakotas and in Montana. One negative note, severe plant disease problems combined with low prices have been a blow to small grain producers in eastern North Dakota, where bankers say incomes and spending are down notably. While cattle production continues above year-ago levels, veterinarians in parts of the Dakotas touched by severe cold last winter report unusually high rates of beef cows that did not conceive this season, a lingering reaction to stress suffered earlier in the year. Despite high loan-to-deposit ratios, most banks that responded to the Minneapolis Fed third quarter survey of agricultural credit conditions had adequate supplies of loanable funds. Interest rates on most types of loans fell 20 to 50 basis points, to their lowest levels in two years. Consumer Spending and Tourism A Minnesota-based national retailer reported very strong sales for the third quarter of 1997, and regional hardware and department store chains echo with accounts of good business across most lines of general merchandise. Furthermore, industry sources generally agree on optimistic expectations for holiday season sales. However, many continue to express concern about the continuing expansion of retail space in major regional markets and resulting stiff competition and tight margins. Auto sales show moderate strength, according to registration numbers and reports from dealers association spokespersons. A businessman from northeastern Montana noted that improved cattle prices are resulting in strong demand for pickups, as ranchers make long-deferred replacements of their vehicles. As in general merchandise, structural change in auto retailing is accentuating competitive pressures for smaller independent dealers, particularly those in small towns. But sources in the sector are generally optimistic in their outlook for 1998. Tourism is the weakest component of consumer spending. Reports are mixed, with some resorts in Minnesota and Wisconsin reporting moderate to good fall business. But visits to major tourist destinations in the Dakotas and Montana were disappointing overall. Good weather and ample game in key hunting areas is one bright spot. Employment, Wages and Prices Securing needed employees in a tight labor market remains a knotty problem for virtually all employers. A major manufacturer of personal computers located in South Dakota feels that further expansion in that state is stymied by a lack of workers. Many employers reportedly are giving wage increases, in the 3 percent to 6 percent range. But there are several reports of firms that have given boosts of 10 percent to even 20 percent to keep skilled manufacturing technicians or computer specialists. Moreover, a chain of airport shops hiked starting wages from $6 to $8 per hour to maintain needed staff. Reports of product price increases are less common than those of decreases. Propane for heating and crop drying is in better supply than last year, and dealers expect lower prices. Some manufacturers report price drops for general and some specialty grades of steel. Those who manufacture components for other firms also report continuing pressure to lower their prices and are doing so through increased productivity. Return to top St. Louis Kansas City