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Ninth District economic growth continues at a moderate to strong pace in most sectors. Ongoing robust construction helps pull the economy ahead and abundant consumer spending buoys retailing. Manufacturing apparently is growing slightly. Output is also steady to strong in energy, mining and agriculture, but low output prices in these sectors are squeezing producers financially and have retarded new capital investment. Banks are doing well overall. Labor markets remain very tight, with unemployment rates at or near historic lows in most areas, and many firms still cannot find needed workers.
Business and consumer sentiment appears much more guarded than earlier in the summer for a variety of reasons. Air travel dependent business is disrupted by an ongoing pilots strike. In some areas, the financial plight of farmers is casting a pall over the broader economy, while elsewhere recent international economic events and declines in capital markets are described as causes for concern.
Business Sentiment
In compiling information for this report, the number of sources who expressed concern about the near future is striking. Many referred to events in Asia, Russia or U.S. financial markets as a source of concern. Even those who said their own businesses were prospering voiced doubts that current prosperity would last. Nearly 45 percent of business and community leaders in North Dakota who responded to a Minneapolis Fed poll in late August described their outlook for the next 12 months as somewhat or very pessimistic. The corresponding number in the same region only 9 months ago was 13 percent. Low farm incomes are apparently a major factor here.
Banking
Banking conditions remain strong overall, but there is reportedly some weakening of credit quality and expectations of lower profitability for 1998 in agriculturally dependent banks. Such banks are reportedly responding to the less favorable agricultural conditions by tightening credit standards and attempting to diversify loan portfolios, according to one correspondent banker. Lending competition is reportedly fierce, especially for commercial loans in urban markets. In general, bankers are optimistic about performance during the remainder of the year. "1998 is looking to be a good year," remarked one correspondent banker.
Real Estate and Construction
"Fall building boom could trigger record," according to a Fargo, N.D., news article describing strength in residential, commercial and municipal building in that city. Similar strength is evident in Minneapolis-St. Paul, Eau Claire, Wis., and Sioux Falls, S.D. In Minnesota, where public building contracts are up 38 percent for the year through July compared to 1997, and where July single-family residential permits were up nearly 22 percent over year-earlier levels, building clearly is a locomotive for the economy as a whole.
Realtors continue to describe strong business in new and existing housing as strong incomes and low interest rates fuel demand. One Minnesota-based agent says, "a lot of people are expressing some concern about the future of the economy, but they are still going ahead and making offers."
Manufacturing
Little change from early summer is visible in the manufacturing sector where slight to modest growth continues. While a few firms with Asian or farm customers report declines, most manufacturers continue to enjoy good orders. With the exception of strike-caused interruption of some automobile component production, small and medium machine shops and component manufacturers are busy and complain more of labor shortages than of insufficient orders.
Agriculture
"Crop prospects are the best ever." "Repayment ability has deteriorated drastically." These comments from bankers responding to the Minneapolis Fed's most recent survey of agricultural credit conditions outline the situation in agriculture. Yields of most major crops will be very good this year, and output of cattle and hogs is high. While this bodes well for consumers, Ninth District farmers face the most difficult financial situation in more than a decade due to low prices for most farm products. Nearly 82 percent of bankers responding to a Minneapolis Fed third quarter survey of agricultural credit conditions described farm incomes as low and below usual levels. Less than 2 percent described it as above normal. Few report higher loan loses or delinquency rates, but many say that some of their customers may be forced to liquidate if prices do not improve.
Energy and Mining
Oil drilling remains subdued at about half the level prevailing two years ago. But work on new gas wells in Montana is somewhat stronger. Copper and gold mines are under financial pressure from low prices, but no further contractions are reported. Iron mine output apparently will be equal to that of 1997. Traditional lumber production continues well below historic levels in South Dakota and Montana and suffers from lower prices caused in part by weak demand in Asia. Oriented strand board plants face rising output prices and are reportedly running at capacity. Profitability in the paper industry reportedly varies greatly by class, but output is unchanged from earlier in the year.
Consumer Spending and Tourism
"Earnings to be 'mindblowing'," headlined an early September news story on second-quarter profits for a Minnesota-based national electronics retailer. National and regional retail chains based in the district also report robust sales across many categories of consumer goods. General consumer spending continues robust across many product lines. Reports on vehicle sales are somewhat mixed. They are generally strong in urban areas, and weaker in rural ones. A Montana General Motors dealer describes significant sales declines as a result of the strike but notes generally good demand overall. North and South Dakota dealers' representatives describe moderate to good sales in larger cities, but very sluggish ones in smaller towns that are dependent on agriculture.
Tourist businesses across the district generally had a good summer season. Spokespersons describe cheap gasoline and favorable weather as beneficial factors. National destinations such as Mount Rushmore and Yellowstone and Glacier parks had somewhat higher visitation than in 1997. A source in South Dakota said that warm weather and crop conditions favor good fall hunting.
Employment, Wages and Prices
"Bus driver shortage keeps students waiting," is a headline demonstrating yet another ramification of continued extreme tightness in Minneapolis-St. Paul labor markets. Many school districts in that region were short dozens of drivers as schools opened. Unemployment rates remain very low, in some cases at record low levels, in most urban areas of the district. Workers with computer skills are still in great demand. Sioux Falls, S.D., city government fears losing more such employees to private industry. Unemployment in Michigan's Upper Peninsula is at the lowest level in many years, but at 5.9 percent remains well above district and national averages. There is also slack in labor markets in much of Montana. But despite such continued tightness, increases in direct wages are commonly in the 2 percent to 4 percent range.
Some worker reductions are occurring. A major manufacturing firm extended planned cuts from 4,000 to 4,500 persons as part of a restructuring hastened by overall decreased profits from
Asian operations. A check-printing firm also increased announced layoffs from 2,500 to 3,500, as part of internal restructuring rather than weak demand.
Strikes are a more prominent feature of district labor markets than in many years. Telecommunications workers were off the job in August and a pilots strike continues to shut down a major airline. Both disrupted other business activity, with the airline strike having wider effects.
Prices remain in check. Motor fuels are at some of the lowest levels so far this decade. Weak Asian currencies are helping to keep prices of imported goods such as clothing, toys and consumer electronics low. Both manufacturers and retailers describe an intensely competitive business environment in which it is difficult to raise prices.
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