March 17, 1999 Federal Reserve Districts Ninth District - Minneapolis

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In early 1999 the pace of Ninth District business activity has picked up from the strong conditions reported at the beginning of the year, although natural-resource based industries remain in the doldrums. Businesses and forecasters are more optimistic now than in December. The forward momentum continues for construction, consumer spending and manufacturing. Low commodity prices continue to depress farm income, curb iron mining and stall oil exploration. Businesses would like to hire additional workers and are raising wages to attract them. They, however, are reporting few other price increases. Business Sentiment "Nothing short of awesome," is the Minnesota state economist's current description of the national and state economies. Minnesota is now projecting a state budget surplus of $4.1 billion over the next three years, up from a $3.3 billion surplus that was projected in early December. A recent survey of Upper Midwest business supports his contention. In February 64 percent of respondents reported increasing sales as contrasted to 53 percent in December. Ninth District banks report strong loan demand. Construction and Real Estate "Home builders have greatest January in 7 years," proclaims a Minneapolis news article. Housing permits increased all across the region in January from the previous year's level. Other construction remains strong, with January contract awards in Minnesota and the Dakotas 15 percent over year-earlier levels. Medical and health care facility construction projects are under way in Minnesota and Montana, and a large factory hog farm is planned in South Dakota. Public works projects are increasing across the district, with highway construction driven higher in Minnesota, Montana and South Dakota. Consumer Spending and Tourism Retail spending showed continued momentum in early 1999. A major electronic goods retailer reports sales up substantially so far in 1999. A major Minneapolis/St. Paul retailer reports strong sales gains in February and is "cautiously optimistic" about future sales. Elsewhere, a mall manager in North Dakota reports sales up 5 percent from a year ago for the first seven weeks of 1999. Vehicle registrations increased significantly in South Dakota for the month of January compared to a year earlier, but decreased slightly in North Dakota. A North Dakota auto dealer association spokesperson expects the trend in auto sales to be "flat at best," due to the lagging agriculture and oil sectors. After a slow start in December, winter tourism picked up in January and February. In northern Minnesota a major ski hill recorded record weekends in January and February, following a weak December. In the Upper Peninsula of Michigan most motels were full on weekends in February, as contrasted to vacancies in December. South Dakota ski resorts also report a strong season, but a lack of snow has slowed snowmobiling. Meanwhile, in northern Montana business at a ski resort has been up only slightly from a year ago, due to the unfavorable exchange rate with Canada. Manufacturing District manufacturing remains quite robust, despite the restraining influence of a weak international economy. A computer-components manufacturer recently announced a major expansion in western Wisconsin, which could add more than 1,000 jobs. A construction equipment manufacturer intends to expand its two North Dakota manufacturing plants, and a window manufacturer is adding workers at its North Dakota plant. High-tech manufacturing is bolstering production in South Dakota, according to a regional survey of purchasing managers. Moreover, several small manufacturers report strong, improving sales, according to a recent survey of Upper Midwest business. Weak foreign economies, however, continue to constrain manufacturing. The Asian economic collapse has weakened demand for paper, and a major paper manufacturer recently announced the closing of a plant in northwestern Minnesota. Moreover, two western Wisconsin manufacturers attribute soft sales to weak international business, and according to a regional survey of purchasing managers, Minnesota manufacturers tied to international markets, especially high tech, continue to report problems. Energy and Mining Mineral-based industries remain in the doldrums. In response to weakening demand for domestic steel, one Minnesota mine shut down a taconite pellet line last fall, and it is uncertain whether the line will restart this spring as hoped, states a company spokesperson. Another Minnesota taconite producer is expected to lay off at least 100 workers by late May and could cut production this year by 18 percent. Meanwhile, "oil exploration is at a standstill," reports a bank director. No rigs are currently working in North Dakota and only five in Montana as compared to 16 and 9, respectively, a year ago. Agriculture Like mining, agriculture remains stalled. Corn, soybean and wheat prices continue to remain near historic lows. Moreover, milk prices are declining, due to increased production. Hog prices have recently increased from December's extremely low prices but still remain below the break-even point for many producers. Several outbreaks of hog pseudorabies have been reported due to cash-strapped hog farmers eliminating vaccinations. The mild winter weather and low feed prices, however, have benefited cattle, dairy and hog producers. "The low commodity and livestock prices are drastically taking their toll on the net worth/capital of the farmers and drastically diminishing their ability to repay loans," reports a local agriculture lender. Based on preliminary results of the Ninth District's first quarter survey of agricultural credit conditions, 61 percent of respondents reported a below normal rate of loan repayment compared to 51 percent of the fourth quarter survey respondents. In both the first quarter 1999 survey and the fourth quarter 1998 survey approximately 70 percent of respondents reported farm income decreases from the previous year's levels. Employment, Wages and Prices "Most firms would hire qualified workers if they could find them," a recent survey of Upper Midwest businesses reports. But it is tough; unemployment rates are under 3 percent in nine out of the district's 14 metropolitan statistical areas (MSAs). Nevertheless, 60 percent of the St. Paul firms responding to a staffing firm's recent survey indicated they plan to add workers in the second quarter, which is up from the 46 percent giving that response a year ago. In addition to innovative incentives and recruiting schemes to attract workers, employers are raising wages. A telemarketing firm recently boosted its starting wage to $7.50 an hour from $6.75. Plus, several large district firms indicated that they are increasing wages 4 percent to 5 percent this year. Increasing health insurance premiums are pushing up compensation costs, states a Minnesota union official. While firms have to raise wages, they "can't increase prices," says a Minneapolis/St. Paul banker. Competitive pressures are keeping firms from raising prices, but low import prices are helping many of them to keep their costs down. Seventy percent of participants to a survey of Upper Midwest business reported stable or declining prices for their products, the same percentage as in December. Construction input prices, however, have been rising, due to the strong pace of building activity. Return to top St. Louis Kansas City