Federal Reserve Bank of Minneapolis Quarterly Review

Winter 1978

The U.S. Economy in 1977 and 1978 (p. i) Inflation: An Extreme View (p. 7)

The Regional Economy in 1977 and 1978 (p. 15)

IIIIIIIUIIII L

Federal Reserve Bank of Minneapolis Quarterly Review Vol. 2, No. 1

This publication primarily presents economic research aimed at improving policy making by the Federal Reserve System and other governmental authorities. Produced in the Research Department. Edited by Arthur J. Rolnick, Senior Economist, and Kathleen S. Rolfe, Editor/Writer and Visuals Specialist, with assistance from Jeananne Struthers. Graphics assistance provided by Phil Swenson and Karen Sizer, Graphic Services Department. Address requests for additional copies to the Research Depart-ment, Federal Reserve Bank, Minneapolis, Minnesota 55480. Articles may be reprinted if the source is credited and the Research Department is provided with copies of reprints.

The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.

The Regional Economy in 1977 and 1978

David S. Dahl

Economist Research Department Federal Reserve Bank of Minneapolis

Despite another drop in farm income, economic ac-tivity in the Ninth Federal Reserve District1 kept pace with the national economic recovery in 1977. The four-year-long slide in farm income has signifi-cantly reduced the share of district income earned in agriculture. By last year that share, like our other in-dustries; was very close to the share earned nation-

ally. In 1978, therefore, even if ag income does not grow again, as is expected, the regional economy should continue to keep up with the nation.

1 Minnesota, Montana, North and South Dakota, the Upper Peninsula of Michigan, and northwestern Wisconsin. Personal income data are only a-vailable for the four full states.

Most district industries participated in the nation's second full year of recovery.

% -20

1977 Changes in Personal Income From One Year Earlier * by Industry

District • U.S. W .

M i n i n g

. ^ M a n u f a c t u r i n g S e r v j c e s C o n s t r u c t i o n

- 1 0

- 5

- 0 - 1 Personal Income Distribution

by Industry District U.S.

Mfg. V 21% 1 Services

49% Constr\

6% ^ I ^ G o v t . Constr 6% ^ \ 17% I 6%

'Three quarters Source: U.S. Department of Commerce

A l l I n d u s t r i e s

G o v e r n m e n t i A g r i c u l t u r e

20-

15-

1 0 -

5 -

- 5 -

- 1 0 -

-15-

- 2 0 -

15

Our economy grew as fast as the nation's in 1977 . •. Personal income2 is one of the best measures we have of overall economic activity in the district, and according to it, growth here matched the nation's in 1977, the second full year of the recovery. During the first three quarters of the year (the latest data avail-able), income in both the district and the nation was up about 10 percent from a year earlier. Leading this increase with gains close to 13 percent were our two largest sectors, manufacturing and services.

Income in two smaller sectors did grow slower here than nationally, but their growth was still rela-tively strong. Our construction industry was coming off a much better 1976 than the nation's, so the stronger growth nationally in 1977 merely indicated U.S. construction was catching up. Growth in our mining sector, though also much slower than in the nation's, was actually surprisingly strong consider-ing that last year's long iron ore strike included about one-third of the district's miners. Income to

this sector was boosted by efforts to develop coal, oil, and gas resources in two district states, Montana and North Dakota.

Other indicators of economic activity support the strength shown in personal income data. Employ-ment grew 3.1 percent here and 3.5 percent nation-ally; about 80,000 more district workers had jobs in 1977 than in 1976. Our unemployment rate stayed at least 1 full percent below the nation's during the year and dropped just as much. Sales of manufac-tured goods were about 15 percent ahead of 1976 in the district and 12 percent in the nation. And home-building (measured by residential building permits authorized), while strong nationally, set a new rec-ord here. Financial activity reflected the strength in other sectors: bank deposits grew about 10 percent both in the district and in the U.S. as a whole.

^Includes wages, salaries, and business income paid to individuals. Does not include dividends, interest, rent, or transfer payments.

Our unemployment rate fell with the nation's in 1977 . . .

Unemployment as a percent of the labor force Seasonally adjusted

Sources: State employment security departments, U.S. Department of Labor

. . . while sales of our manufactured goods grew strongly . . .

Changes in manufacturing sales from one year earlier

District • U.S. •

Sources: FRB Minneapolis, U.S. Department of Commerce

. . . and homebuilding set a new record here.

Housing units authorized by building permits Seasonally adjusted annual rates

thou. r~ 80

i

-60 1 District

-40 1 i 1 \ 1972 record totals

-20 I I I . . I I I

1976 1977

Source: U.S. Department of Commerce

16 Federal Reserve Bank of Minneapolis Quarterly Review/Winter 1978

• • . despite a decline in farm income • . . The one sector without any income growth in 1977, either in the district or the nation, was agriculture.

Due to larger supplies but little change in de-mand, farm income declined nationwide. Large crops last year added to the already large carry-overs. For the third consecutive year, more than two billion bushels of wheat were produced; and corn and soybean production set new records. Since de-mand for these products did not change much, prices fell well below their 1976 levels. And because purchases still did not increase much despite the lower prices, farmers' receipts stayed well below a year earlier too. Production costs rose, however, so U.S. farm income amounted to 8 percent less than a year ago in the first three quarters of 1977.3

Personal income to the district's farmers de-clined 16 percent during this time. The significantly bigger drop here was due to our heavier dependence on wheat, which last year was being sold for less

than its production cost.

• . . making 1977 an unusual year for the district Given last year's decline in agricultural income, it is surprising that the district even came close to matching the nation's overall income gain. For in the past when farm income was strong or weak in both the district and the nation, overall economic ac-tivity measured by personal income was much stronger or weaker here. When farm income rose rapidly in 1971-73, the district's total grew substan-tially more than the nation's. And when farm income declined in 1974-76, the total grew much less here than nationally.

^Although regional personal income data are now only available for 1977's first three quarters, preliminary estimates indicate that national farm income for the entire year may have been up about 5 percent from 1976. If so, this increase came primarily from the large farm subsidy pay-ments made in late December. While these funds will help farmers in 1978, they don't change the weak farm income story above.

Ag income fell again in 1977 because large crops and carryovers increased supplies. . .

SUPPLY CONSUMPTION Carryover M ] Domestic Use

Production ^ H Exports

est. proj. est. proj.

Source: U.S. Department of Agriculture

. . . but demand didn't change much, so prices stayed well below 1976 levels . . .

Minneapolis prices received by farmers for grains

$ per bu.

. . . while production costs rose above them.

Index of U.S. prices paid by farmers for production items (1967 = 100)

Index

17

This old relationship is not hard to explain. First, while agriculture is generally a volatile in-

dustry, it was more volatile in the district than the nation. From 1971 to 1973 strong worldwide demand for our major crops, particularly wheat, boosted farm income 65 percent annually here but only 24 percent nationally. Then in 1974-76 when grain sup-plies burgeoned and prices dropped, farm income fell 32 percent in the district and only 12 percent in the nation. These larger farm income changes showed up strongly in the totals partly because personal income gains in our other major sectors were very close to the national gains.

Furthermore, the agricultural sector contributed a significantly larger share of total income in the district than in the nation. On average in 1971-76 farming accounted for 13 percent of personal income here and only 3 percent nationally; in terms of in-come shares, our ag industry was more than four times bigger. At the same time, our other industries were all roughly the same size as or somewhat smaller than the nation's.

But what happened in 1977? As usual, farm in-come fell much more in this district than in the na-tion. So why didn't the nation's overall economy grow substantially more than the district's?

The answer is that although on average agricul-ture here has been bigger than nationally in recent years, its share of district income has actually been shrinking. When farm income increased rapidly in 1971-73, agriculture's share of district personal in-come reached 16 percent, but it has declined since and by 1977 was down to only 5 percent. In the na-tion, ag's share was 3 percent in 1977, only slightly less than its 4 percent high in 1971-73. By 1977, therefore, farming's contribution to total personal income in the district was small and, like the other sectors, about the same size as in the nation as a whole.

1978 will be a reran Because of this similar income distribution, in 1978 the district economy should grow at about the same pace as the nation again even if income to farmers drops again or changes very little, as the U.S. De-partment of Agriculture (USDA) predicts. And since the nation is generally expected to have a 1978 pret-ty much like 1977, the district probably will too.

Until 1977, changes in ag income had an obviously bigger impact in the district than the nation.

Changes in Personal Income From One Year Earlier, 1971-77

District • U.S. § 1

-20 Total

2 0 -

1971-73 average

1974-76 1977 average (3 quarters)

-80 Agricultural

% 80-

- 6 0

- 4 0 4 0 -

-20 20-

—20

-40

r 1971-73 1974-76 average average

Source: U.S. Department of Commerce

1977 (3 quarters)

-0 -

- 2 0 -

-40-

18 Federal Reserve Bank of Minneapolis Quarterly Review/Winter 1978

Ag's shrinking share of personal income

District ^ U.S. | | v

10.7%

L4.5%

1974-76 1977 average (3 quarters)

Source: U.S. Department of Commerce

The underlying factors which held down farm in-come last year are not expected to change in 1978. At current prices, corn, wheat, and soybean sup-plies should be more than adequate to meet this year's demand. Consequently, prices of these crops and revenue from them will probably fall again while production costs continue to rise. At most, last year's farm legislation will offset the revenue drop only enough to keep total personal farm income at its 1977 level.

Yet, because agriculture has become a much smaller part of the district's income, overall activity here should still match national activity in 1978— and that is expected to be as strong as in 1977. For the third full year of recovery, most economic fore-casters predict about a 10 percent increase in cur-rent dollar gross national product. Total personal income growth in the district and the nation should therefore again be about 10 percent too.

National forecasts indicate that this income growth will be distributed among nonfarm industries much the same as last year. But in 1978 even con-struction and mining, the district's two slower sec-tors in 1977, should at least match their national counterparts. Personal income to construction work-ers last year appeared significantly stronger nation-ally because the district was already at such a high level in 1976. Now that the nation has caught up, in-come growth should be just about even. Income to

miners, though, should actually grow faster here than nationally in 1978. Not only will energy devel-opments in Montana and North Dakota once again give the district a special boost, but because most of our coal miners are not involved with the United Mine Workers' strike, this year the U.S.—not the district—will be hit harder by a prolonged strike.

Other regional signs support the national fore-cast of continued growth. The current high level of help wanted ads signals further strong job growth ahead. If it's as strong as last year, the district's un-employment rate could fall below 5 percent. District manufacturers responding to our February survey expected their sales to grow nearly as much as last year. Mortgage loan commitments are still high at savings and loans, so homebuilding will not let up soon. And so far this year banks appear able to fi-nance continued growth at current interest rates; their deposit inflows have shown no signs of weak-ening.

Beyond 1978? Thus, because of ag's smaller size, for 1978 the na-tion's forecast is probably a good barometer of eco-nomic activity in the district. But it may not be be-yond 1978. The USDA recently predicted that ex-ports of our major crops—corn, wheat, and soy-beans—will increase substantially in the next de-cade. This should make ag income again grow faster in our region than in the nation, which could restore much of ag's income share here. Though it won't likely come close to its size early in this decade, our farm sector could then, together with a mining sec-tor strengthened by energy developments, pull the region's economic growth somewhat ahead of the nation's.

15.7%

1971-73 average

19