Statement by Gary H. Stern, President, Federal Reserve Bank of Minneapolis, before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, March 10, 1993 - Statements to the Congress - Transcript

Federal Reserve Bulletin, May, 1993

I appreciate this opportunity to discuss with you economic conditions in the Ninth Federal Reserve District and my views on monetary policy. Largely by avoiding the swings of the national economy, the Ninth Federal Reserve District's economy has grown steadily but unspectacularly since 1985. In 1985 the nation was expanding, but the District was still affected by problems in its natural resource-based industries. Now, the District's economy is somewhat stronger than the nation's. In recent years, while the nation's economy was sluggish, the Ninth District's economy--less affected by reductions in defense spending and falling commercial real estate prices--grew at a faster rate.

UNSPECTACULAR BUT STEADY

Close to three-fourths of Ninth District business leaders responding to a poll conducted by the Federal Reserve Bank of Minneapolis last fall said their communities' economies were doing better than the nation's. Personal income growth since the trough of the 1990-91 recession supports their observations: Income in the District's four complete states grew faster than in the nation.(1) And in 1992 the District's banks, buoyed by favorable interest rate spreads and strong demand for residential loans, had their best year in a decade. This performance is in marked contrast to March 1985, when the nation was in its ninth quarter of recovery, but the District's states, except Minnesota, were expanding more slowly than the nation. In fact, between the fourth quarter of 1982 and the first quarter of 1985, South Dakota, North Dakota, and Montana ranked forty-fourth, forty-eighth, and forty-ninth respectively in annual growth. During this time the District's banks mirrored the real economy, especially in rural areas, and in 1986 banks had their worst performance in years.

The defense expenditure buildup of the mid-1980s and the commercial real estate expansion largely bypassed the Ninth District; therefore, when these industries suffered in the early 1990s, the region's performance did not deteriorate as much as the nation's.

The Ninth District's relative improvement, however, is more than the avoidance of the economic swings that have occurred nationally (indeed, the District has experienced its own cycles, particularly within its natural resource-based industries). My travels across the Ninth District and visits with its leaders, along with articles in the fedgazette, the Federal Reserve Bank of Minneapolis' regional business and economics newspaper, reveal considerable vitality and adaptability. Increased exports, growing output from industries created by new technologies, expanding tourism, and Canadian cross-border shopping have enabled the region to advance, despite persistent problems in its important natural resource-based industries.

MANY ACRES, MANY RESOURCES, FEW PEOPLE

The Ninth District covers a big area but has a small population. Montana, North Dakota, South Dakota, Minnesota, the Upper Peninsula of Michigan, and northwestern Wisconsin make up nearly 12 percent of the total land area of the United States but contain only 3 percent of its population.

Natural resource-based industries are important in the District but are no longer the driving force they once were. Still, these District industries produce about 16 percent of the nation's agricultural output, 11 percent of mining, and 9 percent of forest products. Such industries are especially important in the District's three western states, accounting for 26 percent of North Dakota's total output, 22 percent of Montana's, and 20 percent of South Dakota's.

These sectors--agriculture, mining and energy, and forestry--have long been important in the Ninth District, but, in general, they are no longer dynamic engines of growth. Instead, these sectors struggle to earn modest profits, maintain employment levels, and replace obsolescent machinery. Agriculture, along with mining and energy, went through a roughly parallel cycle of a 1970s surge followed by a 1980s slowdown and a weak recovery into the 1990s. The forest products sector has followed a different pattern but faces structural problems of its own.

AGRICULTURE'S IMPACT

The rural financial crisis was at its height in 1985. Concerns for the agricultural and rural economies dominated board of directors and advisory council sessions as well as many of my meetings across the District throughout the late 1980s.

Agriculture experienced wrenching adjustments in the 1980s. Good crop prices and low real interest rates led to the quadrupling of land prices between 1970 and 1980. But these factors turned negative in the 1980s and pushed agricultural profitability and land values into a slump. From 1980 to 1987, Ninth District land prices declined 35 percent to 60 percent, and foreclosures increased markedly.

Now the spate of bankruptcies is over. Farm incomes have climbed slowly from mid-1980s lows. Total agricultural debt dropped 30 percent from 1984 to 1990 as lenders wrote off and farmers paid down debt. Land prices stabilized and then rose; by 1992, unadjusted for inflation, they roughly had regained their 1984 levels.