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Beige Book Report: Minneapolis

May 31, 2017

Summary of Economic Activity
The Ninth District economy grew modestly overall since the last report. Employment grew moderately, tempered by poor labor availability. Wage pressure was moderate to strong, while price pressure was modest. The District economy showed growth in professional services, construction, manufacturing, energy, and mining. Consumer spending and tourism were mixed, while residential and commercial real estate activity declined slightly, and agriculture remained weak.

Employment and Wages
Employment grew moderately since the last report, tempered by poor labor availability. Initial unemployment claims dropped by 16 percent over the most recent six-week period compared with a year earlier, and continuing claims dropped by 11 percent. April employment figures were strong, and contacts reported healthy labor demand. Job openings were growing in the oil-producing area of North Dakota, including for jobs outside energy production. A Minnesota staffing contact said, "We can't keep up. I have to say no to clients regularly – there is strong demand from our clients for talent," but a lack of available workers. A job fair in exurban Minneapolis-St. Paul saw employer booths sold out for the second straight year and a "much longer" wait list for booths. A job-fair contact in Missoula, Mont., said job openings were plentiful and employers were more anxious to fill openings, with some spot hiring. In northern Minnesota, "some businesses are suggesting they may have to cut back in services if they cannot find more workers," said a regional source. Another said it was "constantly" trying to fill 30 open positions among a workforce of 250. However, there were a number of layoffs, including 200 at a distribution center, 232 at a business services firm, and 250 from an insurer, all in Minnesota. Numerous government agencies also announced labor cutbacks, though many were through attrition.

Wage pressure was moderate to strong since the last report. An ad hoc survey of professional services firms in Minnesota found that average wages were expected to rise about 3 percent in 2017. Anecdotally, contacts said average wages were increasing up to 3 percent, with some technical and health care jobs receiving wage increases closer to 5 percent. In Michigan's Upper Peninsula, construction workers were seeing 3 percent to 4 percent wage increases. A distribution center in southern Minnesota was hiring again and raised starting wages to $17.50 per hour, the third consecutive annual rise in starting wages, according to a local contact. In western Montana, wages were trending upward, but more modestly because "employers tend to tout benefits and working conditions more than wages."

Prices
Price pressure was modest since the last report. Just over half of respondents to a Minneapolis Fed survey of District businesses reported that input costs had increased slightly compared with a year earlier, while 40 percent said costs were unchanged. An electrical utility in Minnesota announced plans to raise residential rates 2.7 percent this year, about half as much as it increased rates last year; a Montana electrical utility also announced that it was reducing rates. Most prices received by farmers decreased in March from a year earlier, with the exception of soybeans, milk, chickens, and hogs.

Consumer Spending and Tourism
Consumer spending across the District was mixed since the last report. Car dealers from Rapid City, S.D., reported that used car sales rose by as much as 25 percent, but new car sales remained flat over the past six months. Elsewhere in South Dakota, sales tax revenues were down by 1 percent, indicating a slight downturn in consumer spending in the state. A national shoe store chain was closing eight stores across the Ninth District due to bankruptcy. Benefitting from healthy home construction in Minnesota, a tile-supply chain store saw first-quarter sales increase by 9 percent from the previous year.

Tourism conditions were mixed since the previous report. Canadian tourists decreased across Ninth District states, which tourism officials attributed to the exchange rate. However, tourists from China and across the United States continued to show up in record numbers to national parks in Montana. With high levels of snow still on the mountains of Montana, ski resorts reported record numbers of visitors.

Services
Professional services activity was up modestly. A scanning technology firm saw increased business, due in large part to increased activity in construction and engineering. A law firm with offices across the Ninth District reported increased business associated with security risks and concerns. An electronic health records software firm witnessed an uptick in business since the last report.

Construction and Real Estate
Construction activity was up modestly since the last report. An industry count of total nonresidential construction projects in the District showed an increase compared with the same period a year earlier, including a notable increase in local government projects. Commercial permitting in April rose in Fargo, N.D., Sioux Falls, S.D., and Rochester, Minn., but was flat in other regions, and declined in Minneapolis and Rapid City. Strong multifamily housing development continued in many District markets. But construction in other commercial sectors was slower, according to industry contacts, particularly in Minneapolis-St. Paul. Residential building, on the other hand, strengthened since the last report. Sizable increases in the number of permitted, single-family homes in April occurred in Minneapolis-St. Paul, Rochester, and Missoula, with smaller increases in Billings, Mont., and St. Cloud., Minn. Home building remained lower among North Dakota metros.

Commercial real estate declined slightly since the last report, though from strong levels. Retail and office vacancy rates in Minneapolis-St. Paul ticked higher, while industrial rates remained unchanged. Commercial real estate transactions also slowed slightly. Thanks to significant new construction, hotel occupancy rates in Minnesota were expected to decline, leading to a drop in average room rates by the end of the year, contacts said. Residential real estate slowed, much of it reportedly due to low inventory. April home sales were lower in the Flathead region of Montana, as well as in northern and western Wisconsin counties. In many cases, slow April sales followed strong March sales. In Minnesota, March home sales rose 8 percent, only to fall by 11 percent in April. In Sioux Falls, April sales fell 11 percent after jumping 18 percent in March, but April median prices there were up 6 percent from a year earlier, according to an industry source. "Buyer demand has not abated, nor is it expected to in the immediate future."

Manufacturing
District manufacturing activity increased modestly since the last report. An index of manufacturing conditions produced by Creighton University indicated increased activity in April compared with a month earlier in Minnesota and the Dakotas. Respondents to an annual survey of Minnesota manufacturers indicated the highest level of confidence in the 10-year history of the survey. A truck trailer manufacturer was expanding into a recently shuttered boat factory in Minnesota. However, a plant that produces matches was shut down in Minnesota, and a producer of residential construction materials delayed plans to open a new plant.

Agriculture, Energy and Natural Resources
District agricultural conditions remained weak since the previous report because of continued low commodity prices. However, growing conditions have improved. After heavy rains slowed early planting, progress as of mid-May was roughly on par with five-year averages in most District states. Activity in the energy and mining sectors increased. District oil and gas drilling as of mid-May increased slightly from a month earlier. A Montana gold mine announced plans to expand, and a Minnesota iron mine began producing a new ore output.