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Beige Book Report: Minneapolis

July 12, 2017

Summary of Economic Activity
Since the last reporting period, the Ninth District economy experienced modest growth. Employment grew modestly, held back by poor labor availability. Wages grew moderately to strongly, while price pressures remained modest. The District economy showed growth in professional services, residential construction, manufacturing, energy, and mining. Commercial and residential real estate, along with commercial construction, were mixed. Tourism activity was flat overall, while consumer spending fell, and agricultural conditions weakened.

Employment and Wages
Employment grew modestly since the last report, held back by poor labor availability. While total employment grew across District states, it grew by less than normal for this time of year. Job demand continued to be strong. A Minnesota construction contact said, "Everyone is hiring in all markets." A Montana staffing contact said second quarter orders overall were "stagnant," but June orders have seen an uptick. A staffing firm in southeastern Minnesota said job openings over the previous two months grew by 14 percent over the same period a year earlier, and a general labor shortage had clients "concerned that this was going to impact growth of their business." Tourism businesses across the District reported difficulty finding workers; three Minnesota resorts reported close to 200 unfilled openings. Initial unemployment insurance claims over the most recent six-week period dropped by 13 percent in the District over the same period a year earlier, with continuing claims dropping by 10 percent. An employer survey in District states found a small increase in the share of companies expecting to hire more staff in the coming quarter compared with the current quarter; the share of firms expecting to cut staff was low and roughly unchanged. Job losses continued from large retailers, and hiring in eastern North Dakota continued to be soft, while employers in the western, oil-producing region of the state were reportedly "hungry to hire," according to a regional source.

Wages grew moderately to strongly overall since the last report. A central Minnesota contact said wage pressure is "a big deal for companies with entry level jobs," and a regional survey there found that half of respondents were increasing wages to deal with a tight labor market. Average wages for 18 Minnesota construction unions saw annual increases of between 3.3 percent and 5 percent in recent three-year contracts negotiated in May. A Minnesota food processing company increased union worker wages by close to 3 percent annually over four years; a Montana natural resource company increased wages by a total of 5 percent over a two-year period. In North Dakota, state budget difficulties have resulted in a freeze in salaries for many state and higher education workers.

Prices
Price pressures remained modest since the last report. Pressure on construction materials prices has eased, according to industry contacts. Recent bids for a large highway construction project in Minnesota came in 18 percent below expectations. Iron ore prices have fallen in recent months, while scrap metal prices, by contrast, have been on an upward trend since late last year. Retail fuel prices in District states decreased slightly in June compared with a month earlier. Most prices received by farmers decreased in May from a year earlier, with the exception of hay, milk, cattle, chickens, and eggs.

Consumer Spending and Tourism
Consumer spending was down slightly since the last report. May sales tax collections in South Dakota were down 2 percent from a year earlier. Recent sales of passenger vehicles decreased, according to auto dealer contacts, while sales of trucks increased slightly. In contrast, a contact at a North Dakota mall reported that sales were up slightly. A regional big box retail chain and a supermarket chain were planning to add stores.

Tourism activity was flat overall since the last report. May visits to national parks in the District were down 2 percent from a year earlier. Demand for hotel lodging in Minnesota was flat in May from a year earlier. In contrast, gaming revenues in Deadwood, S.D., increased 8 percent in May.

Services
Activity in the professional services industry increased moderately since the last report. According to preliminary results from an annual survey of District services firms, respondents reported that sales, productivity, and employment all increased over the past year; firms expected more growth over the coming year. An accounting firm reported increased activity, even as the busy tax season subsided. Contacts in the trucking industry reported flat activity over recent months.

Construction and Real Estate
Commercial construction was mixed since the last report. According to industry figures, commercial building and nonbuilding construction activity in May was lower than a year earlier. A separate database of construction projects out for bid across several District states through mid-June was flat compared with a year earlier. But a Minnesota industry association contact said most members "seem to be having good years with full or potentially full calendars of work." Commercial permit values in May grew considerably over a year earlier in several larger cities in the Minneapolis-St. Paul region, including the core cities; however, they were flat or lower in a large majority of other larger cities in the District. In Rochester, Minn., construction was described as "fairly subdued," but was expected to change. Residential construction grew modestly. Single-family permits in May rose in only a small majority of large District cities compared with a year earlier. Multi-family construction continued its strong activity, with more than 900 units permitted in May across the Minneapolis-St. Paul metro, the highest monthly figure in almost four years.

Commercial real estate was mixed since the last report. A contact in Rapid City, S.D., said transaction activity there has been strong. "Apartment complexes get sold within a week of listing." Retail vacancy was described as "pretty stable," while office vacancy appeared to be rising thanks to new space coming to the market. Retail vacancy rates have continued to rise slowly in Minneapolis-St. Paul, thanks to a significant amount of space vacated by large retailers. However, another source noted that retail space under construction was lower than a year earlier and grocery expansion continued to eat up available space. Despite strong construction activity, multi-family vacancy rates remained low in the region, and rents were rising. Residential real estate was mixed. Closed sales rose in northern and western Wisconsin counties located in the District compared with a year earlier; sales also grew in Sioux Falls, S.D. Sales were mixed in Montana--strong in the Flathead region, flat in Missoula, but lower in Helena. In Minneapolis-St. Paul, May sales fell by almost 2 percent, while sales in the rest of the state were flat, attributed largely to low inventories of homes for sale.

Manufacturing
District manufacturing activity increased moderately since the last report. An index of manufacturing conditions produced by Creighton University indicated increased activity in May compared with a month earlier in Minnesota and the Dakotas. Several contacts in the metal-fabricating industry reported very strong recent activity; one contact had record sales in May and was expecting a similar level in June. A dealer of capital equipment and services reported that orders were up. An electronics producer announced a major new facility in Minnesota.

Agriculture, Energy and Natural Resources
District agricultural conditions weakened since the previous report. Severe drought conditions affected the Dakotas and parts of Montana, hampering crop progress and triggering disaster relief payments to ranchers in some areas. By contrast, crop conditions in the eastern parts of the District were mostly good or excellent as of late June. Activity in the energy and mining sectors increased slightly since the last report. District oil and gas exploration activity increased in late June from a month earlier, even as crude prices fell. Recent production at Minnesota iron ore mines has been running well ahead of levels a year earlier.