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Beige Book Report: Minneapolis

May 30, 2018

Summary of Economic Activity
The Ninth District economy grew moderately since the last report. Employment grew modestly and continued to be restrained by a tight labor supply. Wage growth was moderate, while price pressures increased slightly. Growth was noted in consumer spending, services, commercial construction, commercial real estate, manufacturing, energy, and mining. Agriculture and residential real estate conditions were mixed, while residential construction was broadly lower across the District.

Employment and Wages
Employment grew modestly since the last report and continued to be restrained by a tight labor supply. Hiring demand appeared robust. A job fair in northwestern Wisconsin had a full roster of interested employers and had to turn away others. A job fair in eastern Minnesota was also sold out with 50 employers, who reported almost 1,700 open positions. North Dakota saw April online job postings rise 9 percent over a year ago. Minnesota construction firms reported strong hiring, especially among skilled workers. A poll of human resource professionals in Montana found near-universal hiring, along with more unfilled jobs compared with last year. A poll of Minnesota staffing firms found that a majority saw job orders increase in the first quarter of 2018 compared with the same period a year earlier, and similar results were expected in the second quarter. However, hours booked did not grow at a similar rate, reflecting an inability to find workers for available jobs. There were some signs of softness. Through the end of April, initial unemployment insurance claims were higher in Minnesota and Wisconsin, temporarily halting a lengthy downward trend; continuing claims were also higher in Minnesota and South Dakota. The bankruptcy of a major retailer has affected or will affect an estimated 2,000 or more workers across the District.

Wage pressures were moderate but with some signs of stronger growth. A majority of Minnesota staffing firms said wages paid by clients in the first quarter of 2018 were more than 3 percent higher than a year earlier. However, a notable majority of staffing respondents expected wages at their own firms to grow less than 3 percent. A poll of Montana human resource professionals found that close to half expected average wages this year to increase by more than 3 percent. However, a poll among Minnesota construction firms showed that 2018 wage expectations were more modest despite persistent reports of labor shortages.

Prices
Price pressures increased slightly relative to the previous report, while certain input prices were growing more rapidly. An April survey of purchasing managers indicated increased inflation expectations relative to the previous month. Contacts from manufacturing, energy, and construction reported that prices of steel products continued to increase sharply in response to recently announced tariffs. Retail fuel prices in most District states as of mid-May increased briskly from the previous reporting period. Prices received by farmers for corn, soybeans, wheat, hay, chickens, and eggs increased in March compared with a year earlier; cattle prices were flat, while prices for milk, hogs, and turkeys decreased.

Consumer Spending and Tourism
Consumer spending rose modestly since the last report. Several Montana bankers noted an increase in consumer retail loans, especially home equity loans, which were being used for home improvements and general spending. An operator of several car dealerships reported that new car sales were up every month this year relative to last, while used car sales were flat. While gaming revenue this spring in Deadwood, S.D., declined by 5 percent compared with a year earlier, total hotel stays and occupancy rates in the region rose compared with last year; Minnesota lodging demand also increased by 1 percent over a year earlier. Thanks to heavy snowfall, Montana resorts reported strong ski seasons; one resort bested its previous record for visitors by 10 percent. However, a cold and wet spring--including record April snowfall in some parts of the District--delayed or otherwise dampened fishing-related visits and spending in northern areas, where lakes remained frozen as long as a month later than normal.

Services
Activity in the professional services industry increased moderately since the last report. Accountants reported a strong tax season, partly due to recent changes in federal tax policy. Contacts reported major disruptions in international supply-chain management and import-export banking business due to uncertainty over trade policy. While the health care sector has seen strong growth overall, rural healthcare providers were experiencing weaker demand, as the slowdown in agriculture lingered.

Construction and Real Estate
Commercial construction saw moderate growth overall since the last report, though activity levels differed regionally. An industry database of project activity across multiple states showed that current levels were similar to last year's solid activity. A Minnesota concrete contact reported that commercial construction "continues to be busy." However, the aforementioned poll of Minnesota construction firms found less optimism, with a majority reporting flat or lower activity compared with a year ago, likely the result of a cold and wet April. Certain markets, including Sioux Falls, S.D., and Mankato and St. Cloud, Minn., have seen strong permitting activity this spring. Medical construction continued to show strength, with major hospital expansions announced in Minnesota and Montana. Residential construction was broadly lower across most of the District. Following a strong March, residential permits in Minneapolis-St. Paul fell significantly in April. Single-family permits in April were also lower in Rochester, Minn., Fargo, N.D., and Billings, Mont.

Commercial real estate grew modestly since the last report. In Minneapolis-St. Paul, industrial activity saw continued growth, with solid levels of new construction and low vacancy rates. Office sales in the region have been brisk, and vacancy rates in this sector have been stable. Apartment sales have slowed year-to-date in Minneapolis-St. Paul compared with last year, though 2017 was a very strong year. The recent bankruptcy of a national retailer will see the closure of almost 40 stores and well over 1 million square feet of space in the district; this comes on top of numerous earlier chain-store closures this year. While retail vacancy rates in some cities have remained stable, others have risen, including in Eau Claire, Wis. Residential real estate was mixed. April sales in Minnesota were down 3 percent from a year earlier, with Minneapolis-St. Paul seeing a drop of almost 6 percent. However, Missoula and Bozeman, Mont., saw notably higher sales, and Sioux Falls home sales also rose slightly.

Manufacturing
District manufacturing activity increased robustly. An index of manufacturing conditions indicated strongly increased activity in April compared with a month earlier in Minnesota and South Dakota; the index for North Dakota indicated flat to slightly decreased activity. Multiple contacts from a diverse group of industries described strong orders so far this year, with some experiencing record growth; strong demand was leading to challenges filling orders and to increased lead times. Contacts were also concerned about supply-chain disruptions in the steel and aluminum materials markets in response to recent tariff announcements.

Agriculture, Energy, and Natural Resources
District agricultural conditions were mixed. While recent increases in some commodity prices were viewed as a positive sign, farmers were also concerned about access to international markets. Late-season snows delayed spring planting in much of the District, with crop progress well behind five-year averages as of mid-May. Activity in the energy sector continued to increase. District oil and gas exploration increased from the previous report. March natural gas production in North Dakota hit a new record, while oil production declined slightly. District iron ore mines were operating near capacity, and an idled facility was reportedly considering restarting production.