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Minneapolis: September 2019

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Beige Book Report: Minneapolis

September 4, 2019

Summary of Economic Activity
Ninth District economic activity was stable since the previous report. Employment was flat, while wage pressures were moderate and price pressures remained modest overall. The District economy saw growth in construction, real estate, and manufacturing. Consumer spending was flat while tourism activity was mixed. Energy activity decreased while agricultural conditions remained weak.

Employment and Wages 
Employment was flat since the last report, with some continuing signs of softness. Hiring demand remained healthy, according to recent ad hoc polls of employers in Minnesota and Montana. A Montana insurance contact said that renewals for workers' compensation policies showed that firms widely expected higher employment levels over the coming year. July job postings were 7 and 5 percent higher, respectively, in North and South Dakota compared with a year earlier. Job postings rose slightly in Montana, but fell slightly for Minnesota and Michigan's Upper Peninsula. Labor availability continued to constrain hiring, and turnover remained problematic for many firms. A northern Wisconsin contact said, "It's hard to find a business that is not looking for more employees," and a few employers said they will have to close or move if workers cannot be found. There were some notable signs of softness, however. July employment fell slightly in most District states (and overall) compared with June levels. Initial unemployment insurance claims saw a 10 percent uptick over the most recent six-week period (ending in early August) compared with a year earlier; continuing claims also rose slightly. Staffing contacts reported that recent job orders were mixed, with declines seen in Minnesota and Wisconsin offices. But most staffing contacts predicted strong third-quarter orders in part because businesses would soon be losing many student workers once school began.

Wage pressures varied, but were moderate overall. Two-thirds of large Minnesota employers responding to an ad hoc poll said that wages grew by less than 3 percent over the last 12 months, and wage expectations for the coming 12 months were even more modest. However, in Montana, a slight majority of poll respondents said wages grew by more than 3 percent, including nearly one in five that saw increases of more than 5 percent. But expectations for future wage increases were slightly lower. Staffing contacts cited a wide range of wage increases for available jobs; a Minnesota contact noted that average wages for jobs across more than a dozen offices in the District rose by less than 2 percent over the last 12 months. However, two other staffing contacts reported wage increases of 8 percent or more.

Price pressures remained modest overall since the previous reporting period. A majority of respondents to a survey of Montana businesses reported having increased prices charged to customers by less than 2 percent over the past year, and a larger proportion expected to increase prices in the same range over the coming year. Input price pressures were slightly greater, according to respondents. Contacts in the construction sector continued to report brisk input price increases. Retail fuel prices in District states as of mid-August were modestly lower relative to the previous reporting period. Prices received by farmers in June increased from a year earlier for corn, hay, cattle, hogs, milk, and turkeys, while prices for wheat, soybeans, eggs, and chickens decreased.

Consumer Spending
Consumer spending was flat overall since the last report. Gross sales in South Dakota and Wisconsin in July were flat year-over-year; in Wisconsin, that represented a modest rebound from slower June sales. Sales tax collections in North Dakota in July rose by about 15 percent compared with a year earlier. Vehicle sales in the western part of the District were higher in July, and a dealer contact said he expected August and September sales to be good. But recreational and powersport vehicle sales across the District have been lower, according to industry sources.

Tourism offered a mixed bag. Hotel occupancy in July saw a moderate bump over last year in Minnesota and Montana. A Montana lodging contact said it has been a "normal" tourism season overall, but added that "for the first time in a while, we needed to discount room rates to fill rooms." A Minnesota resort contact said bookings were about 2 percent higher this season compared with last year, and guest spending was higher. However, visitation to six of the eight largest national parks in the District was down in July and year-to-date, with several seeing double-digit declines. Attendance at state fairs was higher this year in Montana but lower in North Dakota. Traffic to the annual Sturgis Motorcycle Rally in South Dakota was down modestly compared with last year. Contacts also noted that labor constraints have meant shorter operating hours for some businesses.

Construction and Real Estate
Commercial construction grew strongly since the last report. The value of construction starts across the District saw a healthy rise in July compared with a year earlier, continuing an uptick seen in June. A construction project database indicated that the number of new and active projects in the District through early August was slightly higher than or on par with last year. A contact in northern Wisconsin noted strong activity in the Duluth-Superior region, particularly in healthcare and energy. A Minnesota banker expected "continued strong demand" for new hotel and multi-family construction lending. Another contact in the state said, "All I hear is that (construction companies) are incredibly busy. There's so much work out there." Contacts said some of the increase in activity was due to persistent spring rains and flooding, which pushed more work into summer months. Minneapolis-St. Paul saw a healthy increase in single-family permits in July compared with a year earlier, but other large District cities saw mixed permitting activity.

Commercial real estate grew modestly. In Minneapolis-St. Paul, industrial property continued to see healthy demand, falling vacancy rates, and strong new development. Office vacancy rates rose overall, but asking rents have risen in some submarkets due to strong demand from the tech sector. Retail vacancies were stable overall despite continued pressure on traditional retailers. However, average lease rates and property sales were lower, and new construction hit a multi-year low. In Sioux Falls, S.D., office and retail vacancy rates have risen, while the industrial vacancy rate was stable at very low levels. Residential real estate grew moderately. Closed home sales for July grew in most markets compared with a year earlier, helped by lower mortgage rates. Great Falls, Mont., and Grand Forks, N.D., saw particularly strong July sales, while statewide sales in Minnesota rose 4 percent.

District manufacturing activity grew slightly, with some signs of softening. An index of manufacturing conditions indicated increased activity in July compared with a month earlier in Minnesota and the Dakotas. A medical-device producer announced a large expansion at a Minnesota facility. Two pet food manufacturers announced new plants in Minnesota. Several industry contacts reported a tight supply of workers as the main constraint on growth. However, other contacts noted some signs of softening, particularly in international demand. A producer of capital equipment noted slowing in the pace of new orders and a decline in order backlog.

Agriculture, Energy, and Natural Resources
District agricultural conditions remained weak. Recent estimates lowered the planted acreage and expected production for corn, soybean, and spring wheat in District states compared with last year, due in part to heavy rains and flooding. Respondents to the Minneapolis Fed's second-quarter (July) survey of agricultural credit conditions indicated that farm income and capital spending decreased relative to a year earlier, with further declines expected for the coming three months. However, some contacts expressed optimism about a recent rally in commodity prices. District oil and gas exploration activity as of mid-August was down relative to the previous report. District iron ore mines continued to operate at near-capacity; a Minnesota facility finished a $100 million equipment upgrade that would allow it to produce higher-grade ore.