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Minneapolis: November 2019

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Beige Book Report: Minneapolis

November 27, 2019

Summary of Economic Activity
The Ninth District economy grew at a modest pace since the last report. Employment grew slightly, while wage pressures were moderate overall and price pressures remained modest. The District economy saw growth in consumer spending, commercial and residential construction and real estate, and energy. However, manufacturing declined slightly, while agricultural conditions remained weak.

Employment and Wages
Employment was slightly higher since the last report. In several ad hoc polls, conducted in three states among a mix of business types, a majority of respondents said they were hiring in some capacity. A broader poll of contacts across the District found somewhat softer (but still positive) sentiment about recent and future employment levels at their firms. An October survey of manufacturers in Minnesota and the Dakotas found that hiring sentiment had improved from contractionary levels a month earlier. A second survey among bankers and other rural businesses in these same states found that new-hiring sentiment was quite positive. Job postings this fall were modestly higher in the Dakotas and Michigan's Upper Peninsula, while Minnesota's were lower. A major layoff at a manufacturer in central Minnesota, involving more than 800, was seen by some local employers as a contribution to the local labor pool. However, contacts widely noted difficulty filling open positions, including in manufacturing, which has been experiencing some overall softness. Many staffing contacts reported lower job orders from clients, particularly in manufacturing, with some seeing declines of 20 percent, year over year. Initial unemployment insurance claims over the most recent six-week period (through the end of October) were about 3 percent higher than a year earlier, with increases seen in Montana, North Dakota, and Wisconsin, while Minnesota saw a slight decline.

Wage pressures were moderate overall. Staffing contacts suggested varying degrees of wage pressure. Among a group of six staffing offices (all with the same franchise, located mostly in Minnesota), average wages rose less than 2 percent at three locations over the previous 12 months, but more than 5 percent at two locations, and almost 10 percent at the remaining office. In the span of one week in October, a staffing contact in western Wisconsin said four manufacturing clients increased wages by $1 to $3 an hour. A Minneapolis Fed survey of Districtwide businesses found that 62 percent of employers raised wages by 3 percent or more compared with a year earlier. However, among a small sample of large Minnesota firms, most reported increasing wages by less than 3 percent over the past 12 months. As has been the pattern for some time, however, contacts continued to believe that future wage increases will be slightly to modestly softer than previous wage gains.

Price pressures remained modest since the previous report. A majority of respondents to a survey of large District firms reported recent increases in nonlabor input costs of less than 2 percent, with a similar outlook for the coming 12 months. Retail fuel prices as of mid-November were slightly lower in most areas of the District relative to the previous reporting period. Home heating costs were expected to rise more in District states than nationwide this winter, largely due to differences in regional increases in the prices of natural gas. Prices received by farmers in September increased from a year earlier for corn, potatoes, milk, hogs, and turkeys, while prices for wheat, soybeans, hay, cattle, eggs, and chickens decreased.

Consumer Spending
Consumer spending increased moderately since the last report. Gross retail sales in South Dakota jumped more than 6 percent in September compared with a year earlier. The state also saw 11 percent growth in gaming receipts. But gross sales in Wisconsin were down 1 percent over the same period, following fairly strong summer sales. Sales tax receipts in Minnesota and North Dakota have also trended higher than forecasts. A vehicle dealership with multiple sales outlets in the western portion of the District saw vehicle sales fall modestly in September compared with a year earlier, but rebounded with an 8 percent increase in October. Airport traffic in September and October was strong across many of the District's regional airports. In Minnesota, hotel occupancy and revenue per available room improved modestly in September (year over year). Lodging and accommodations taxes in Montana were also slightly higher in the third quarter compared with 2018. However, several bankers noted that consumer loan demand was mixed. Monthly visitors to several major national parks in the District also saw double-digit declines in September (year over year). Restaurants and other businesses catering to consumers reported having to shorten hours of operation due to lack of staffing.

Construction and Real Estate
Commercial construction rose moderately since the last report. A construction database showed that new and active projects across the District over the most recent six-week period (ending in early November) were modestly higher than the same period a year earlier. Most contacts in engineering, architecture, and construction reported solid backlogs and were optimistic heading into a traditionally slower period. Commercial permitting this fall was broadly higher across most of the District's larger cities, and was particularly strong in Sioux Falls, S.D.; one notable exception was the city of Minneapolis, where permitting slowed in October. A contact in Michigan's Upper Peninsula said the region was seeing normal seasonal slowdown, and there were fewer projects to bid on for work next year. Residential construction was moderately higher; single-family construction was higher in many locations, but flat in a few places; multifamily construction was mostly lower. However, both single- and multifamily construction were strongly higher in Minneapolis-St. Paul in September and October.

Commercial real estate improved modestly since the last report. In Minneapolis-St. Paul, office vacancy rates were down slightly compared with this summer. Industrial space in the region continued to expand, but strong leasing activity kept vacancy rates low. Retail vacancy rates have remained among the lowest in the country, thanks to strong leasing and lower levels of new construction. Rental rates, however, have been flat or falling. Office vacancies have trended lower this year in Sioux Falls, and industrial vacancies were stable; however, retail vacancies there were still elevated. Multifamily vacancy rates remained low across most of the District, according to sources. Residential real estate was modestly higher across the District. Closed home sales in September and October in Minnesota were about 2 percent higher over the same period a year earlier. Higher sales over this period were also seen in western Wisconsin, Grand Forks and Fargo, N.D., and Bozeman and Missoula, Mont. However, slower sales were seen in northern Wisconsin and Sioux Falls.

District manufacturing activity declined modestly from the last report. Contacts continued to point to decreases in orders, production, and capital spending. A heavy equipment producer noted a slowdown in sales that they initially blamed on heavy rainfall this year, but said this "masks a much deeper contraction in capital equipment spending." Custom manufacturers reported a decrease in order backlogs. In contrast, an index of manufacturing conditions indicated increased activity in October compared with a month earlier in Minnesota and South Dakota and flat activity in North Dakota.

Agriculture, Energy, and Natural Resources
District agricultural conditions declined from an already weak position. Roughly three in five lenders responding to the Minneapolis Fed's third-quarter (October) survey of agricultural credit conditions reported that farm incomes decreased in the third quarter relative to a year earlier, with a similar proportion reporting decreased capital spending. Persistent heavy rains have delayed harvests and damaged crop quality in substantial portions of the District. District oil and gas exploration activity was steady since the previous report. The number of active drilling rigs as of early November fell slightly from a month earlier, but the most recent figures (as of August) indicated that oil production hit a new record.