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Beige Book Report: Minneapolis

September 12, 2018

Summary of Economic Activity
Ninth District economic activity expanded moderately since the last report. Employment grew strongly, with robust hiring demand despite continued labor constraints. Wage growth was moderate to strong and price pressures were moderate since the previous report. The District economy showed growth in consumer spending, tourism, services, manufacturing, residential real estate, commercial real estate, mining, and tourism. Commercial and residential construction were mixed, while agriculture remained weak overall.

Employment and Wages
Employment grew strongly since the last report despite continued labor constraints. Hiring demand was robust. The number of July job postings at state workforce centers grew strongly across the District compared with a year earlier, with several states posting low double-digit growth. In Minnesota, the number of July openings in high-tech fields rose from a year earlier. Two separate July surveys reported solid hiring sentiment in the Dakotas and Minnesota. Staffing industry contacts reported growth in clients and total job orders. However, finding labor was much more difficult. Over the most recent six-week period (through mid-August), both initial and continuing unemployment claims fell by about 11 percent across District states. Staffing clients widely reported more unfilled job openings compared with the same period a year earlier. A contact with offices in Minnesota and Wisconsin said that there were "not nearly enough candidates" for available openings. A North Dakota contact said an "overwhelming" majority of staffing clients were optimistic about current business conditions: "Companies are expanding or want to expand. Their challenge is finding enough workers." Even major layoffs had an offset. A financial call center in South Dakota announced layoffs of about 450 workers. But a Minnesota call center expected to hire 550 workers thanks to higher demand from travel and health care clients.

Wage growth was moderate to strong since the last report. An ad hoc survey of Minnesota staffing firms found average wage growth of 3 percent to 5 percent, with similar expectations for the coming year. A western Wisconsin contact said lower-paying positions were seeing catch-up wage increases, "while the top (wage) stays in place." Increasing entry-level wages from $11 to $13 "hasn't had much of an impact in recruiting, but moving to over $15 has." A North Dakota contact said wages for entry-level office jobs have risen from $12 to $14 over the past year, while those for entry-level forklift operators have gone from $14 to $16 or more. Due to high vacancies, salaries for high-tech positions in Minneapolis-St. Paul were seeing strong increases.

Prices
Price pressures increased moderately relative to the previous report. Retail food and beverage prices accelerated modestly from a year ago, according to industry sources. Construction costs continued to increase briskly, due both to rising materials prices and high demand for subcontractors. Transportation logistics costs have increased substantially this year, according to contacts. A July survey of purchasing managers indicated elevated inflation expectations. Retail fuel prices as of late August were generally unchanged relative to the previous report. Prices received by farmers for wheat, hay, chickens, and eggs increased in July compared with a year earlier; prices for corn, soybeans, hogs, cattle, milk, and turkeys decreased.

Consumer Spending and Tourism
Consumer spending rose moderately since the last report. Available sales and tax data showed higher summer receipts in Minnesota, South Dakota, and Wisconsin compared with a year earlier. A Minnesota consumer goods retailer reported strong financial results in its most recent quarter, and a Minnesota-based furniture retailer announced a major expansion of stores. The Minnesota lodging industry experienced a 2 percent increase in overall demand over last July. Total airline passenger traffic in Minneapolis-St. Paul in July was flat compared with a year earlier, but was solidly higher at other, smaller airports across the District.

Tourism saw moderate growth across District states. Traffic at the annual Sturgis Motorcycle Rally in August was 8 percent higher than a year earlier. However, July gaming receipts in South Dakota fell slightly. Extremely hot weather reportedly led to an attendance drop at the Montana State Fair, but total revenue was nonetheless strong. The summer music and festival season in Billings and Bozeman (Mont.) were reportedly very strong in terms of attendance and spending. The North Dakota State Fair fell just short of setting an all-time attendance record. Following two months of increased traffic, July traffic across the Mackinac Bridge leading to Michigan's Upper Peninsula was flat compared with a year earlier.

Services
Activity in the professional services industry increased moderately since the last report. An electronics distributor broke ground on a $300 million expansion. Demand for agricultural data analytics has increased this year as farmers seek to economize on input costs, according to a contact. Freight demand was up, particularly in trucking. Great Lakes cargo shipments increased 2.5 percent in July from a year earlier.

Construction and Real Estate
Commercial construction was mixed since the last report. Industry data suggested that commercial construction was down steeply in July. However, spending in the heavy construction sector was higher as crews took advantage of dry summer weather. Commercial permitting in July--a signal of future activity--was also higher in many of the District's larger cities, including Minneapolis; Billings; and Bismarck, N.D. Residential construction was mixed. Limited data on August permitting suggested that activity increased compared with a year earlier, including in Minneapolis-St. Paul. However more extensive July permit data showed mostly flat-to-lower activity across the District. A Montana contact said market-rate apartments were seeing strong growth in larger markets, which was expected to continue into next year. Minneapolis-St. Paul saw a considerable increase in August multi-family units permitted compared with last year, following an equally notable decrease in July.

Commercial real estate saw modest growth since the last report. Office vacancy and lease pricing were stable in Minneapolis-St. Paul. Industrial leasing in the region reportedly slowed compared with last year, due to lack of suitable space; industrial vacancy rates have tightened and space under construction has risen in response. However, closures continued among large retail stores, including two mall anchors in western Wisconsin. Residential real estate activity rose modestly. Closed sales were higher overall in Montana's larger cities compared with a year earlier; they also rose modestly in Sioux Falls, S.D. While July sales were flat in Minnesota, those across northern Wisconsin were the strongest in at least a dozen years, and sales also rose in the western area of the state. Low inventories of homes saw some improvement, increasing by 4 percent in both Minneapolis-St. Paul and Sioux Falls.

Manufacturing
District manufacturing activity increased moderately. An index of manufacturing conditions indicated increased activity in July compared with a month earlier in Minnesota and the Dakotas. A solar panel producer was preparing to re-open a shuttered plant in Minnesota. An HVAC manufacturer and a producer of radiators for heavy equipment announced expansions at existing facilities. Contacts from across the sector continued to report negative impacts from trade restrictions.

Agriculture, Energy, and Natural Resources
The District agricultural sector was weak overall. Growing conditions in much of the District were good this summer, with producers in some areas expecting record yields. However, low commodity prices continued to drag on farm finances and contacts remained concerned about trade conflicts. District oil and gas exploration activity as of late August decreased slightly from the previous report. Coal production in Montana increased from a year earlier. District iron ore mines were operating at capacity, with work underway to bring an idled facility back online; iron ore shipments on the Great Lakes were up 7 percent in July from a year earlier.