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Beige Book Report: Minneapolis

December 5, 2018

Summary of Economic Activity
Ninth District economic activity increased moderately since the previous report. Employment grew moderately, with hiring demand remaining robust, but a tight labor supply was restraining employment growth. Wage pressures were moderate overall, while price growth remained modest. The District economy showed growth in consumer spending, construction, residential real estate, manufacturing, and energy. Commercial real estate activity was mixed, while agricultural conditions remained weak.

Employment and Wages
Employment grew moderately since the last report. Hiring demand remained robust, but a tight labor supply was restraining employment growth. Job postings tracked by district states were higher overall in October compared with the same period a year earlier. Minnesota and North Dakota saw particularly strong growth in job postings, while South Dakota and the Upper Peninsula of Michigan had small declines. Ad hoc surveys of businesses in Minnesota, Montana, and South Dakota, conducted in late October and November by the Minneapolis Fed, found that a significant majority of respondents' firms were hiring; many were hiring to both increase total headcount and replace turnover. Numerous construction contacts in Minneapolis-St. Paul said they were hiring, and most were looking to increase total headcount. However, tight labor availability was making it difficult for firms to find necessary workers. Surveys by the Minneapolis Fed found that labor availability was widely seen as the biggest obstacle to short-term growth. Unemployment insurance claims have also continued to drop; over the most recent six-week period (through early November), both initial and continuing claims saw a cumulative decline of 12 percent across District states compared with the same period a year earlier. A Montana contact noted that seasonal layoffs for male-dominated industries like construction have been pushed back this year. "This hasn't happened before in the years that we've been watching."

Wage pressures were moderate overall, with some evidence of stronger pressures for certain industries and worker skills. Several ad hoc surveys by the Minneapolis Fed showed wage increases coalescing around 3 percent over the past 12 months. A small majority of Minnesota and South Dakota firms reported wage increases below 3 percent; however, a small majority of Montana firms reported increases above 3 percent, as did about 70 percent of Minneapolis-St. Paul construction firms. A Minnesota services company announced it was raising its base wage from $12 to $14 per hour in hopes of hiring 300 people by year's end. A tight labor market for high-tech skills in Minneapolis-St. Paul has led to double-digit wage increases for some information technology and other STEM positions over the past 12 months. There were also reports that more companies, especially those in construction trades, were picking up a greater share of workers' health insurance premium costs to attract and retain employees.

Prices
Price growth remained generally modest since the previous report, though input prices saw more pressure. In a recent survey of large firms, about 30 percent saw input prices rise by 3 percent or more over the past 12 months, but 41 percent believe they will rise by 3 percent or more over the coming 12 months. Several contacts reported notable increases in freight and transportation logistics prices. Retail fuel prices in District states as of late November were substantially lower than a month earlier. However, home heating costs were expected to increase faster in District states than nationally this winter, largely due to rises in the prices of heating oil and natural gas, as the average temperature forecast is roughly flat from last year. Prices received by farmers for corn, wheat, hay, and cattle increased in September compared with a year earlier; prices for soybeans, hogs, milk, chickens, eggs, and turkeys decreased.

Consumer Spending and Tourism
Consumer spending grew moderately since the last report. Taxable sales have seen strong growth in South Dakota this fall compared with a year earlier; Wisconsin also saw sales growth year over year, but at slower rates than those seen over summer months. In Minnesota, hotel demand rose, with higher occupancy and revenue per available room in October compared with a year earlier. Tourism activity was solid in Montana, with October visits to Glacier National Park seeing a 9 percent increase. Total enplanements at Montana's two largest airports were also up 9 percent over a year earlier. Attendance at national parks elsewhere in the District were mixed. Total visits in October were down at Mount Rushmore, as well as at Pictured Rocks in Michigan's Upper Peninsula, and vehicle crossings at the U.P.'s Mackinac Bridge have been lower this fall compared with a year earlier.

Construction and Real Estate
Commercial construction activity grew moderately since the last report. Industry data showed that total construction spending in October was higher across much of the District compared with a year earlier. Industry data showed that both new commercial projects and total active construction projects in the District as of early November were slightly higher than a year ago. However, there was also some evidence that the number of active projects may be elevated to some degree by the inability of construction firms to find available labor. Overall, commercial permitting in October was strong in Minneapolis-St. Paul, but otherwise mixed among the District's other metro markets. Several industry contacts in Minneapolis-St. Paul said project pipelines were full heading into the end of the year and early part of 2019, and industrial and medical construction sectors were said to be strong. Another construction contact also noted significant activity in the energy segment in Minnesota. Residential construction activity saw moderate growth. October single-family permitting was higher in a notable majority of District metros compared with a year earlier, while multifamily permitting was mixed.

Commercial real estate activity was mixed since the last report. In Minneapolis-St. Paul, industrial and multifamily sectors both continued to show healthy leasing demand, with low vacancy rates despite significant new construction. However, both retail and office vacancy rates have been increasing. Several national retailers announced closures in Minnesota, and one specialty retailer announced the closure of eight stores in the state. Consumer shifts to online retailers have contributed to rising vacancy rates in retail space, but have also contributed to lower industrial vacancies due to increased leasing of industrial warehouse space in Minneapolis-St. Paul. Residential real estate activity rose moderately. Closed sales in October were mostly higher compared with a year earlier across most of the District. October home sales were particularly strong in western and northern counties of Wisconsin. Sales in Montana's larger markets were mixed, but softer overall.

Manufacturing
District manufacturing activity increased modestly since the previous report. An index of manufacturing conditions indicated increased activity in October compared with a month earlier in Minnesota and the Dakotas. An industrial equipment producer announced a large expansion that would nearly double capacity at a plant in Minnesota. However, multiple contacts have reported putting capital spending plans on hold due to uncertainty in their outlooks.

Agriculture, Energy, and Natural Resources
District agricultural conditions remained weak. According to results from the Minneapolis Fed's third-quarter survey of agricultural credit conditions, roughly three in five lenders surveyed reported that farm incomes decreased in the third quarter relative to a year earlier, while a similar proportion reported decreased capital spending. While early indications were for very strong production in much of the District, in some areas heavy rains and unseasonably cold weather were complicating harvests. District oil and gas exploration activity as of late November increased moderately relative to the last report. North Dakota oil production increased to a new record in September. A major natural gas processing plant began operations in North Dakota.