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Beige Book Report: Minneapolis

January 16, 2019

Summary of Economic Activity
The Ninth District economy grew modestly overall since the last report. Employment grew moderately, though lack of available labor continued to hamper overall hiring. Wage pressures were moderate, while price pressures were modest. The District economy showed growth in consumer spending, manufacturing, commercial real estate, and mining. However, construction and residential real estate were mixed, energy slowed, and agriculture remained weak.

Employment and Wages
Employment grew moderately since the last report, though lack of available labor continued to hamper overall hiring. Demand for labor across the District has ebbed slightly but remained healthy overall. November job postings fell slightly in Minnesota, South Dakota and Michigan's Upper Peninsula compared with a year earlier, in contrast with double-digit increases in Montana and North Dakota. Among more than a dozen staffing firm contacts, mostly in Minneapolis-St. Paul, a small majority said job orders and total clients were higher in the fourth quarter compared with a year earlier. But tight labor supply was limiting job placements and hours booked among staffing firms, with unfilled job orders seeing a notable increase. Surveys by the Minneapolis Fed in late November and December identified labor availability as the biggest obstacle to short-term growth. In a separate, external survey of Minnesota builders, almost two-thirds said the lack of available labor has forced them to turn down business. A Montana retailer noted that "every business is hiring and the hiring pool is shallow." Very little relief in labor supply was expected. Numerous metro areas were at or near record-low unemployment; unemployment insurance claims over the most recent six-week period (through mid-December) dropped more than 4 percent across District states, and continuing claims dropped by 10 percent.

Wage pressures rose moderately. Recent surveys by the Minneapolis Fed found widespread wage increases that coalesced a little below 3 percent. One survey found more persistent wage increases for new employees and specific positions, rather than company-wide raises. Staffing firm contacts noted continued reluctance among some clients to raise wages enough to change hiring difficulties. "Clients are not changing with the labor market, so wages are not going up as much as they should," said a contact in Minneapolis-St. Paul. A central Minnesota contact said that "skilled trades are hard to find and wages are not increasing (enough) to bring in good candidates that have the necessary skills and background." Most surveys showed that expectations for future wage hikes were slightly below 3 percent. One modest exception was the Minneapolis Fed's annual manufacturing survey (conducted in partnership with the Minnesota Department of Employment and Economic Development). Respondents to this survey expected wages to increase by 3 percent to 5 percent in 2019.

Prices
Price pressures were modest since the last report. Slightly more than half of respondents to the Minneapolis Fed's annual manufacturing survey reported that prices charged for their products increased over the past year, while just over a third reported unchanged prices. For the coming year, a similar proportion expected to increase their prices, while a strong majority expected the rate of inflation in the broader economy to increase. Retail fuel prices continued to fall sharply in District states through the end of 2018, reaching their lowest levels in nearly two years by early January. Prices received by farmers for corn, wheat, hay, hogs, cattle, and eggs increased in October compared with a year earlier; prices for soybeans, milk, chickens, and turkeys decreased.

Consumer Spending
Consumer spending rose moderately since the last report. State-level sales tax collections in November were higher in the Dakotas and Wisconsin. Lodging taxes were higher in Montana over this period, but hotel occupancy rates in Minnesota fell and average room rates were flat. Total enplanements at a number of District airports in November rose notably, with the exception of Minneapolis-St. Paul International, which saw a slight decrease. Retail contacts reported a strong holiday shopping season overall. A mall manager in southern Minnesota said foot traffic was up on Black Friday compared with a year earlier, and stayed strong though the holidays despite the loss of a major anchor tenant earlier in the year. The manager added, "Overall sales and traffic exceeded expectations almost entirely across the board."

Construction and Real Estate
Commercial construction was mixed since the last report. An industry database of construction spending showed November activity was slower than a year earlier, particularly for nonresidential building. However, this was possibly related to a particularly strong October. Construction contacts in Minneapolis-St. Paul noted strong demand for new industrial building, but office construction was slow. Another industry database showed that projects out for bid in District states were somewhat higher over the most recent six-week period (through mid-December) compared with a year earlier. The average number of active projects was also higher over the same period; however, this might be the result of projects taking longer due to labor shortages in construction. Available data for November and December showed commercial permitting was higher in the core cities of Minneapolis and St. Paul, but lower across most of the District's other metro cities. Residential construction was mixed. Minneapolis-St. Paul and Bismarck, N.D., saw healthy year-end increases for both single- and multi-family units. But residential activity elsewhere was flat or declined over the same period.

Commercial real estate increased slightly since the last report. Vacancy rates in multi-family units continued to be low throughout the District despite healthy construction activity. Similar market conditions existed for industrial space in Minneapolis-St. Paul. Large retailers continued to be pressured, with multiple big-box store closures across the District. Residential real estate was mixed. November home sales grew modestly over the previous year in western Wisconsin, Sioux Falls, S.D. and Missoula, Mont., but fell across Minnesota as well as in Bozeman and Great Falls, Mont.

Manufacturing
District manufacturing activity increased moderately since the previous report. Respondents to the Minneapolis Fed's annual manufacturing survey indicated growth in orders, production, employment, capital investment, and productivity over the past year, with expectations for further growth in 2019. An index of manufacturing conditions produced by Creighton University indicated increased activity in December in Minnesota and the Dakotas. A producer of electrical transmission equipment broke ground on a large new plant in South Dakota.

Agriculture, Energy, and Natural Resources
Agricultural conditions in the District were stable at low levels. District oil and gas drilling activity slowed notably recently in response to a rapid decline in the price of crude oil. An industry contact reported that expectations for capital expenditures in the Bakken oil patch have shifted downward dramatically. However, as of late December, the drilling rig count in the region was unchanged from a month earlier. District iron ore mines were operating at near capacity, with a recent estimate suggesting 2018 production would be up slightly from the previous year.