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Beige Book Report: Minneapolis

April 17, 2019

Summary of Economic Activity
The Ninth District economy grew modestly overall since the last report. Employment grew modestly, while wage pressures rose moderately and price pressures were modest. The District economy saw growth in professional services, commercial construction and real estate, manufacturing, energy, and mining. However, consumer spending was mixed, while residential construction and real estate saw small declines, and agriculture remained weak.

Employment and Wages
Employment grew modestly since the last report. Ad hoc surveys by the Minneapolis Fed found varying demand for labor. In Montana, 30 percent of employers polled said they were hiring to add head count; a survey of human resources professionals in central Minnesota found that more than half were trying to increase head count. A poll of 20 Minnesota staffing firms, most of them in Minneapolis-St. Paul, found that recent job orders were modestly higher over the same period last year, while hours booked were lower and unfilled job orders somewhat higher as a result of continued tight labor supply. Expectations for job orders in the second quarter were also notably higher. A central Minnesota banker said some companies have money to expand but were fearful that they won’t be able to fill the jobs they create. A North Dakota staffing contact said, "We have to be careful who we tell we have workers for." Yet some signs of weakness were present. Initial unemployment claims rose significantly in Montana over the most recent six-week period (through mid-March) compared with a year earlier, and a modest increase was also seen in South Dakota. Layoffs in retail continued, and a Minnesota financial services firm announced a layoff of 210 workers. February job postings fell notably over a year earlier in Minnesota (8 percent), Michigan’s Upper Peninsula (12 percent), and Montana (17 percent); job postings in the Dakotas were mostly flat. Widespread spring flooding was also likely to hamper hiring.

Wage pressures rose moderately. A major retailer publicly announced a one-dollar increase to base pay, to $13 an hour, starting in June. Staffing contacts in Michigan’s U.P. and western South Dakota noted that pay rates have risen 5 percent and 8 percent, respectively, over the past 12 months. Two ad hoc polls by the Minneapolis Fed (one in Minnesota, one District-wide) found that wages have risen by more than 3 percent over last year. However, a majority of respondents to three other ad hoc polls (one in Montana and two in Minnesota) pegged recent wage increases below 3 percent; they also expected roughly the same level of wage pressure going forward.

Prices
Price pressures increased modestly. A Minneapolis Fed business survey indicated that a slight majority of firms increased output prices in the first quarter of 2019 relative to the same period a year earlier; a similar proportion planned price increases in the second quarter. A larger share of firms reported input price increases. Contacts reported that tariffs continued to create significant uncertainty about the outlook for raw materials, notably for metals. Retail fuel prices in District states in early April were substantially higher relative to the previous reporting period. Prices received by farmers in February increased from a year earlier for corn, wheat, hay, milk, and turkeys; prices for soybeans, eggs, chickens, cattle, and hogs decreased.

Consumer Spending
Consumer spending was mixed across the District since the last report. February sales tax collections fell 4 percent in Minnesota compared with a year earlier, and hotel demand was also lower. However, in North Dakota, February motor vehicle excise and other sales taxes were higher over the same period. Total gaming receipts in South Dakota were about 2 percent higher in the first two months of the year compared with last year, and statewide taxable sales were also 4 percent higher over this period. New and used auto sales slumped in the western portion of the District in February compared with a year earlier, but March sales saw a solid rebound. Sales of recreational vehicles were also lower over the first two months of the year compared with a year earlier, especially in Minnesota. Montana’s ski season was strong in the first quarter compared with a year earlier, and lodging sales taxes in the state were about 15 percent higher. But some regions were hurt by widespread snowfall; a contact in Michigan’s U.P. noted that snowmobile tourism was down there because other regions had their own snow; February traffic across the Mackinac Bridge (a gateway to winter tourism in the U.P.) was down 10 percent over last year.

Services
Activity in the professional services sector grew modestly overall. Contacts in the trucking industry reported that extreme winter cold and heavy snows led to delays and a reduction in activity, but sources predicted a rebound due to pent-up demand. An ad hoc poll of accountants in Minneapolis-St. Paul found that half saw increased activity in the first quarter, while one-quarter saw a decline. The group also was slightly more positive about activity over the coming two quarters. A survey of job openings found that statewide STEM openings rose by 15 percent in February over a year earlier.

Construction and Real Estate
Commercial construction rose modestly since the last report. An industry database showed that the value of total construction starts in the first two months of the year was lower in District states compared with a year earlier, but likely due in part to extreme weather. Industry contacts said project pipelines were healthy heading into the spring building season, and a second database showed that the number of total continuing projects (as of late March) were at levels similar to last year over the same period. For larger cities in the District with available first-quarter data, Billings, Mont., Fargo and Bismarck (N.D.), and Sioux Falls, S.D., saw growth in commercial permitting over last year, while Rapid City, S.D., experienced a decline. Residential construction was lower. Total permitted housing units in the first quarter were down significantly from last year in Minneapolis-St. Paul and Sioux Falls, while Bismarck was up modestly and Fargo and Billings were mostly flat. Extreme winter weather was again cited for the decline, and industry contacts expected activity to rebound with the return of warmer weather and a recent decline in mortgage rates.

Commercial real estate grew modestly since the last report. In Minneapolis-St. Paul, multifamily permitting slowed down in the first quarter, but new-unit deliveries this year were expected to remain strong and vacancy rates tight. New office construction in the region has fallen, but a significant amount of renovated space was scheduled to re-enter the market this year. Industrial vacancy rates remained low. In Sioux Falls, multifamily development has slowed and vacancy rates have risen to about 10 percent. Retail vacancy was high in the city’s busiest retail corridor, but activity was reported to be stronger in other, outlying areas of the region. Residential real estate in the District was lower compared with the same period a year ago. February home sales were mixed compared with a year ago, rising modestly across Minnesota, but falling in many other markets. However, preliminary March data suggested home sales fell in Billings, Sioux Falls, and Minneapolis-St. Paul. Sources expected a rebound in home sales in the near term.

Manufacturing
District manufacturing activity increased briskly. An index of manufacturing conditions indicated increased activity in March compared with a month earlier in Minnesota and the Dakotas. Demand for capital equipment remained strong, according to contacts. Agricultural machinery producers reported solid sales, with domestic weakness more than offset by strong export activity. Officials approved plans for a $54-million compressed gas plant in Minnesota.

Agriculture, Energy, and Natural Resources
District agricultural conditions remained weak. Heavy snows and resultant early spring flooding were likely to delay planting in many areas. In South Dakota and southern Minnesota, where flooding was most severe, the impact could be considerable. District oil and gas exploration activity as of early April increased relative to the previous report. District iron ore mines continued to operate at near capacity.