Beige Bonus: An expanded look at regional economic conditions

The Federal Reserve Bank of Minneapolis’ most recent Beige Book report on current business conditions, released Dec. 5, found that the Ninth District economy continued to grow in many areas, including construction, manufacturing, and energy.

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Supplemental information offers additional details on how business contacts view current economic conditions. Most saw the economy growing in their region or sector, with some notable exceptions like agriculture. Many also noted growth in spite of a variety of challenges. (All source contacts were made before Friday, Nov. 23, and, similar to the Beige Book policy, all sources remain anonymous to protect confidentiality.)

By most measures and anecdotes, demand for workers continued largely unabated. For example, drilling activity in the Bakken oil-producing areas of western North Dakota was returning and bringing more jobs. October job postings in North Dakota rose by 17 percent over a year earlier—the fifth consecutive month of double-digit growth. October data also showed significant increases in available IT and STEM positions in Minnesota.

Strong demand for workers is getting foiled somewhat by tight labor availability. A Minnesota food-processing company said it had more than 130 unfilled jobs at two plants. In South Dakota, a construction source said the company was “passing up work due to a shortage of workers. A manufacturer there said that “the availability of even unskilled workers is very poor,” and a banker turned to temporary workers as “a tragic necessity.” A Montana financial services firm noted that hiring of entry level positions is taking two to three times longer due to low application numbers.

That tightness shows up in the data as well. Across Ninth District states, recent initial and continuing claims for unemployment insurance saw big declines over last year (see chart). In three separate ad hoc surveys by the Minneapolis Fed—one each in Minnesota, Montana, and South Dakota—employers identified available labor as the biggest obstacle for future growth.

Some employers also noted high turnover, especially among lower-skill positions. “The more we stretch our requirements and hire less-qualified employees, the greater our turnover,” said a Minneapolis-St. Paul manufacturer. “It seems that the number of jobs available in the economy has exceeded the number of people capable of holding down a job.”

Wages are important for attracting workers, and available evidence suggests they are rising. But some interesting dynamics are in play, including shifting pay practices. For example, contacts reported bonuses and merit pay getting doled out earlier, rather than at the end of the year. “People are working too hard to wait until the end of the year,” said a Minnesota contact. Bonuses were also being blended more often between personal and team merit. A Minnesota contact in the accounting sector noted that his firm took away an “average hours” bonus, not because things were tight—almost the opposite; the bonus was a negative incentive for some employees to “hoard work” to goose their salaries.

Others noted that the biggest pay bumps were going to either new hires or workers with competing offers. “Most could get a raise immediately if they wanted to move” to a new job, said a Minneapolis construction source. Several other sources said existing employees tended to be content with whatever raises they received and rarely asked for more.

There also appears to be some misalignment of wage expectations. “Overall, we have noticed that applicants are coming in with higher wages than we were prepared for,” said a Minneapolis-St. Paul construction materials manufacturer. In many cases, a job offer isn’t even extended “due to our inability to hire them at their requested wage.”

A contact at a digital marketing firm in the Twin Cities said salaries at the company have risen by 25 percent this year to better compete for talent. Despite the increase, the company has struggled to hire new college grads because they were asking for roughly double the going salary “and asking for college debt forgiveness and living expense benefits.” The source said there was a “major misconception” of occupation salaries in Minnesota versus the coasts. “Once we communicate the differences … they either go into larger corporate jobs or go back to being baristas.”

Interest rates and credit availability: Many sources also offered insights on the effect of higher interest rates. Along with difficulty finding labor, a South Dakota print shop said interest rate increases “are impacting both our operating margins and our clients’ plans for expansion.”

A Montana banker noted that the rise in short-term interest rates “has had an immediate impact on the cost of operating capital” for small businesses and ag producers, the latter of which are already in a tight spot with low crop and livestock prices. A developer in that state has reportedly backed away from doing additional multifamily housing projects due to higher interest rates and increased construction costs. Another contact there noted that rising construction costs and interest rate hikes were creating some urgency in completing projects before more rate hikes. “We are concerned this will create a surge rather than a metered growth.”

A Montana bank executive believed that higher rates were already having an impact in western Montana, primarily Missoula, where there has been a noticeable slow-down in the residential mortgage business in the past month or two. This coincides with 30-year mortgage rates reaching 5 percent and higher, though low inventory of homes for sale was also a factor. An equity investment contact in South Dakota shared that recent interest hikes were not worrisome, but similar increases (100 basis points) over the coming year would be.

Agriculture: A soft farm economy is front and center for many rural businesses. A Montana banker said ag clients “are facing very challenging times” thanks to low prices for several years running, along with intermittent drought. Many farmers have seen working capital plummet, “and now it looks like we may be eating into farm and ranch equity.” Highly leveraged farms are facing the prospect of covering debt with flat or declining income and potentially higher interest rates. As a result, “I would expect to see land prices retreat in 2019.” Another banker there agreed. “I talk to people from Iowa to Montana, and land values and cash rents are under pressure because of poor commodity markets.” 

Tariffs: A number of contacts across the district noted the real and potential future impact of tariffs. A Wisconsin metal fabricator said the company has passed “substantial” increases in steel and aluminum prices along to customers. A South Dakota contact said, “We are concerned about the impact of tariffs. It will be painful this year, but worse next year if we don’t have open markets.”

A number of contacts noted greater uncertainty given tariffs and other issues clouding their outlook. The Wisconsin metal fabricator: “The current business climate is the most difficult to gauge in my 30-year business experience.” As a result, the company changed its capital expense plan for 2019. “I will be very surprised if we are alone in our more conservative plan for the immediate future.”