More ears to the economic ground

The Federal Reserve Bank of Minneapolis convenes and maintains multiple advisory groups to gain insights into the Ninth District’s economy. Each advisory group has a specific focus, and group members represent private businesses, financial institutions, and community organizations from across the Ninth District, which is composed of Montana, North Dakota, South Dakota, Minnesota, 26 counties in northwestern Wisconsin, and the Upper Peninsula of Michigan.

Members of the Ninth District Advisory Council (NDAC) represent a variety of industries from across the district. This group advises the Bank on regional economic conditions. The Community Depository Institutions Advisory Council (CDIAC) advises the Bank on conditions affecting community banks and consists of leaders of thrifts, credit unions, and banks with assets of less than $10 billion.

At the groups’ most recent meetings this spring, Minneapolis Fed President Neel Kashkari spoke about the challenges he and his colleagues on the Federal Open Market Committee face in returning inflation to the Fed’s 2 percent target, and the importance of letting data drive their decisions. Council members were then asked to share their on-the-ground insights into current conditions in housing, labor markets, credit conditions, and consumer confidence.

CDIAC recap of current conditions

Housing inventory remains historically low throughout the Ninth District. CDIAC members noted some improvement in housing availability and an uptick in new construction, which was leading to some price softening in high-priced areas. Some areas in the district, however, reported that high land development and construction costs were preventing projects from getting built.

Meeting participants reported that labor markets were loosening across the district, though conditions varied by industry, occupation, and geographic location. Overall, the services, hospitality, and construction sectors continued to struggle with recruitment and retention. Participants also reported that employee demands to work from home remained high, with some employers leaning into virtual work as a recruitment tool to broaden their labor pool.

Reports on consumer confidence varied across participants, though there was broad agreement that low- and moderate-income consumers remained the hardest hit by inflationary prices at the grocery store. But participants also noted that strong labor markets have led to increased consumer confidence, with consumers slowly adjusting to higher interest rates and moving ahead with purchases they had been postponing in the hopes of a lower interest rate environment. One financial institution noted an increase in credit card balances, with more consumers carrying a higher balance or making minimum payments, while another noted that customers in their area are defaulting on loans on pandemic-purchased recreational vehicles.

Participants reported steady demand for small business loans, noting that many businesses have been able to pass along costs from higher interest rates to customers in the form of price increases. There was, however, some uncertainty around how long consumers would be willing to bear those increases.

CDIAC members also discussed consumers’ increased expectations about the technology services that financial institutions should offer, and the regulatory and financial burdens that these expectations place on smaller institutions in particular.

More insights from district businesses

Members of the NDAC reported that the tourism industry was deeply impacted by the lack of snow across the district, which had an adverse effect on communities whose economies rely on winter activities. Reports indicated declines in some consumer spending, with retail members noting that preorders and seasonal orders were down due to large inventories of unsold winter apparel and other seasonal items. Similar to discussions held in the CDIAC, multiple participants reported that it is becoming more difficult to pass along costs to consumers, who were feeling financially stretched because of inflation.

NDAC members reported that they were finding businesses less willing to purchase new equipment, build new space, or use lines of credit due to uncertainty about the economic outlook. They also noted that customers were shifting their purchasing habits, moving toward less expensive goods and financing more purchases rather than buying outright. One participant reported that the interest rate environment has changed the financial picture for tech startups, which were finding it harder to raise capital after benefiting for years from low interest rates.

Overall, participants reported that labor markets were easing across the district. Some notable exceptions included the skilled trades, which continued to struggle with inadequate labor and lag in the training pipeline. Participants specifically discussed the labor challenges with construction and manufacturing occupations.

Council members discussed the impacts of automation and artificial intelligence, with most reporting that businesses were interested in making use of AI but weren’t sure how it might apply to their specific business. Manufacturing was noted as an early adopter with AI applications for production, accounting, and financial management. Members discussed the human element to overseeing additional automation and AI as it becomes more commonplace within the work environment.

Helping monetary policy

As Federal Open Market Committee members continue to work to bring inflation back to its 2 percent target, insights from these two advisory groups provide real-time, ground-level perspectives to complement all of the data that the Fed studies. These insights can help identify emerging trends not yet visible in the data and ensure multiple perspectives are represented in the monetary policymaking process.