Increasing uncertainty in a resilient economy

Economically, “Detroit Lakes seems like it’s in a good place, but there is some nervousness around the edges,” said Minneapolis Fed President Neel Kashkari following a visit to the west-central Minnesota city.

Hearing from business owners, community leaders, and residents across the Ninth District is an important part of how the Minneapolis Fed collects regional economic intelligence. President Kashkari’s visit to Detroit Lakes, Minnesota, included a public town hall, a business roundtable, and a tour of a tribally owned modular housing plant. The visit was the Minneapolis Fed’s contribution to the Federal Reserve System’s initiative, Fed Listens, to hear from stakeholders across the country on issues related to monetary policy.

Many shared their thoughts on the current state of the economy as well as their expectations. Their comments reflected increasing uncertainty creeping into an otherwise healthy picture.

Still more hands needed

Business representatives described a labor market that was slightly softer than in recent years but remained tight. This tightness, however, was not without nuance. A manufacturer said that some jobs had become easier to fill, but finding workers for jobs that require specialized skills was becoming harder: “It feels like the tight labor market is moving sideways.”

Vacancies in tech and health care jobs were reportedly harder to fill than in the past, and wage growth was still outpacing inflation, according to one employer. But there was also some relief: The use of traveling nurses, an expensive labor fill-in that gained prominence during the pandemic, has reportedly declined, giving managers more stability in their workforce.

An aging and retiring population presents extra challenges for regional employers. At the same time, some slowing of a robust economy was welcomed by some employers who lost workers to retirement. They reported that hiring recently “got a bit easier” as other companies reduced their workforce. “That’s good for us, although not necessarily for the area,” acknowledged a manufacturer.

Labor challenges

Some event participants pointed to how generational differences affect the local labor market. Younger workers are “demanding more benefits like flexible schedules,” said one participant, and remote work options.

One employer noted that, while they receive a considerable number of applications for open positions, more than half of those invited to interview fail to show up. Another participant reported that workers stop showing up once employed.

But there’s also a flip side to employers’ labor challenges. A nonprofit participant highlighted that many people would be “very happy to join the workforce.” But in many cases, child care, transportation, affordable housing, and worksite proximity are real challenges for some workers and their families. These pressures, particularly among lower-income families, can also lead to untreated mental health challenges: “Things that lead people to get [upset] and quit … that’s not helpful to anyone,” they said.

Rising costs and uncertainty

Baseline budgets for construction projects have increased with the persistent rising costs of construction materials. This makes it difficult to attract bidders. Labor also remains an issue. “Specialty contractors are aging out,” according to one participant. They said the industry does not have enough trained—or trainable—workers to replace those skills, which puts upward pressure on wages.

A business owner noted these pressures are factors that make new rental units “somewhere between $20,000 to $30,000 more expensive in rural areas.” With higher interest rates on financing, they said, “companies would have to double rents to make buildings [generate] cash flow.” Some expressed nervousness about the possibility of rising prices and other impacts from tariffs. Costs of Canadian lumber and other prefabricated construction components were top of mind.

Representatives from other industries expressed uncertainty as well. A manufacturer who relied on several inputs from other countries also worried about increased costs. They reported Canadian customers were already “feeling a lot of angst” that was threatening demand. A new 25 percent tariff worried an agricultural business owner. He regularly imports 125 truckloads of soil enhancers from Canada and plastic containers from China.