Regional economic insights in an evolving landscape

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. 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.

Minneapolis Fed President Neel Kashkari spoke to the groups this fall about the challenges he and his colleagues on the Federal Open Market Committee face with a dual mandate in tension. They are working to return inflation to the Fed’s 2 percent target, while balancing the labor market’s changing landscape. Council members shared their insights into current conditions in housing, labor markets, credit, and consumer confidence.

CDIAC recap of current conditions

The housing market across the Ninth District continues to face challenges due to tight inventory, rising costs, and labor shortages in the construction industry. CDIAC members noted tariff and trade policies are impacting the housing market. Building materials like lumber and steel are increasing in cost, making it more challenging to build new homes that will match appraisal values.

Meeting participants reported labor availability remains a challenge in the district. It is not quite as acute in higher-wage white collar occupations. Labor supply for agriculture, construction, and the service industry was noted as a pain point, with a lack of child care being a contributing factor. There is frustration in rural parts of the district with data centers under construction as those projects seem to absorb all the skilled tradespeople in the area.

Members noted consumer confidence is stable in most areas of the district. However, those in agricultural markets reported that low commodity prices and trade uncertainty are impacting confidence. Overall, members said that while consumers are impacted by higher prices, many are still making purchases. Participants reported an increase in credit card usage, personal loans, home equity lending, and auto loans of up to 96 months. One financial institution reported that their home equity lending is two to three times higher than normal. Members voiced widespread concern that these borrowing trends are indicative of consumers struggling to make ends meet.

Participants reported strong demand for small business loans. One financial institution had already exceeded their annual growth expectations. Another financial institution discussed concerns about the decrease in tourism, impacting small businesses reliant on a strong tourism season. The sluggish tourism season impacted borrowers who run smaller hotels and restaurants more than higher-end businesses that are better positioned to weather the downturn.

Mortgage activity across financial institutions was quite active throughout the summer months, with participants noting that the tight housing market created a backlog of borrowers looking to purchase a home. Customers are watching interest rates closely and are ready to refinance mortgages once the long-term mortgage rates go down.

More insights from district businesses

Members of the NDAC reported tariffs and trade are having an outsized impact on the business community, and many industries are expecting slower growth for the remainder of the year. Manufacturing and construction firms that leverage global supply chains reported that input costs are increasing due to tariffs, which has added complexity to logistics and production and tracking. Large construction firms are planning for layoffs later in the year due to stalled projects.

NDAC members reported a decrease in foot traffic in retail stores, with small businesses struggling to stay afloat due to changing consumer behavior and purchasing habits. As mentioned in the CDIAC meeting, Canadian travel and general tourism across the district is also down, impacting small businesses in or adjacent to border communities and in the hospitality industry.

Participants reported that, despite recent softening, labor markets are tight across some industries, with health care and construction reporting the biggest challenges recruiting enough talent to meet demand. Wage inflation has decreased significantly, and many reported seeing lower turnover as the job market is cooling. Members discussed decreased immigration as a challenge for the hospitality, agriculture, information technology, construction, and manufacturing sectors.

Council members discussed automation and artificial intelligence. Large businesses reported making greater use of new technologies; small businesses expressed more uncertainty in how to implement them into their workflow. The expense and governance of adopting new technologies is a barrier for smaller businesses, which don’t have the time or resources to fully explore emerging technologies.

Helping monetary policy

Federal Open Market Committee members continue to work to bring inflation back to its 2 percent target while balancing a changing labor landscape. Insights from these two advisory groups provide real-time, ground-level perspectives to complement the hard data. These insights supplement existing data sources and ensure multiple perspectives are represented in the monetary policymaking process.