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Beige Book Report: Minneapolis

April 21, 2004

From late February through mid-April, the overall Ninth District economy demonstrated solid growth. Residential real estate, manufacturing, agriculture, consumer spending, mining, energy and tourism were up, while commercial real estate activity was slow. District employment grew slightly. Wage increases and overall price increases for consumer goods were modest; however, significant increases were noted in a number of manufacturing and construction inputs and commodities.

Construction and Real Estate
Commercial construction was generally slow. Contracts awarded for large construction projects in Minnesota and the Dakotas were down 1 percent for the three-month period ended in February compared with a year ago. The value of permits for commercial construction projects for the first three months of 2004 in Billings, Mont., were down compared with the same period last year, but the number of permits was up slightly. With recent vacancy rates at about 20 percent, rental rates in several downtown Minneapolis office buildings are more than 15 percent lower than five years ago. In contrast, a company plans to expand into as much as 100,000 square feet of additional office space in downtown Minneapolis, the largest office space absorption in some time, according to a commercial real estate company. Furthermore, a real estate developer noted increased activity in industrial building on speculation in the Minneapolis-St. Paul area.

In contrast to commercial construction, residential real estate activity generally grew. Home sales activity was brisk in February and March in the Minneapolis-St. Paul area, according to a representative of a realtors association. Home closings increased almost 2 percent in Billings, Mont., during February compared with a year ago. Housing units authorized in district states; however, were down 4 percent for the three-month period ended in February compared with a year ago. In addition, recent apartment vacancy rates in Sioux Falls, S.D., reached 10 percent.

Consumer Spending and Tourism
Overall consumer spending increased moderately. A major Minneapolis-based retailer reported same-store sales during March were 7 percent higher than a year ago. Traffic in February and March was up about 6 percent at a South Dakota mall compared with last year. February same-store sales at a North Dakota mall were up 2 percent to 3 percent compared with a year ago. Two Minneapolis area mall managers reported that same-store sales were up about 10 percent for February compared with a year ago and reported optimism for spring and summer sales.

Auto sales were up in February after a very slow January, while sales in March were strong, according to a Minnesota auto dealer.

Winter tourism finished the year sturdily in many parts of the district. Snowmobiling and cross country skiing activity was well above year-ago levels and ran late into the season in northwestern Wisconsin, according to a chamber of commerce official. Convention bookings in Duluth, Minn., were recently reported up by 25 percent in 2004. However, winter use of Yellowstone National Park was down 18 percent, primarily due to issues regarding snowmobile regulations. Tourism officials and resort owners are optimistic for a healthy summer season in northern Minnesota.

Manufacturing
Manufacturing activity increased. A March survey of purchasing managers by Creighton University (Omaha, Neb.) indicated robust growth in manufacturing activity in the Dakotas and Minnesota. Several Minnesota manufacturers noted strong demand and have added work shifts, employees and machines. A new beef processing plant is planned for South Dakota. A hydraulic machinery fabricator in western Wisconsin plans a major expansion. In Montana, a linerboard facility, formerly at risk of closing, will remain open due to increased demand. However, in Minnesota, an industrial baking equipment manufacturer reduced production due to low orders, and an ammunition plant will shut down and move production to a facility outside the district. In western Wisconsin, an industrial automation company will close a plant and move production to other facilities in the United States.

Energy and Mining
Activity in the energy and mining sectors increased. Late March district oil and natural gas exploration and production amounts increased from early February levels. In addition, progress on several wind-energy and other energy projects has accelerated. Meanwhile, prices for most major district mining commodities remain strong. District iron ore mines continue to produce at capacity and "can't make pellets fast enough," said an iron mining official. In Montana a mining official noted that the higher mining commodity prices "have increased the health of the existing companies, but as yet we have not seen this transition into significant exploration."

Agriculture
Agricultural conditions are positive. Prices remained robust for most district agricultural commodities. The U.S. Department of Agriculture reported that mid-March prices for livestock, corn and soybeans increased significantly from February. Dairy producers in Wisconsin expected record prices for their milk in March. District farmers intend to plant more acres of soybeans and fewer acres of wheat in 2004 compared with 2003. Even though the western part of Montana still faces extreme drought, late winter and early spring storms reduced drought pressures across most of the district. Calving and lambing are on schedule. About 40 percent of the winter wheat crop in Montana and South Dakota is rated good or excellent.

Employment, Wages and Prices
Employment increased slightly since the last report with signs of future increases. Nonfarm employment increased 0.9 percent in February compared with a year earlier, the fastest year-over-year rate of growth since January 2001. In South Dakota, a trailer manufacturer plans to create up to 35 jobs beginning this spring and the aforementioned beef processing plant is expected to eventually create 300 jobs. A temporary staffing agency survey showed that 32 percent of employers in Minneapolis-St. Paul expect to hire more workers during the second quarter of 2004 and 1 percent expect to reduce payrolls. Last year 18 percent expected to increase payrolls and 7 percent planned reductions. A nursing shortage was reported in several areas of the district.

In contrast, in Minnesota an energy company recently announced plans to reduce staff by 100 employees at its headquarters, and a retirement services company will layoff 100 employees due to consolidation. Recent announcements of closings and lay-offs in Eau Claire, Wis., will likely result in about 600 job losses.

Overall wage increases were modest, while health benefits remained a key issue in contract disputes. During March and early April, over 2,000 bus workers were on strike in the Minneapolis-St. Paul area, primarily over retiree health benefits. Meanwhile, employment officials noted upward pressure on wages in Bozeman, Mont., due to the low unemployment rate (2.9 percent).

Overall price increases for consumer goods were modest, while significant increases were noted in a number of manufacturing and construction inputs and commodities. Helena bank directors noted that recent price increases were generally moderate. The Billings, Mont., area consumer price index increased 0.3 percent in February from January. Meanwhile, news reports and bank directors noted significant price increases in several manufacturing and building materials, including steel, copper, aluminum and lumber. Gasoline prices in Minnesota for the week of March 29 were up 13 percent from a year ago. Prices received by North Dakota farmers for agricultural products were up 10 percent in March compared with the same month last year.