Beige Book Report: Minneapolis
December 2, 2015
The Ninth District economy grew moderately overall since the last report. Increased activity was noted in consumer spending, tourism, commercial construction and real estate, residential real estate, and professional services. Agriculture and energy were mixed, while manufacturing, residential construction, and mining were down. Labor markets tightened overall, while wage pressures were modest and price pressures were low.
Consumer Spending and Tourism
Consumer spending was moderate. At a Minneapolis-St. Paul mall, analysts report that "the appetite for luxury is growing," and a discount retailer noted "solid" third-quarter profits. In Helena, Mont., several new dining options have opened, including a brewery, a coffee shop, and a restaurant. A national telecommunications vendor expanded its retail space in Minneapolis-St. Paul in recent months to enhance the shopping experience. An auto dealer in Montana reported that "sales in September and October were exceptional."
Tourism was moderate; favorable weather was reported as a factor in sustained tourism interest in the fall. A national park in Montana surpassed the all-time annual record for visitation for the second year in a row, despite summer forest fires. Hotel occupancy rates in Deadwood, S.D., jumped by 6 percent in September from the previous month. In the Upper Peninsula of Michigan, tourism sales were "very good," according to a tourism official; assessed fees on hotel rooms were up 8 percent since the last reporting period and up 15 percent from the same period last year.
Construction and Real Estate
Commercial construction expanded at a strong pace since the last report. Sioux Falls, S.D., and Billings, Mont., have seen strong commercial permitting this year, including this fall. A commercial contractor in Rochester, Minn., said that it has large work backlogs, both locally and statewide. For residential construction, single-family permits have been flat to down since the last report in Minneapolis-St. Paul, Billings, Sioux Falls, and Rochester, but up in Fargo, N.D. Multifamily permitting has slowed in many places, with exceptions like Rochester and Minnetonka, Minn.
Commercial real estate activity grew moderately since the last report. Minneapolis-St. Paul retail, office, and industrial space all saw positive net absorption, along with lower vacancy rates. In the St. Paul downtown market, office occupancy has risen to levels last seen in 2001. Numerous sources in Rochester reported strong activity, especially downtown. Residential real estate activity was also moderate. Closed sales were strong in Minneapolis-St. Paul this fall, but flattened in October, with median sale prices up 5 percent over the previous year. In Sioux Falls median October sale prices rose almost 6 percent from a year earlier. Activity slowed in Missoula, Mont., though prices there continued to rise; third quarter and early fourth quarter sales in Bozeman, Mont., have been flat compared with a year earlier. Apartment rents were reportedly rising in most markets, including by 5 percent in Minneapolis in the third quarter over a year earlier.
Services
Professional services growth was moderate to strong. A tele-health services firm opened in Sioux Falls in recent weeks. A health information management and records retrieval business in South Dakota was expanding operations. An architecture firm in Wisconsin grew during the past three months and reported "enough financial health that higher wages can be absorbed." A Wisconsin mental- and behavioral-health services company was expanding to Minneapolis-St. Paul due to growing demand. Revenue was up at staffing offices in Wisconsin, some of which was the result of high labor turnover for clients. A staffing executive there said, "Sales will not be sustained if there is not greater participation in the labor market."
Manufacturing
District manufacturing activity decreased slightly since the previous report. An index of manufacturing activity released by Creighton University fell to levels indicating contraction in October in Minnesota and the Dakotas. Several manufacturers reported weaker overseas sales due to slower demand and exchange rate fluctuations, including a producer of paint-spraying equipment and a consumer products maker. Contacts also pointed to the continued decline in demand for agricultural and mining equipment as a source of weakness. In contrast, demand from the commercial and residential construction sectors was solid. A producer of laminated timber announced plans in October for a major new facility in Montana, and an ammunition maker announced in early November that it will open a new plant in South Dakota.
Energy and Mining
Activity in the energy sector was mixed. Oil and gas exploration activity in North Dakota and Montana declined further since the previous report; oil production was down slightly from its peak earlier this year. Meanwhile, a firm announced plans for as many as 10 solar energy farms in Montana. A dozen wind energy farms were under construction across the District, though none have begun operations yet this year. Mining activity continued to decline. A major iron ore facility in northern Minnesota announced that it will idle for an indefinite period, and a smaller operation shut down. Iron ore shipments on the Great Lakes fell 20 percent in September from a year earlier. Nonferrous mining operations in the District have been negatively impacted by falling metals prices, weak international demand, and the increased exchange value of the dollar.
Agriculture
District agricultural conditions were mixed overall since the last report. Farmers were buoyed by favorable weather during harvests, which were completed well ahead of the typical schedule. Corn and soybean production hit new records in some District states; sugar beet producers in Minnesota and North Dakota also saw record yields and good quality. However, crop prices remained low and farm incomes were expected to be weak. According to the Minneapolis Fed's third quarter (October) survey of agricultural credit conditions, 83 percent of lenders surveyed reported that incomes fell from a year earlier, and 79 percent expect them to be down in the fourth quarter. Prices received by farmers fell in September compared with a year earlier for wheat, soybeans, hay, milk, chickens, hogs, and cattle; prices increased for corn, eggs, and turkeys.
Employment, Wages, and Prices
Labor markets tightened overall, but softened in some places and sectors. Two recent Minneapolis Fed ad hoc surveys showed that employers overall expect to add workers in the coming year. A media company announced in November that it plans to add 400 jobs in St. Paul next year. Across the District, numerous sectors reported difficulty finding workers. A staffing services executive in southeastern Minnesota noted that labor tightness had shifted from skilled labor to general labor. But employment was soft in some areas. In North Dakota, October online job openings with Job Service North Dakota dropped 4 percent over the previous month and 20 percent from a year earlier. In the past month, silica sand mines in western Wisconsin laid off workers, and two Minnesota iron ore operations announced total jobs cuts of about 650 workers.
Overall, wage pressures were modest. Ad hoc surveys suggested that a majority of District employers expect wage increases between 2 percent and 3 percent in the coming year, though larger raises were being reported for certain sectors and workers. A South Dakota firm noted that it was seeing "lots of wage pressure on the low-end, entry level." A Minnesota staffing firm expected wages to continue rising for its clients "but not as much as this year."
Price pressures overall were low, with certain exceptions. A Minnesota electronics manufacturer expected little change in input prices for 2016, and an information technology executive expected "more of the same" in terms of low inflation, especially with cut-rate energy costs. Average propane prices for October and November were roughly one-third lower than for the same time last year. Health care premiums for many employers and individuals were expected to increase considerably in all District states. Several Rochester-area businesses reported premium increases between 35 percent and 50 percent.