Beige Book Report: Minneapolis
January 13, 2016
The Ninth District economy grew modestly since the last report. Increased activity was noted in consumer spending, commercial construction and real estate, residential construction, and professional services. Tourism and residential real estate were mixed, while manufacturing, energy, mining, and agriculture were down. Labor markets tightened, while wage pressures were moderate and price pressures remained low.
Consumer Spending and Tourism
Consumer spending was strong. A North Dakota mall manager reported that Black Friday sales were up by double digits from this time last year, which was better than expected. A major retailer reported strong sales starting Black Friday weekend that continued into December; holiday sales online were reported as "record breaking." A wholesaler of curricular materials reported that business was up 6 percent. An auto dealer contact in Minnesota reported that car sales were "very good" and back to prerecession numbers.
Tourism was mixed in the District. Mild weather extended the tourism season in some areas, but stalled winter tourism activity. At national parks in Montana, visitor numbers were record breaking and remained strong through December, which sources attributed to mild weather and lower fuel prices. A lack of snowfall in Michigan's Upper Peninsula and northern Wisconsin contributed to 100 percent cancellation rates at some lodges and ski venues. Some small hotels were deciding not to open this season, having missed out on the usual holiday peak in business. A tourism official in the Upper Peninsula said, "Snow is our only product this time of year, and we're just out of it."
Construction and Real Estate
Commercial construction was strong since the last report. "Very cooperative weather" allowed contractors to complete more projects than normal, said an industry source. Activity in Minneapolis was steady at very high levels and was expected to continue in 2016. Missoula, Mont., witnessed a record year with several major construction projects under way and others in planning stages. Commercial permitting in Billings, Mont., and Bismarck, N.D., remained strong through November. Residential construction rose moderately. November and December housing permits in Minneapolis-St. Paul were up from a year earlier, and home construction "remains strong" in Mankato, Minn., said a local source. But permits and permit values were down since the last report in Rapid City, S.D., and Billings compared with a year earlier. Multifamily activity continued to be strong in Minneapolis-St. Paul, Billings, and Rochester, Minn., but fell in Bismarck in November.
Commercial real estate activity was moderate to strong since the last report. Retail, office, and industrial vacancies in Minneapolis-St. Paul have been falling and rents have been rising, according to multiple industry reports. In northwestern Montana, commercial vacancies "have mostly disappeared," with rates stabilizing at about 5 percent, said a local source, while the Rapid City market "has been extremely active these last couple of weeks of the year." Residential real estate was mixed. Reports across the District showed as many sales decreases as increases in October and November compared with a year earlier, though most markets saw a strong 2015 overall. Numerous sources said low inventories, particularly for lower-priced homes, have held back home sales. Median home prices in November were widely higher year-over-year, rising 7 percent in the Twin Cities.
Services
Growth in the professional services sector was moderate to strong. The head of a commercial design firm in Rochester characterized business as "revving up and a little frenetic," attributing the increased activity to "pent-up demand for renovations." North Dakota services firms continued to see demand despite slower activity in oil fields; an engineering firm in Bismarck expanded its services across the state. Architecture firms in Sioux Falls and Grand Forks, N.D., experienced increases in profits. A national freight service company in Minnesota reported that annual volumes were up slightly and that "e-commerce sales are driving most activity."
Manufacturing
District manufacturing decreased since the last report. An index of manufacturing activity released by Creighton University remained at levels indicating contraction in December in Minnesota and the Dakotas. However, according to preliminary results from the Minneapolis Fed's 2016 survey of manufacturers, respondents expected orders, investment, and profits to increase in the coming year. An aircraft producer was expanding in preparation for the launch of a new product.
Energy and Mining
Activity in the energy sector remained slow. The number of active oil and gas drilling rigs in the District at the end of December fell from a month earlier to its lowest level since late-2009; oil production barely changed in October from the previous month and remained below the peak it reached in early 2015. Meanwhile, major upgrades began on a Montana oil refinery, which will take place over the next year. An ethanol plant in Minnesota announced a large expansion. Mining activity continued to decline. Iron ore shipments on the Great Lakes fell 17 percent in November from a year earlier. However, a quartzite mine reported that demand from construction was solid.
Agriculture
District agricultural conditions softened since the last report. Crop prices remained low, and farm incomes for 2015 were expected to be at their lowest levels in 10 years. District sugar beet growers were concerned about reduced demand, as a major candy producer has switched to cane sugar due to consumer concerns about genetically modified ingredients. Several District cattle producers reported that a sharp drop in prices late in the year substantially downgraded their financial outlook. Prices received by farmers fell in November compared with a year earlier for wheat, soybeans, hay, milk, chickens, hogs, and cattle; corn prices were unchanged, while prices increased for eggs and turkeys.
Employment, Wages, and Prices
Labor markets tightened since the last report, with some isolated softness. In eastern North Dakota, two manufacturers announced in late November that they were both looking to add up to 100 workers in the coming year. Most stores were hiring during the holiday shopping season at outlet malls in Minneapolis-St. Paul. Staffing firms in Minneapolis-St. Paul and western Wisconsin said mid-December hiring was surprisingly strong. There were also areas of soft employment. Online job openings with Job Service North Dakota continued to fall since the last report. In December, mines in Montana laid off nearly 200 workers. Preliminary results from the Minneapolis Fed's 2016 annual Business Outlook Poll indicated that District firms believed employment would increase in their communities in the coming year, though they were slightly less optimistic about hiring at their own firms.
Overall, wage pressures were moderate. The majority of Business Outlook Poll respondents expected wages to rise by 2 percent to 3 percent in the coming year. A major retailer announced that it was raising base wages for 2,500 store workers in South Dakota. A Minneapolis-St. Paul staffing source said high health care costs were pushing up total compensation costs, but limiting wage increases to about 3 percent. However, an eastern North Dakota manufacturer said that it was raising wages by 10 percent to attract and expand its workforce. Price pressures overall remained low. The majority of Outlook Poll respondents expected inflation over the coming year of 2 percent or slightly lower. Input prices "are flat," said a North Dakota engineering firm, and construction bid prices in that state have been lower because of a slower state economy and greater competition for projects. A mild District winter and cheap fuel prices were expected to reduce home heating costs by 30 percent or more.