Beige Book Report: Minneapolis
March 02, 2016
The Ninth District economy grew modestly since the last report. Growth was noted in construction and real estate, tourism, and manufacturing. Consumer spending and professional services were mixed, while energy, mining, and agriculture were down. Labor markets remained tight, while wage pressures were moderate and price pressures remained low.
Consumer Spending and Tourism
Consumer spending was mixed since the last report. A mall in Michigan's Upper Peninsula was struggling after the exit of some of the retailers, while a mall in Minot, N.D., announced that several national chain stores will be opening there. A mall in the Minneapolis-St. Paul area reported that sales were up 2 percent from the previous report, which reflected the post-holiday "gift card effect." As the U.S. dollar continued to remain strong relative to the Canadian dollar, border crossings and related retail sales decreased, according to a retailer in Whitefish, Mont. A coffee store chain in Minnesota reported that stores saw a 9 percent jump in sales from a year ago, even though in-store traffic softened after the holidays; consumers spent an additional 50 cents per order on average over this time last year. In Eau Claire, Wis., a retail jeweler reported "a rough January that was even more off than usual after the holidays," but that February was starting off stronger. Sales of trucks were off by 20 percent in eastern North Dakota since the last report, according to an auto dealership; new and used car sales there were up slightly.
Tourism conditions strengthened since the previous report. A ski resort manager in northern Minnesota stated that the ski season started slowly in December, but has picked up in January and February. "Revenue in January was the highest it's been since 2010," she reported. Tourism activity was solid in the national parks of Montana and South Dakota's Black Hills, and it carried into the winter months. A state tourism official in South Dakota stated that sales were "tremendous," adding 6 percent to the state's economy. Duluth, Minn., reported strong tourism industry growth and saw an 8 percent increase in food and beverage sales from the previous year.
Construction and Real Estate
Commercial construction continued to be robust since the last report. Significant new industrial space was under construction in Minneapolis-St. Paul, along with continued strong retail and office activity. January commercial permit values were up in Billings, Mont., and Sioux Falls, S.D. In a recent survey, Minnesota contractors expected dollar volumes to be higher in 2016, especially for multifamily and office developments. Residential construction rose moderately. The number of permitted housing units in January grew from a year earlier in Minneapolis-St. Paul, Billings, and Rochester, Minn.; permitted units were flat in Rapid City, S.D., over the same period, but permit value was up.
Commercial real estate activity was strong since the last report. Fargo, N.D., has seen "a lot of activity," according to a local source. In Minneapolis-St. Paul, property sales have been "especially strong" to start the year with some big trades in downtown Minneapolis, said an industry source, while vacancy rates were nearing or below prerecession levels despite significant new construction. St. Paul saw more net absorption in the last year than in the previous 10 years combined, according to an industry source. Residential real estate activity was moderate. January sales were 18 percent higher than a year earlier in Minneapolis-St. Paul, but down 9 percent in Sioux Falls. Local sources in the Butte and Flathead Valley regions of Montana reported strong January activity. However, low inventories of for-sale homes were negatively affecting sales across the District.
Services
Activity among professional services firms was mixed. A design firm in Minneapolis reported strong activity at the start of the year and a need for more talent to keep up with demand. Utility services spending in Wisconsin increased almost 4 percent in 2015 compared with a year earlier. However, a railroad recently announced plans to decrease capital expenditures by 25 percent from 2015, which reflected the drop in oil and coal freight. A railroad executive stated that even though regional shipments were down, online orders increased 5 percent in 2015.
Manufacturing
Manufacturing rose slightly since the last report. An index of manufacturing activity released by Creighton University increased to levels indicating expansion in January in Minnesota and South Dakota; the index increased in value from a month earlier in North Dakota but remained at contractionary levels. A survey of Montana manufacturers indicated that they expected higher sales for the coming year. A medical device maker in Minnesota announced a facility expansion. However, an electronics producer and a metal fabricator in Minnesota were cutting capital expenditures due to lower demand.
Energy and Mining
The slowdown in the energy and mining sectors continued. The number of active drilling rigs as of early February in the District fell to its lowest level since 2009. In North Dakota, state agencies were ordered to slash their budgets by 4 percent due to the reduction in oil tax revenue. Output at Minnesota iron ore mines was expected to decrease substantially in 2016, after falling by 35 percent in 2015. Montana coal mines saw shipments fall last year and were expecting to ship less coal in the coming year due to weak international demand. Meanwhile, a Minnesota oil refinery announced plans to invest $750 million in upgrades over three years. An electrical utility said it will accelerate plans to expand its wind energy capacity over the next several years.
Agriculture
District agricultural conditions remained weak. A majority of respondents to the Minneapolis Fed's fourth quarter (January) survey of agricultural credit conditions reported that farm incomes and capital spending fell in the previous three months compared with a year earlier. An animal feed dealer reported that after several years of strong sales, its revenue outlook was flat due to recent declines in the prices of livestock. Prices received by farmers fell in December from a year earlier for corn, wheat, soybeans, hay, hogs, cattle, chickens, eggs, and milk; prices for turkeys increased from a year earlier.
Employment, Wages, and Prices
Labor markets remained tight, but more softness was noted since the last report. Several iron ore and coal mines, along with railroad companies, announced layoffs related to slack demand. In Minnesota, two manufacturers laid off 185 and 100 workers, respectively; heavy equipment makers eliminated more than 200 jobs in northern Wisconsin and 70 in eastern North Dakota. At the same time, a South Dakota manufacturer announced expansion plans along with up to 100 new jobs; a new urea fertilizer plant in North Dakota hired 400 construction workers. A Wisconsin window manufacturer was seeing "crazy-busy hiring," according to a local source. Employers continued to struggle finding skilled labor. A Minnesota firm had 50 to 60 openings, many in accounting, "and we can't fill them." Employer interest in job fairs for college graduates has been reportedly strong.
Wage pressures were moderate. A Wisconsin staffing firm said that wages for some jobs were still increasing, "but seems to have slowed." Three District cities reported pay raises of 3 percent or more for municipal workers; in one city, workers received their largest raise in five years. A new contract with a large health care union in Minnesota included 2 percent raises for three years. In contrast, a survey of Minneapolis-St. Paul technology workers found that wages rose 9 percent from a year earlier. Price pressures remained low. A Montana utility reported that heating bills were down 14 percent over the same period a year ago due to warmer weather and lower prices. Nonresidential building costs in Minneapolis-St. Paul were projected to rise about 3 percent in 2016, roughly on par with their historical average, according to an industry estimate.