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Minneapolis: June 2019

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Beige Book Report: Minneapolis

June 5, 2019

Summary of Economic Activity
The Ninth District economy grew slightly overall since the last report. Employment grew modestly, while wage pressures rose moderately and price pressures were modest. The District economy saw growth in consumer spending and manufacturing. Commercial construction and real estate were mixed, while energy and mining were flat. Residential construction and real estate both fell, and agriculture remained weak.

Employment and Wages
Employment grew modestly since the last report, hampered by tight labor, with some modest signs of softness. In general, hiring demand remained healthy. Most staffing firms across the District reported somewhat higher job orders in April and early May compared with last year. An ad hoc survey of large Minnesota employers found that half were hiring to increase total employee head count. A similar survey of human resources professionals in Montana found that three in four firms were hiring, though a larger share was doing so to replace turnover rather than add personnel. April job openings in North Dakota and Minnesota were 6 percent higher and 3 percent higher, respectively, compared with a year ago. Minnesota also recently reported a record number of job vacancies. But tight labor was widely blamed for subduing stronger employment gains. A Minnesota staffing contact said, "We keep stirring the [labor pool] pot, and there's nothing left in it that wants to work." Every District state saw initial unemployment claims fall over the most recent six-week period (ending in early May) compared with the same period a year ago. Some softness was evident. April job openings in Montana, South Dakota, and Michigan's Upper Peninsula were all down 7 percent or more compared with a year earlier. Minnesota has added only 700 net jobs over the first four months of the year, and its unemployment rate has risen by one-tenth of a percentage point for four consecutive months.

Wage pressures rose moderately. A sizable majority of Minnesota and Montana firms responding to the aforementioned ad hoc polls said wages rose less than 3 percent over the past year, and wage expectations for the coming 12 months were slightly lower. However, a number of contacts noted significantly faster wage growth. North Dakota and Minnesota staffing firms said wages were up more than 7 percent over a year ago, though a western Wisconsin staffing contact said wage increases had "been a little cold recently." A Minnesota manufacturer increased hourly wages for welders from $18 to $22 to better compete for labor. A Minnesota health care firm saw 6 percent wage growth, with support staff receiving larger increases for retention.

Price pressures remained modest overall since the last report. Retailers responding to a survey reported that increases in final prices remained subdued overall; however, wholesale prices saw modestly higher rates of increase. The majority of respondents to a separate survey of large firms reported increases in nonlabor input costs of 3 percent or less over the past year. Contacts in manufacturing continued to note substantial increases in metals prices. Retail fuel prices in District states in late May were generally flat relative to the previous reporting period. Prices received by farmers in March increased from a year earlier for corn, wheat, hay, milk, cattle, and turkeys; prices for soybeans, eggs, chickens, and hogs decreased.

Consumer Spending
Consumer spending rose moderately since the last report. Gross sales in Wisconsin increased by almost 6 percent in April compared with a year earlier and by 5 percent in South Dakota. Sales of new vehicles in the western portion of the District were down slightly in April, but sales of used vehicles were notably higher. Industry data showed that first-quarter sales of camping, travel, and other recreational vehicles were down across the District compared with the previous year, as were sales of all-terrain and other powersport vehicles. However, a Montana banker noted that retailers of boats and other recreation-type vehicles were increasing their inventories, "anticipating strong spring and summer sales."

Tourism was reportedly slowed by a cool spring. However, a survey of Minnesota tourism businesses, released in mid-May, found that 36 percent of respondents expected their summer occupancy to rise compared with last year—twice the rate of those who expected declines. Hotel occupancy rates and revenue per average room in Minnesota were both higher in April compared with a year earlier. Lodging and accommodation tax collections in Montana were also higher over the same period.

Construction and Real Estate
Commercial construction was mixed since the last report. Contractors across the District generally reported strong project backlogs heading into summer. Construction also began on the $2 billion Southwest light rail line in Minneapolis-St. Paul. However, industry data showed that the value of total construction starts in April was down across the District compared with a year earlier. Commercial permitting in April was also lower in most of the District's larger markets, with the exception of Minneapolis-St. Paul. Tight labor may be playing a role in overall activity, as numerous construction contacts said they had turned down work due to the inability of finding necessary workers. Residential construction fell. Compared with a year earlier, April single-family permits were higher in Billings, Mont., and Rochester, Minn., but flat or lower in a majority of District locations.

Commercial real estate was mixed since the last report, as vacancy rates were rising slightly, due in some cases to new capacity coming online. In Minneapolis-St. Paul, a significant amount of new industrial space has seen strong leasing but also increased vacancy rates. Office space in the region has seen a similar increase in vacancies, and rental rates have declined slightly, according to sources. Retail vacancy rates also have ticked higher from the closure of numerous big-box and junior-box stores in Minneapolis-St. Paul. Residential real estate was lower. While a few regional markets saw higher April home sales compared with a year earlier, sales fell in most locations—including by 15 percent or more in Fargo, N.D., Sioux Falls, S.D., and Bozeman, Mont. Low inventories of homes for sale were a major reason for slower sales, according to sources. A Montana contact said, "The truth is we have lots of buyers with nothing to sell them."

District manufacturing activity increased moderately. A survey of Minnesota manufacturers released in May indicated strong expectations for 2019, with a solid majority expecting increased revenue and one-third planning to increase capital expenditures. An index of manufacturing conditions indicated increased activity in April compared with a month earlier in Minnesota and South Dakota, while activity in North Dakota was nearly flat. In contrast, several producers of capital equipment reported a decrease in orders recently. Contacts who produce inputs for residential construction also noted reduced demand.

Agriculture, Energy, and Natural Resources
District agricultural conditions weakened heading into the growing season. Heavy spring rains significantly delayed crop planting across the District, with contacts expressing concerns that some farmers might not be able to get a crop in the ground at all this year. Respondents to the Minneapolis Fed's first-quarter (April) survey of agricultural credit conditions indicated that farm income and capital spending decreased relative to a year earlier, with further declines expected for the coming three months. Activity in the energy and mining sectors was flat overall. Oil and gas drilling as of mid-May was down slightly since the last report. A gold mine in Montana announced it will shut down. District iron ore mines were operating at near capacity, though production for the year was down slightly due to harsh winter weather.