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Minneapolis: January 2020

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Beige Book Report: Minneapolis

January 15, 2020

Summary of Economic Activity
The Ninth District economy grew at a modest pace since the last report. Employment was mixed across the region, while wage pressures were moderate overall and price pressures remained modest. The District economy saw growth in consumer spending, commercial construction and real estate, residential construction, and energy. Manufacturing and energy activity was flat. Residential real estate fell slightly, while agricultural conditions remained weak.

Employment and Wages
Employment was mixed since the last report. Minnesota and Wisconsin both saw seasonally adjusted employment fall in November, while other District states saw slight-to-moderate gains. Job postings rose by double digits in the Dakotas, but were lower in Minnesota and Michigan's Upper Peninsula. Unemployment insurance initial claims were higher overall during the most recent six-week period (through mid-December) compared with the same period a year earlier, with claims increasing notably in Minnesota and Wisconsin, but falling in the Dakotas. A poll of Minnesota staffing firms by the Minneapolis Fed found that recent job orders and hours booked were modestly higher; unfilled job orders were also higher due to tight labor supply. Staffing contacts in eastern North Dakota and Michigan's U.P. also said job orders were higher. A Montana staffing contact said job orders were lower, but the company has also been more selective. "We are no longer writing job orders we know we can't fill." A survey of employer hiring sentiment found more optimism across the District for the first quarter of 2020 compared with the same survey a year ago. However, two other regional hiring indexes that include Minnesota and the Dakotas had softer outlooks, including one that suggested contraction in manufacturing employment. A poll by the Minneapolis Fed of greater Minnesota firms found generally soft hiring activity, particularly compared with a similar poll in mid-2019.

Wage pressures were moderate overall, with considerable variation. Fewer than half of staffing firms polled by the Minneapolis Fed said wages grew by more than 3 percent over the past 12 months, though more than 60 percent said they expected wage increases above 3 percent over the coming year. Close to 70 percent of firms in the aforementioned greater Minnesota poll said wages grew by less than 3 percent over the past year, with future wage expectations only slightly higher. However, a contact in Michigan's U.P. said housekeeping positions have recently seen wage increases of 10 percent or more, while a call center and manufacturer there increased wages by more than 5 percent. A construction contact said workers were getting recruited regularly, and a 3 percent raise "isn't good enough" to retain good employees. In contrast, a manufacturer of hardwood products with plants in Wisconsin that has been "significantly affected" by tariffs cut wages by 10 percent.

Price pressures remained modest since the previous report. Respondents to a recent survey of Minnesota economic development officials reported that retail prices among their business contacts were mostly little changed over the past year; however, the outlook for the coming year was for prices to increase slightly faster than normal. Retail fuel prices as of early January were slightly lower in most areas of the District relative to the previous reporting period. Prices received by farmers in November increased from a year earlier for corn, soybeans, dry beans, milk, hogs, eggs, and turkeys, while cattle prices were unchanged and prices for wheat, hay, and chickens decreased.

Consumer Spending
Consumer spending increased moderately since the last report. Most reports on holiday shopping and other spending were positive. Sources in major markets in Montana and the Dakotas reported good foot traffic in stores. One source noted that a shorter holiday shopping season this year provided steadier business overall. But firms in greater Minnesota reported flat holiday sales. Gross sales in South Dakota saw a healthy bump in November compared with a year earlier, and the state's gambling handle also increased by almost 4 percent. Sales tax collections in Minnesota grew by more than 3 percent in November, but gross sales in Wisconsin saw a 4 percent decline. Poor snow conditions across much of Montana meant slower activity early in the ski season. Nevertheless, the broader winter skiing economy was reportedly "booming" in Montana, with resorts making significant capital investments in new lifts, accommodations, and other amenities. However, Snow conditions in northern Minnesota and Wisconsin were reportedly good in December, with "quite a few snowmobilers out on the trails" in some locations. Hotel occupancy rates and revenue per room in Minnesota rose slightly in November.

Construction and Real Estate
Commercial construction grew modestly since the last report. Construction spending saw a notable uptick in November compared with a year earlier, according to an industry database, with increases seen in every District state except Wisconsin. A second industry database showed that the number of new and active projects over the most recent six-week period (through mid-December) were notably higher than during the same period a year ago. Commercial permitting in the District's larger markets in November saw a modest increase overall compared with a year earlier, with Rapid City and Sioux Falls, S.D., continuing to see strong activity overall. Individual contacts have generally reported strong backlogs. A Minnesota contact said commercial construction was "bouncing along the top," and while there was some expectation of a possible decrease in 2020, "the market is still operating at high levels." Residential construction grew modestly overall. The value of November residential permits was widely higher, with the notable exception of Minneapolis-St. Paul, which broke a string of months with robust single- and multifamily permitting.

Commercial real estate was modestly higher. Vacancy rates in most subsectors in Minneapolis-St. Paul remained stable. Despite persistent new construction of multifamily units, continued low vacancy rates have led to rising rents—roughly 5 percent in the past 12 months, according to one source. Residential real estate fell slightly overall, with mixed sales activity across the District in November compared with a year earlier. Northern and western counties of Wisconsin located in the District saw higher sales, and Great Falls, Mont., saw particularly robust activity. However, sales in Minnesota were largely flat, while small declines were seen in Bozeman and Missoula, Mont., and Sioux Falls, S.D. Fargo and Grand Forks, N.D., experienced larger declines.

District manufacturing activity was flat on balance from the last report. Preliminary results from a survey of Ninth District manufacturers indicated that firms generally reported a slight decrease in orders, production, and investment over the past year. However, expectations for the coming year were generally positive. An index of manufacturing conditions indicated increased activity in December compared with a month earlier in South Dakota, while activity was nearly flat in Minnesota and decreased in North Dakota. In contrast, a Montana staffing contact reported that manufacturers were increasing their hiring late in the year. Producers of construction inputs also reported solid recent sales.

Agriculture, Energy, and Natural Resources
District agricultural conditions remained weak. Industry contacts reported that trade conflicts combined with poor weather put continued pressure on farm households, with federal aid payments and insurance the only source of relief for many producers. One contact called 2019 "the mother of all disasters." In contrast, a dairy industry source reported that the sector has begun to rebound, and producers were becoming more bullish; Montana wheat producers also had a strong year. District oil and gas exploration activity was steady since the previous report. The number of active drilling rigs as of early January fell slightly from a month earlier, but the most recent figures (as of October) indicated that oil production hit a new record.