Beige Book Report: Minneapolis
April 15, 2020
Summary of Economic Activity
Economic activity in the Ninth District fell substantially since the last report due to the COVID-19 outbreak and pandemic response. Employment fell significantly, and wage pressures fell overall due to layoffs, while price pressures remained modest on balance. The District economy saw declines in consumer spending, tourism, services, construction and real estate, manufacturing, and energy. Agricultural conditions were steady at low levels.
Employment and Wages
Employment fell significantly since the last report. Conditions in February were quite positive, with continued strong hiring demand across much of the District. However, conditions changed dramatically over the course of March with the spread of the coronavirus and related government actions for sheltering in place and the forced closure of many nonessential businesses. Applications for unemployment benefits in March easily hit record levels among all District states. Over the last two full weeks in March, more than 225,000 workers in Minnesota filed for unemployment, roughly 30 times the level seen over the same period in 2019. Numerous surveys by the Minneapolis Fed and other external organizations found that a wide swath of firms were laying off workers. Two Districtwide surveys of firms by the Minneapolis Fed (one in mid-March, one in early April) found that layoffs were occurring across all sectors, though with some variation. Cutbacks were highest among firms in food, accommodation, entertainment, health care, and retail sectors, and lowest in banking and finance, followed by manufacturing and professional and technical fields. Reported workforce cutbacks were seen among firms of all sizes, with slightly higher percentages among small firms. Mass layoff events tracked by District states rose, though some states track only those related to permanent closure, of which there were still comparatively few. Information from Minnesota, Montana, and Wisconsin, which track a broader set of layoffs, suggested more widespread layoffs, with the large majority considered temporary by employers.
Wage pressure fell overall due to the unprecedented increase in worker layoffs. Among firms cutting workers, there were also some reports of wage freezes and cuts for remaining workers. For certain industries seeing strong demand—grocery chains, manufacturers of critical equipment—there were isolated reports of wage increases to meet customer demand and to compensate workers for greater health risks.
Prices
Price pressures were modest on balance since the previous report, with the notable exception of surge pricing for some consumer goods in high demand due to the pandemic. A large majority of respondents to a late-March survey of District firms reported unchanged or only slightly increased prices for inputs and in the prices charged for their products or services relative to a year earlier. Manufacturing contacts reported that prices for raw materials such as steel and plastic were stable. Retail fuel prices fell briskly in District states relative to the previous reporting period. Prices received by farmers in February increased from a year earlier for corn, soybeans, dry beans, lentils, milk, hogs, and turkeys, while prices for wheat, chickpeas, canola, hay, cattle, chickens, and eggs decreased.
Consumer Spending
Consumer spending declined significantly since the last report, due to coronavirus concerns and related stay-in-place guidelines from federal and state authorities that shut down many consumer-oriented businesses, either directly or indirectly. Surveys of tourism and hospitality firms in Minnesota and Montana showed notable virus-related declines in sales already in early March, and worsening by month's end. Expectations from Minnesota tourism-based businesses were for conditions to decline further in April, which is typically the start of the busy season for many firms. Hotel occupancy has seen a steep decline, plunging to 17 percent in Minneapolis-St. Paul at the end of March. Airline traffic in the District has seen a similarly large drop in passenger demand in March, with some airports reporting declines of 80 percent or more.
Services
Activity in the professional services sector decreased, though the severity varied widely. A quarter of services firms responding to a survey reported no impact on March sales, though nearly all of the remainder saw modest to severe decreases. The transportation sector saw a similarly mixed impact, with a majority of trucking firms surveyed reporting a decline in activity due to closures of clients, while others saw demand surge from the grocery and other sectors.
Construction and Real Estate
Commercial construction fell since the last report, though some underlying optimism remained. A survey of Minnesota construction firms by the Minneapolis Fed found that a significant number of firms had seen some delays in existing or expected projects. The majority of delays stemmed from concern by owners about project viability given the virus outbreak. But delays also stemmed from supply-chain disruptions, labor shortages, and the lack of availability of some government workers—due to shelter-in-place orders—for permits, inspections, and other approvals necessary to keep projects moving. The overall outlook of the industry has shifted negatively, the result of both known delays and a large amount of uncertainty about future work. However, the designation of the industry as essential in most District states was perceived as a boost, as was the coming of warmer weather so more work could take place outside of confined spaces. Residential construction was modestly lower. In Minneapolis-St. Paul, March single-family permits were higher compared with a year earlier. However, the aforementioned construction survey found that a high share of home builders were experiencing project delays.
Commercial real estate was lower since the last report. Significant layoffs and slower overall activity in March was expected to continue into the coming months, creating upward pressure on vacancy rates and downward pressure on leasing costs across all real estate categories, but particularly for retail and office space. However, the swiftness of changing market conditions made it hard to discern the full effects across different property categories and geographic regions. Residential real estate was modestly lower, but varied geographically. Home sales in rural parts of Minnesota are reportedly "very busy—as if there was no pandemic in place," said an industry contact. At the same time, Minneapolis-St. Paul and other metro centers in the state were seeing "significantly reduced activity."
Manufacturing
Manufacturing activity in the District contracted sharply relative to the last report. An index of manufacturing conditions indicated substantially decreased activity in March compared with a month earlier in Minnesota and the Dakotas; production and employment in particular fell sharply. A majority of manufacturers responding to a large survey of District firms conducted in early April reported decreased sales in March compared with the previous months, with more than a third reporting declines of 25 percent or greater. Impacts of the pandemic and response on manufacturers varied by market segment. Producers of construction materials reported disruptions in demand as construction activity was curtailed in some regions. However, processed food manufacturers reported brisk increases in demand for many products, as did suppliers of inputs to that industry.
Agriculture, Energy, and Natural Resources
District agricultural conditions were steady at low levels. Some contacts described the COVID-19 pandemic as a potential "perfect storm" for an already struggling rural economy. Early reports suggested that District farmers intended to plant less wheat and more corn and substantially more soybean acres this year. District oil and gas exploration activity fell moderately from the previous report. The number of active drilling rigs as of late March was down slightly from the last report, but contacts in the oil-producing region of the District reported layoffs in oil fields and substantial reductions in capital spending. Contacts in nonferrous mining reported that a slowdown in international demand due to the COVID-19 outbreak in China may have abated somewhat in recent weeks.