Beige Book Report: Minneapolis
May 27, 2020
Summary of Economic Activity
Ninth District economic activity declined further after falling substantially in the previous report, due to the COVID-19 pandemic and response. Employment fell significantly, and wage pressures fell overall due to the steep decline in activity, while price pressures remained modest on balance. The District economy saw declines in consumer spending, tourism, services, construction and real estate, manufacturing, energy, mining, and agriculture.
Employment and Wages
Employment fell significantly since the last report. Two surveys in May by the Minneapolis Fed found that April employment fell among a significant number of firms, and many expected additional staffing cuts by the end of the month. Although initial unemployment claims have fallen significantly in recent weeks, they remain much higher than normal levels. Mass layoff events have slowed after a deluge in April. For example, there were more than 60 mass layoff announcements in Wisconsin in April, many involving multiple locations. Through mid-May, there have been only a handful of such announcements. Mass layoffs in Minnesota have followed a similar pattern. April job postings fell steeply in Minnesota and North Dakota. However, states that track job postings every week are showing evidence of a recent bounce-back. After dropping from mid-March through mid-April, job postings in South Dakota and Montana jumped significantly in late April and early May. Seasonal hiring has resumed with the gradual lifting of operational restrictions facing some businesses, but at a much lower level than normal. A Montana firm that normally hired 4,000 summer employees reported that it expected only about 1,000 this year. Ironically, staffing firms with job orders reported difficulty finding workers.
Wage pressures fell due to the steep decline in overall activity. A Districtwide survey of firms found that more than one-quarter have implemented some level of wage cuts, and a similar share of firms expected additional wages cuts over the coming three months. Firms in Minnesota had a higher incidence of wage cuts, while firms in the Dakotas saw a notably lower share. A Minnesota manufacturer cut wages by almost 4 percent for most workers, with senior management and managers taking pay cuts of 10 percent to 20 percent.
Prices
Price pressures decreased on balance. Trucking firms reported that freight rates have fallen, in many cases dramatically, due to a contraction in demand for shipping. North Dakota crude oil prices as of mid-May were down 50 percent from their levels a month earlier. However, retail fuel prices in District states ticked up in recent weeks after declining in April and were roughly unchanged as of mid-May relative to the previous report. Manufacturing contacts continued to report that prices for raw material inputs were stable; however, a beverage bottler reported concerns that supply chain disruptions for plastic and aluminum would feed through to container prices. Recent spot prices for livestock and dairy have fallen precipitously, and restaurant and institutional food service shutdowns have roiled the agricultural supply chain.
Consumer Spending
Consumer spending declined significantly since the last report due to shelter-in-place guidelines and other factors that limited normal activities. Multiple surveys have shown steep revenue declines at restaurants, bars, lodging, and retail establishments. A survey in late April found that one-third of Minnesota tourism firms reported no revenue over the past 30 days. Hotel occupancy in Minneapolis-St. Paul has hovered around or below 20 percent for the past two months. Hotel bookings in Montana were also reported to be very low in April and May. Consumer spending conditions appeared to be less severe in the Dakotas, where businesses faced fewer operating restrictions. Nonetheless, South Dakota tourism tax receipts were down by almost 30 percent in April. There were modest signs of uptick—from very low levels—in some consumer spending areas. For example, vehicle titles and liens registered in Wisconsin have risen for four consecutive weeks. TSA screenings at airports Districtwide were showing small improvements after a freefall in passenger activity. Some hotels in Montana and other high-tourism areas reported improvements in reservations toward the end of June and into July. Activity at restaurants and other consumer-facing businesses was also returning slowly in May as District states lifted restrictions at varying rates.
Services
Activity in the services sector decreased. In a recent survey of Ninth District businesses, 75 percent of professional services firms reported decreased sales in April relative to a year earlier. A railroad reported that total April volumes were down more than 20 percent from a year earlier. A strong majority of trucking firms reported that sales decreased by 25 percent or more in April relative to a year earlier; expectations for May activity were slightly positive compared with April, but substantially down from May 2019. In contrast, a contact in the Great Lakes maritime shipping industry reported that orders remained strong.
Construction and Real Estate
Commercial construction fell since the last report. An industry tracker of construction projects showed a modest dip in activity in April and early May. But other sources suggested a bigger decline. More than two of three respondents to a mid-May survey of Minnesota construction firms said they have had recent or future projects canceled, and an even higher share have seen other projects delayed. Respondents also reported a reduced number of new projects out for bid. Some major projects also moved forward, including a $1 billion project to reconstruct shipping locks on the eastern edge of Lake Superior. Residential construction was lower, but showed some positive signs. The aforementioned survey suggested that many Minnesota housing contractors were seeing project delays. At the same time, single-family permitting remained active in many of the District's larger markets, with Minneapolis-St. Paul, Sioux Falls, S.D., and Bismarck and Fargo, N.D., all seeing healthy growth in April permits compared with a year earlier.
Commercial real estate activity fell since the last report. Slower economic activity was negatively affecting all real estate categories, but particularly retail and office space. Vacancy rates were expected to increase across the board as leasing activity slowed. Among industry subsectors, industrial space was reported to be faring the best, in part because of increased e-commerce demand for warehouse space, both currently and going forward. Rent collections were "top of mind," among contacts. A multifamily property manager reported that rent delinquencies were elevated in May, but by less than expected, and reflected an improvement over April levels. Residential real estate was mixed. Home sales in Minnesota rose 1 percent in April over a year earlier. Sales elsewhere over this period were higher in northern Wisconsin, Fargo, Sioux Falls, and Great Falls, Mont., but lower in western Wisconsin, Grand Forks, N.D., and Missoula and Bozeman, Mont.
Manufacturing
Manufacturing activity decreased further. An index of manufacturing conditions indicated substantially decreased activity in April compared with a month earlier in Minnesota and the Dakotas; employment contracted sharply. Three in five manufacturers responding to a survey of District firms reported decreases in sales by 25 percent or more in April compared with a year earlier. Suppliers of inputs to the oil and gas industry reported a severe contraction in demand.
Agriculture, Energy, and Natural Resources
District agricultural conditions worsened. Reports continued to surface of producers euthanizing animals or placing them on restrictive diets due to pandemic-related closure of livestock slaughter plants. More than two-thirds of Ninth District agricultural lenders reported that farm incomes decreased in the previous three months relative to a year earlier, with a similar share reporting decreased capital spending, according to the Minneapolis Fed's first-quarter (April) survey of agricultural credit conditions. Oil and gas activity, already in decline prior to the pandemic, contracted severely as demand fell. The number of active drilling rigs in the District as of early May was less than half the level during the previous reporting period. Multiple District iron ore production facilities shut down operations as domestic steel production declined.