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Minneapolis: July 2020

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Beige Book Report: Minneapolis

July 15, 2020

Summary of Economic Activity
Ninth District economic activity was mixed since the previous report, with declines in most sectors, despite some improvements due to emergency federal stimulus and gradual reopening of state economies in the District. Employment rose from very contracted levels, wage pressures were flat, and price pressures remained minimal. The District economy saw growth in consumer spending and tourism, but decline in services, construction and real estate, manufacturing, energy, and mining; agricultural conditions remained poor.

Employment and Wages
Employment rose since the last report, but from very contracted levels, and labor markets remained volatile. Solid employment gains were seen in May, and a variety of sources suggested a continuation in June. The lifting of pandemic-related restrictions on many businesses allowed increased hiring and callbacks of laid-off workers in many sectors. Ad hoc polls in June by the Minneapolis Fed showed that slightly more firms were hiring than those that were cutting staff. A staffing contact in North Dakota said job orders have been "much better" since hitting lows in April. Volatility remains in the labor market, however. Announcements of temporary and permanent mass layoffs rose notably in June in Minnesota and Wisconsin after slowing significantly in May. Initial unemployment claims fell in June across the District compared with April and May levels, but remained significantly elevated. Monthly job postings plummeted across the District in May, but there was some evidence of stabilizing in June. Numerous sources noted that seasonal hiring over the summer would remain well below normal levels. A contact in the Bakken region of North Dakota reported that energy-related firms "would not try to save their employees" as they had during the downturn in oil prices five years ago, and that wide-scale layoffs had begun "and will continue at a fairly expedited rate." A workforce contact in northern Minnesota said that some businesses expected somewhat higher permanent layoffs than they were communicating publicly with employees.

Wage pressures were flat overall since the last report. Ad hoc polls by the Minneapolis Fed found that a majority of employers have made no changes in wages since the onset of the pandemic; slightly more reported wage decreases than those reporting increases. Faced with budget deficits, some local governments have reportedly instituted furloughs or negotiated wage cuts, or both. However, some firms that have enjoyed strong demand during the pandemic have increased wages. A discount retailer raised its starting wage from $13 to $15 an hour, and a second discount retailer gave its Minnesota employees a $5 million bonus for working through the pandemic—the third such bonus in as many months. A major health care provider in Minnesota also ended furloughs and pay cuts to most workers after demand rebounded faster than anticipated.

Price pressures remained minimal. The majority of respondents to a recent poll of Ninth District firms in a diverse mix of sectors reported no change in prices charged for their products and services in the second quarter of 2020 relative to a year earlier; of the remainder, more reported decreases in prices than increases. Contacts reported slightly more pressure on input prices. Manufacturing contacts generally reported flat or decreased input prices, with the significant exception of personal protective equipment, which remained in tight supply. Retail fuel prices in District states have climbed appreciably since the previous report, though they remain below their prepandemic levels. Prices received by farmers in May were mixed.

Consumer Spending
Consumer spending improved since the last report, boosted by recent federal stimulus and the reopening of many businesses closed by the pandemic. But overall levels remained depressed. Numerous sources reported that consumer-facing businesses (e.g., retail, restaurants, and bars) were seeing increased traffic compared with May. But most were still well below normal seasonal activity, and even below restricted capacities. A Minnesota mall said it was seeing about one-quarter of its normal shopper activity in June. Tourism contacts in Minnesota and Montana confirmed that the majority of large events booked for the second half of the year have been canceled; one contact called it a "rolling cascade." June traffic across the Mackinac Bridge into Michigan's Upper Peninsula was down 18 percent over a year earlier, an improvement over May crossings, which plummeted by 37 percent.

Motor vehicle sales were strong. A dealership with multiple locations in the western part of the District saw sales growth of 15 percent or more in May and June. Sales of recreational vehicles were also healthy. Data on motor vehicle sales taxes and title registrations showed similar upticks in Minnesota and Wisconsin. Passenger screenings in June at the eight largest District airports roughly doubled over the previous month, but remained 75 percent below last year. Airport contacts said that leisure travel was returning faster than business travel.

Professional services firms reported decreased activity since the last report. Contacts in advertising and marketing reported that clients had curtailed spending as they sought to hold on to cash. Vendors providing displays, food, or logistics services to support convention, exhibition, and entertainment events continued to report a severe contraction in demand. Contacts in trucking and logistics reported steady business overall, with variation depending on customer base.

Construction and Real Estate
Commercial construction was down moderately overall. The value of May construction starts across District states rose compared with April, but was notably down from 2019. The number of active projects was also trending modestly lower through the end of June. Minnesota construction contacts reported flat or falling levels of new projects out for bid. Recent permit activity showed signs of slowing, particularly in the city of Minneapolis, though not everywhere. Numerous sources also said more firms were competing for available work. Residential construction fell modestly overall, due mostly to a sizable drop in single-family permits in Minneapolis-St. Paul; increases were seen in St. Cloud, Minn., Bismarck, N.D., and Rapid City, S.D.

Commercial real estate fell moderately since the last report. Office space was under pressure given the slower economy and delayed return of remote workers to central business districts. Traditional retail space remained under tremendous strain. A major retailer closed six locations across the District. A Minnesota mall reported that many tenants were still closed in late June. Those that were open "are really struggling, nowhere near break-even," and leases for virtually all tenants had been altered or renegotiated. Residential real estate was down across the District, according to the most recent (May) sales data available at deadline. Most regions saw double-digit declines in closed home sales compared with last year, with many reaching 20 to 30 percent.

Manufacturing activity contracted slightly since the last report. An index of manufacturing conditions indicated decreased activity in June compared with a month earlier in Minnesota; the index for North Dakota and South Dakota rebounded to a slightly expansionary level. Some contacts reported strong demand in the plastics sector and supporting industries due to the need for personal protective equipment. However, numerous other contacts reported a marked slowdown in new orders as customers remained in "wait-and-see" mode. "Our order books have never had fewer future demand orders," noted a custom manufacturer, who added that its existing demand was "nearly immediate."

Agriculture, Energy, and Natural Resources
District agricultural conditions remained poor. Producers reported that disruptions in trade with China were creating "headwinds" in grain markets. Recent declines in milk prices dealt a blow to already suffering dairy producers. In contrast, the majority of the District's corn and soybean crops were in good or excellent condition as of late June. Oil and gas activity continued to decline even as crude prices rebounded somewhat. The number of active drilling rigs in the District as of late June was down sharply again from the previous reporting period. Multiple District iron ore production facilities remained shuttered as demand for steel was low.