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Minneapolis: September 2020

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Beige Book Report: Minneapolis

September 2, 2020

Summary of Economic Activity
Ninth District economic activity grew slightly since the previous report, but remained well below its prepandemic benchmark. Employment was mixed, wage pressures fell moderately, and price pressures generally remained modest. The District economy saw growth in consumer spending, tourism, manufacturing, residential construction and real estate, and mining. Agriculture was mixed, while services, commercial construction and real estate, and energy declined.

Employment and Wages
Employment was mixed since the last report. Job postings rose through mid-July in District states, and staffing contacts in Minnesota confirmed that job orders had been rising. However, there were signs of ebbing job demand later in the month and into August. A District-wide survey in late July by the Minneapolis Fed suggested that more firms were cutting staff compared with those adding workers. A second survey of construction firms found that overall hiring sentiment was slightly negative. Contacts in multiple District states said that new job postings and hires have been skewed toward those that directly produce income—sales, manufacturing, construction—while administrative and support positions have pulled back as firms try to remain as lean as possible. Despite high unemployment, staffing and other contacts nonetheless reported that unfilled job orders have been rising. Firms looking for workers reported difficulty in finding labor, particularly in sectors like food and entertainment that were operating at reduced capacity and faced the prospect of future shutdowns. Initial unemployment claims across District states in early August were modestly lower than a month earlier, but still significantly above normal. In general, many firms expressed concern about future demand and its impact on staffing. A large professional services firm in Minneapolis-St. Paul said, "I anticipate furloughs becoming layoffs if some of our shelved work doesn't start up."

Wage pressures continued to fall moderately overall since the last report. The Districtwide survey of general businesses found that most employers were holding steady on wages, but more reported wage decreases (30 percent) than those reporting increases (10 percent). A small share of local governments has also reported wage and other compensation cuts in the face of budget shortfalls. However, wage increases were seen in certain sectors. Staffing contacts reported slightly rising wages, driven by manufacturing clients who were still seeing good business. The Minneapolis Fed survey of construction firms also found that one-quarter had raised wages since the pandemic's onset, while 10 percent had cut wages.

Price pressures remained modest, with some exceptions. Nearly half of early respondents to a survey of Ninth District professional services firms said input prices increased over a year earlier; however, a majority expected prices to remain flat over the coming 12 months. Structural lumber prices spiked since the last report, as inventories dwindled in the face of strong demand. Retail fuel prices in District states were little changed over the reporting period. Prices received by farmers in June increased from a year earlier for soybeans, potatoes, dry beans, and turkeys, while prices for corn, wheat, hay, cattle, hogs, chickens, and eggs decreased; milk prices were unchanged.

Consumer Spending
Consumer spending was modestly higher since the last report, but remained below prepandemic levels. Vehicles sales were up. A dealership in the western portion of the District reported strong year-over-year sales in July across multiple locations. Motor vehicle sales tax collections in Minnesota were also higher over this period. Passenger traffic at the eight largest airports in the District continued to increase modestly through early August. However, total traffic remains at just 35 percent of normal seasonal levels.

Certain segments of tourism reported healthy activity. Businesses catering to summer outdoor leisure reported robust demand compared with earlier in the summer. Sales of equipment and other products catering to this market—recreational vehicles, bikes, ATVs, boats, kayaks—were reportedly strong, but held back by low inventories. But many retail shops, restaurants, and bars continued to report only moderate demand even in the face of restrained operating capacity. Hotel and convention business remained dour with most large business and social gatherings canceled. One notable outlier was the annual motorcycle rally in Sturgis, S.D. Attendance was down modestly from previous years, but offered a spike in regional consumer demand.

Activity in the services sector decreased since the last report. Preliminary results of a survey of District professional services firms indicated that sales and profits decreased for a majority of respondents compared with a year earlier, and employment and productivity fell slightly. Firms' expectations for the coming 12 months were more optimistic. Contacts in the advertising and marketing fields continued to report weakened demand as clients looked to cut budgets. Demand for heavy equipment maintenance and repair services was strong, according to several contacts.

Construction and Real Estate
Commercial construction was moderately lower since the last report. A Districtwide survey of more than 600 construction firms found significant cancellations and delays for both private and public projects. Firms reported staying relatively busy by pulling future work forward, but were also dealing with material shortages, supply chain problems, and labor difficulties. There was growing concern about new projects to bid on for the fall and early next year. Residential construction was modestly higher. While home building contractors reported project cancellations and delays, there were also more frequent reports of increased activity. July residential permitting activity saw year-over-year growth in Minneapolis-St. Paul and St. Cloud (Minn.), Bismarck and Fargo (N.D.), and Sioux Falls, S.D. But flat or lower activity was reported in other regions.

Commercial real estate slowed modestly. In Minneapolis-St. Paul, vacancy rates in most segments have risen modestly. Industrial space was called a "bright spot" by one source. New, speculative construction has slowed, but client-driven demand continued, particularly for new manufacturing and distribution space. Leasing and sales for office space has slowed, and several sources noted some demand flight to the suburbs from downtown. New senior housing projects were reportedly struggling to find tenants. Residential real estate was moderately higher. Most markets saw home sales rise in July—many by double digits—over a year earlier, with the notable exception of Minneapolis-St. Paul, where sales were flat.

District manufacturing activity increased slightly since the last report, though it remained below prepandemic levels. An index of manufacturing activity indicated expansion in Minnesota and South Dakota in July compared with a month earlier, but decreased activity in North Dakota. A producer of construction equipment reported that while demand from the commercial sector was down, it was offset by an increase in demand from residential building. Food processors reported a similar divergence between commercial and home demand. Contacts reported that while they've remained busy with backlogs through the pandemic, the pace of new orders had declined, leading to concerns about conditions later in the year and into 2021.

Agriculture, Energy, and Natural Resources
District agricultural conditions were mixed. Lenders responding to the Minneapolis Fed's second-quarter (July) survey of agricultural credit conditions overwhelmingly reported decreased farm incomes in their area relative to a year earlier, with a similar share reporting decreased capital spending. Crops as of early August were in strong condition in most areas of the District, with some states on track for record or near-record production, but prices for most commodities remained low. Activity in the energy sector decreased further, while mining rebounded. District oil and gas exploration held steady at subdued levels. The number of drilling rigs in the District as of mid-August was unchanged from a month earlier. Meanwhile, recent North Dakota oil production fell well below its recent peak. Most District iron ore operations that were closed during the early stages of the pandemic have reopened.