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Minneapolis: December 2020

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Beige Book Report: Minneapolis

December 2, 2020

Summary of Economic Activity
The Ninth District economy grew modestly overall since the last report, but some signs of softening appeared recently as COVID-19 infections surged. Employment rose modestly since the last report, but conditions were volatile. Wage pressures were moderate and appeared to be increasing for some, while price pressures were modest. Consumer spending, manufacturing, energy, and residential construction and real estate grew since the previous report. Commercial construction and real estate activity fell. Agricultural conditions improved slightly.

Employment and Wages
Employment rose modestly since the last report, but conditions were volatile and likely to remain so in the face of rising COVID-19 infections. A survey of District construction firms in late October found that firms were hiring overall, particularly in skilled trades. However, hiring sentiment for the coming months was somewhat softer. A handful of ad hoc surveys of Minnesota firms in November showed similar findings. Job postings have seen modest-but-steady growth through mid-November across most District states. A western South Dakota contact said many firms were "desperate for help," a situation worsened by visa programs that were no longer a reliable labor source. However, there was widespread concern over new, pandemic-related restrictions on business activity and employment. Some indicators also showed small business employment falling steadily in October through mid-November. Initial unemployment insurance claims increased in the last half of October, due in part to normal seasonality, but were nonetheless several times their level last year. The number of workers receiving unemployment benefits steadily declined through October, but remained high overall, especially among minority workers. Though unemployment has been dropping steadily, state government contacts noted that falling labor force participation was responsible for much of the recent drop.

Labor constraints became more pronounced, particularly in sectors, such as health care, experiencing worker shortages due to COVID-19-related quarantines. Firms also reported difficulty filling open positions, frequently citing enhanced unemployment benefits as a work disincentive. However, workforce contacts noted that the expiration of more generous benefits has not led to a big increase in job seekers. Other obstacles—child care availability, virtual school for households with children, and virus fears—also impacted labor participation, particularly among women. A Minnesota contact noted that workforce systems were "failing to reach" those most negatively affected, particularly African American and noncollege-educated workers.

Wage pressures were moderate and appeared to be increasing for some. More District businesses reported raising average wages than cutting them. Certain sectors like construction were seeing greater wage pressures, and sources also noted bonuses and temporary wage hikes for frontline retail workers, higher entry-level wages, and reinstatement of pre-pandemic wage levels that had been cut. Pressures were not uniform, however. A large Minnesota nonprofit said that frontline staff received wage increases related to virus exposure, while other staff have been laid off or had wages frozen.

Price pressures since the previous report were modest overall. A majority of firms responding to recent Minneapolis Fed surveys reported little or no change to nonlabor input costs and final prices compared with pre-pandemic levels. By contrast, more than half of respondents from the construction industry reported input price increases of greater than 5 percent. Respondents also expected a similar rate of price increases over the coming year, consistent with rapid growth in construction materials prices. Home heating costs were expected to rise more in District states than nationwide this winter, largely due to regional differences in the prices of natural gas and greater demand due to work from home. Retail fuel prices in District states as of mid-November fell slightly from the previous reporting period. Prices received by farmers in September increased from a year earlier for soybeans, wheat, dry beans, cattle, hogs, eggs, and turkeys, while prices for corn, hay, potatoes, chickens, and milk decreased.

Consumer Spending
Consumer spending grew slightly overall. Car and truck sales rose modestly in October compared with a year earlier, and contacts noted strong demand for recreational and powersport vehicles. However, spending was checked by softening demand at retail, restaurant, accommodation, and other firms more directly affected by rising COVID-19 infections. Numerous ad hoc polls showed that (self-reported) consumer spending remained below pre-pandemic levels, and future spending would be influenced by infection trends. Strong outdoor activity has lingered; visits to most of the District's major national parks rose in October compared with last year, and Mackinac Bridge traffic to Michigan's Upper Peninsula also rose over the same period. However, leisure travel through District airports as of mid-November had leveled off after modest-but-steady growth through September.

Construction and Real Estate
Commercial construction fell moderately since the last report. Industry data showed a slowing of new and active projects in the District. A survey of construction firms in late October found that 40 percent saw revenues decline compared with earlier in the pandemic, and a slightly smaller share saw revenues increase. Firms were also more pessimistic about revenues in the coming months due to a shrinking pipeline of new projects. A minority-owned contractor in the western part of the District said the company had a fraction of its typical workload due to COVID-19-related cutbacks in spending on government projects. "There is very little work out there...and prices are being driven down drastically as contractors are all bidding for the same projects." However, prospects in Minnesota improved with the state's recent passage of a record-high $1.8 billion bonding bill. Residential construction continued to outperform other industry segments, in both recent project activity and planned future work, according to the recent survey. Most of the District's metros saw growth in single-family permitted units in October compared with a year earlier.

Commercial real estate fell modestly since the last report. Vacancy rates have risen across most categories, particularly in retail and office space. Industrial vacancy rose slightly in Minneapolis-St. Paul but was still considered healthy. While federal and state eviction moratoriums were keeping people housed, rent collections at lower-priced units in Minnesota were reportedly falling faster than at higher-priced units. Rising nonpayments were also squeezing smaller landlords, who have fewer options for mortgage forbearance than larger landlords. Residential real estate saw robust growth, with closed home sales in October seeing double-digit growth across the District. A Minneapolis-St. Paul contact said demand was "relentless." Low inventories of homes have also resulted in strong increases in median sale prices.

District manufacturing activity increased briskly since the previous report. A regional manufacturing index indicated strong growth in October in Minnesota and South Dakota compared with a month earlier, with positive but more moderate growth in North Dakota. A producer of cleaning equipment was expanding operations as it sought to in-source more if its supply chain. A manufacturer of home furnishings reported difficulty keeping up with strong demand due to pandemic-related safety measures.

Agriculture, Energy, and Natural Resources
Agricultural conditions improved slightly due to solid harvests, recent increases in prices for some commodities, and federal relief aid. Respondents to the Minneapolis Fed's third-quarter (October) survey of agricultural credit conditions mostly reported unchanged farm income compared with a year earlier, while the outlook for the fourth quarter was for increasing farm incomes. District oil and gas activity increased slightly from low levels; the number of active drilling rigs was little changed since the last report, while oil production increased from its lows earlier in the year but remained below pre-pandemic output. District iron ore mines were operating at normal levels except for one idled facility that was scheduled to reopen in December. Contacts in nonferrous mining described activity as steady.