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Minneapolis: January 2021

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Beige Book Report: Minneapolis

January 14, 2021

Summary of Economic Activity
Economic activity in the Ninth District increased modestly since mid-November. Employment grew modestly, with increased hiring demand, but restrained labor supply. Wage pressures were moderate overall, and price pressures were generally modest. Sources reported growth in consumer spending, residential construction and real estate, manufacturing, and agriculture. Energy activity held steady at low levels, while tourism and commercial construction and real estate activity declined.

Employment and Wages
Employment grew modestly since the last report, with hiring demand seeing continued growth, but labor supply not responding in kind. Staffing contacts in Minnesota and North Dakota said December job orders were surprisingly strong, possibly to expand workforces to cope with virus-related quarantines and other interruptions. A November survey of hiring expectations among Ninth District firms found that a modestly higher share was planning to increase employment in 2021 compared with those planning to decrease staff levels. Many contacts noted evidence of healthy hiring demand. Districtwide, job postings have mostly recovered on a year-over-year basis, except in Minnesota, where postings have plateaued about 10 percent below year-ago levels. There were pockets of pessimism, however. A mid-December survey of Minnesota hospitality and tourism firms found that more than half were cutting or furloughing staff, in part due to operating restrictions put in place by the state a month earlier. Preliminary December data on workers compensation policies in Minnesota also showed a slight drop-off, suggesting that employers might be pulling back on future hiring plans. Initial and continuing unemployment insurance claims rose in recent weeks, due at least in part to normal seasonal slowing in some sectors like construction. As of mid-December, the number of workers receiving jobless benefits in District states was two-and-a-half times the level seen one year earlier.

Labor supply constraints remained significant. A handful of workforce development sources acknowledged a growing number of available jobs. But one contact noted that many available jobs lacked health care benefits and "just don't pay enough" to take given higher health risks and other obstacles, like day care availability, transportation difficulties, or the possibility of being recalled from furlough. The prospect of further enhanced unemployment benefits was also keeping some workers on the sidelines. A contact in Minneapolis-St. Paul said she was seeing lower labor force participation among younger workers who were "extremely worried about parent and grandparent vulnerability" to COVID-19. Multiple contacts also noted technology equity issues, manifested in broadband availability and the lack of computer skills necessary for effective job search. "Just about every business in today's world is run by technology. If you lack those skills, you will not succeed" in the job search, said one contact. Many job assistance offices remained closed to walk-ins, and newly enhanced online services compounded search problems for those without computer skills.

Wage pressures were moderate overall. A staffing contact overseeing multiple offices in Minnesota said that average wage offers in mid-December were 8 percent higher than a year ago, with most of that growth materializing in the second half of the year. Other contacts reported a rise in signing bonuses, but also a decline in hazard pay. A notable share of hospitality and tourism firms reported little or no wage increases given the difficulties in that sector. "I really can't even think of a wage increase except the mandatory (minimum wage increase) on January first," said the female owner of a Minneapolis-St. Paul restaurant. "I need to survive first."

Price pressures were generally modest, but shipping costs were up. Survey respondents from the hospitality and tourism industry generally reported flat or mildly increased wholesale prices over the past year, including for food and drink. Retail prices saw even less pressure. Most participants in a poll at a large transportation conference in early December expected freight pricing (excluding fuel surcharges) to increase faster than usual through early 2021. An industry source reported that residential rents as of December declined 2.1 percent in Minneapolis-St. Paul month over month, and 11 percent since March, the ninth fastest decline among the nation's 50 largest cities since the start of the pandemic.

Consumer Spending
Consumer spending rose modestly from the previous report. Many Minnesota retailers saw lighter foot traffic during the holidays, but some reported that it nonetheless exceeded their scaled-back expectations. Online sales were widely and significantly higher, but contacts suggested that total sales for many would fall modestly short of last year, particularly for small retailers. North Dakota retailers had cautious holiday expectations because of the downturn in the oil sector. A South Dakota contact said retailers saw "a real mixed bag." Rural consumers there have been more willing to shop in person, so foot traffic in smaller communities "seems to be steady."

Vehicle sales saw a modest dip in November, but a dealership in the western part of the District said sales in early December were solid, "although we would like more inventory, especially trucks." Vehicle sales taxes in Minnesota in December were higher than last year. Restaurants and bars continued to see decreased revenue across the District. A majority of hospitality and tourism firms in Minnesota reported negative revenue trends in December and continued pessimism for early 2021. Results were even more dour for minority-owned firms. A minority-owned hotel in central Minnesota said the facility's pool and breakfast buffet were both closed, and area bars and restaurants were barred from inside dining and drinking due to state-imposed restrictions. "Why would anyone want to stay?"

Construction and Real Estate
Commercial construction fell moderately since the last report. Two industry databases showed construction starts and total active projects in the District continuing to slow into December. A recent Minnesota survey reported a sour industry outlook, with 42 percent predicting a sectoral downturn in 2021, compared with 10 percent last year. Residential construction continued to outperform the rest of the sector. November single-family permitting rose 8 percent over last year in Minneapolis-St. Paul and also rose in Bozeman, Mont., Bismarck, N.D., and Sioux Falls, S.D.

Commercial real estate fell modestly since the last report. Softening levels of new commercial construction has helped keep a lid on vacancy rates in many real estate categories. However, the overall 2021 outlook was subdued, particularly in urban areas. Late payments among multifamily renters continued to creep up, according to surveys, which has put particular strain on more affordable properties with already thin margins. Sources believed federal stimulus proposals would temporarily relieve some financial stress for tenants and landlords, but there was continued concern over pandemic-related forbearance policies and their effects on housing markets. In contrast, residential real estate was strong. November home sales were robust across most the District, including many rural areas, and banking contacts reported record-level mortgage activity.

District manufacturing activity increased briskly since the previous report. An index of regional manufacturing activity indicated brisk expansion in North Dakota and South Dakota in December compared with the previous month, while activity in Minnesota grew more moderately. Transportation industry contacts generally reported increased freight orders in the fourth quarter of 2020 relative to the third, with much of the growth coming from manufacturing customers.

Agriculture, Energy, and Natural Resources
Agricultural conditions improved modestly on strong harvests and recent increases in some commodity prices. However, contacts in the industry cautioned that much of the recent growth in farm incomes has been due to increased government aid rather than improved market conditions. District oil and gas activity remained steady at low levels.