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Minneapolis: June 2021

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Beige Book Report: Minneapolis

June 2, 2021

Summary of Economic Activity
Ninth District economic activity grew at a moderate-to-strong pace since early April. Employment grew moderately, with strong hiring demand outpacing labor availability. Wage pressures were moderate overall, and wholesale price pressures increased briskly while consumer prices increased more moderately. Growth was noted in consumer spending, construction, real estate, manufacturing, agriculture, and energy. Minority- and women-owned businesses in the region reported moderate improvements in business activity.

Employment and Wages
Employment grew moderately since the last report, with strong hiring demand outpacing labor availability. Job postings saw strong increases in recent weeks, particularly in South Dakota and Montana. A Minnesota staffing firm with multiple offices said every location had at least 100 job openings. Hiring demand was healthy across all sectors, but was strongest in manufacturing, construction, health care, and hospitality. Recent hiring and near-term hiring expectations improved for firms of all sizes; however, large firms reported significantly stronger hiring tendencies. For those hiring, most said their ability to find and hire staff was moderately or extremely difficult. Contacts in the Dakotas and Montana expected some improvement in labor availability with the early elimination of enhanced federal unemployment benefits in those states. But the action itself was weeks away, and competition for new entrants would be high.

Wage pressures were moderate overall. Wage growth among the large majority of contacts remained below 3 percent on an annualized basis. Workers at construction, manufacturing, and hospitality firms saw stronger wage growth, while many service-related firms saw weaker growth. Future wage expectations were slightly higher, but not well aligned with firms' broader concerns over labor availability. A manufacturer of construction products recently increased hourly wages by $3 an hour and saw job applications jump significantly.

Worker Experience
Job seekers saw modest improvement in labor market conditions since the last report. While hiring demand was robust, job service contacts reported low wages as a moderate or significant barrier keeping job seekers from taking available jobs. They also noted increased interest in telework, but few viable options. A workforce contact said that displaced high-income earners were actively seeking jobs to replace lost income, while low-income earners were more likely to stay on the sidelines if they were receiving government benefits. Contacts also cited the challenges of childcare and children's school schedules in making employment decisions. Several contacts pointed to increased inoculations and the gradual return of activities in travel and hospitality as positives for frontline workers. A labor contact expressed that while employment for janitorial workers remains 10 percent below pre-pandemic levels, more janitors were finding work deep cleaning commercial spaces.

Wholesale price pressures increased briskly, while consumer prices increased more moderately, as ongoing spikes in certain inputs fed through to final prices. Nearly a quarter of respondents to a business conditions survey reported nonlabor input price increases of greater than 10 percent relative to pre-pandemic levels. Pressures were slightly lower for final/retail prices charged to customers. Respondents to a construction survey noted increases in materials costs across the board, but particularly sharp increases for lumber, steel, and copper wire. Manufacturing contacts continued to report higher final prices due to increased costs for raw materials, packaging, and transportation. However, contacts offered that growing demand was allowing firms to pass along a greater share of markups to customers. Retail fuel prices increased at a moderately strong pace since the previous report.

Consumer Spending
Consumer spending was slightly higher since the last report, but remained at elevated levels. Restaurants, bars, hotels, and recreation firms all reported increased activity in recent weeks. However, many reported difficulty hiring and were operating at limited hours and/or capacity. A Montana contact said tourism firms were "facing the toughest recruiting season ever." Auto sales in the western portion of the District remained strong, with low inventories remaining the biggest obstacle. "Most new units are spoken for by the time they arrive at the dealerships," said one Montana contact. Similar demand was reported for recreational and marine vehicles. Airline passenger levels have hit a seasonal lull before the summer travel season, but a North Dakota travel contact said activity was expected to rise "once families begin summer vacations." A regional shopping center in Minnesota said that traffic had been rising; while still below pre-pandemic levels, growth was expected to continue due to pent-up demand.

Construction and Real Estate
Commercial construction activity grew slightly overall, held back by supply chain disruptions and rising costs for materials. Overall project activity showed signs of increasing, according to two industry trackers and contacts across the District. However, many contacts also noted that supply chain problems and inflated materials costs were creating significant project delays and some outright cancellations, and lack of available labor was further eroding their ability to either take on work or complete projects. All of these pressures were having a noticeable effect on profits. Similar difficulties were evident in residential construction. However, contacts noted stronger overall demand and outlooks, and recent residential permitting remained robust across many of the District's larger markets.

Commercial real estate improved modestly overall, though subsectors varied. Industrial property remained strong, with some speculative building reentering the market. Vacancy rates rose in office and retail, with sublease activity also increasing. Apartment vacancy rates remained low across the District, and rents were reportedly rising again, but uncertainty related to the elimination of eviction moratoriums remained. Residential real estate continued to see strong home sales across the District. In many District markets, inventories of homes for sale were half—or less—of last year's levels; shortages were acute among lower-priced homes, sparking offers above asking prices.

District manufacturing activity increased briskly since the last report despite sharp cost increases. An April index of regional manufacturing conditions indicated strong expansion in activity in Minnesota and increased activity in North Dakota and South Dakota from a month earlier. More than half of manufacturing contacts reported that they expect revenues to increase in the second quarter of 2021 from the previous quarter.

Agriculture, Energy, and Natural Resources
Agricultural conditions improved sharply since the previous report. Contacts expected strong farm incomes heading into planting season, building on recent commodity price increases and export demand. Crop progress as of mid-May was generally well ahead of recent averages in District states. However, extreme drought conditions spread in portions of the District. District oil and gas exploration activity increased slightly since the previous report, but remained well below its pre-pandemic level.

Minority- and Women-Owned Business Enterprises
Minority- and women-owned business enterprises (MWBEs) in the region reported moderate improvements in business activity, according to a May survey. Customer traffic and revenue is modestly to significantly higher compared with the same period a year ago, when restrictions were imposed. A contact working with minority entrepreneurs warned that barriers faced by many businesses to access financial assistance during the pandemic continued to put them behind in the recovery. They further indicated that while many businesses have been technologically adapting to the new environment, some clients lack the knowledge and/or capacity to do so. A contact in the hospitality industry expressed difficulty finding employees and highlighted the inability of small businesses to match current income from government benefits. Like firms overall, MWBE manufacturing and construction businesses were faring well, but also faced labor and material shortages, respectively.