Beige Book Report: Minneapolis
March 2, 2022
Summary of Economic Activity
Ninth District economic activity increased moderately since early January. Employment saw moderate growth, though hiring was constrained by tight labor availability. Wage and price pressures were strong, with particularly strong pressure on input prices. Growth was noted in consumer spending, professional services, commercial construction, manufacturing, and energy. Residential construction and commercial real estate were flat, while residential real estate fell. Agricultural conditions improved since the previous report, as strong crop prices offset higher input cost pressures. Minority- and women-owned businesses saw growth and were optimistic in their outlooks.
Labor Markets
Employment grew moderately since the last report. Hiring demand remained bullish across most sectors, and particularly among large firms. Very few firms were cutting workers. However, actual hiring was more muted; a surprising number of firms reported that staffing levels had dropped due to turnover and an inability to fill openings. A South Dakota transportation company said, "The amount of work I have to turn away due to lack of staff is staggering." Firms in accommodation, construction, manufacturing, and retail reported more difficulty hiring than those in other sectors.
Wage pressures remained strong. Among surveyed firms, half said wages have risen by 3 percent or more on an annual basis, and one-quarter cited increases of more than 5 percent. Some labor unions reported strong wage gains among new contracts. "Everyone wants more [money] to take a job, and existing employees are getting antsy for more to stick around," a Minneapolis-St. Paul construction firm noted. Raises have been larger and more common among large firms, and smaller firms reported difficulty competing with those increases. Contacts said that wage acceleration was being driven by recruitment and retention challenges, rather than workers' inflation concerns. Contacts also reported increased interest in automation as a hedge against both labor availability and fast-rising wages.
Prices
Price pressures remained strong, particularly for inputs. Manufacturers continued to report that prices were increasing rapidly for transportation, raw materials such as steel, and other inputs, including food. One contact noted that "prices are increasing faster than we can keep up." More than a third of survey respondents reported that their nonlabor input prices were up by more than 10 percent from a year ago, with similar results for final prices charged to customers. Agricultural input costs also increased sharply, according to a survey of agricultural credit conditions, in which two-thirds of lenders responded that input cost and/or availability was their top concern for 2022. Retail fuel prices in District states as of mid-February were sharply higher than January.
Worker Experience
Labor supply remained tight across the District. A labor contact in Montana reported that low wages and salaries for many public sector workers are pushing them to seek employment elsewhere. "Government employees may have benefits but working for lower pay than the pizza delivery guy is very demoralizing." According to another labor contact, more nurses in Minnesota took higher-paying traveling contracts, and some came out of retirement to meet demand. A workforce development contact working with underrepresented populations said that clients with limited digital literacy struggled making occupational changes, while more educated individuals increasingly looked for jobs that offered retirement plans, time off for self-care, and overall flexibility. A management consulting firm reported seeing a "small but noticeable increase" in the number of independent contractors looking for work, perhaps in response to their need for flexibility. Lateral moves among some professionals were reportedly on the rise.
Consumer Spending
Consumer spending grew moderately since the last report. A mid-January survey found that accommodation, retail, and entertainment firms saw softer business activity compared with most other sectors. A restaurant in Michigan's Upper Peninsula said the winter season "relies on local customers and that number has greatly declined with the Omicron variant surging." However, some of that consumption was simply shifting. A Minneapolis-St. Paul grocer said foot traffic slowed due to Omicron, but basket size increased. "We see some increase in sales when [Covid] fears prevent people from eating at restaurants." Supply chain disruptions and resulting low product inventories continued to hamper sales at many businesses. Winter tourism was healthy; Montana ski resorts have seen strong traffic, lodging tax receipts were above average, and regional airport activity in January was above pre-pandemic levels.
Professional Services
Professional services activity in the District was strong. According to an intellectual property law firm contact, demand for services picked up intensely after a slow January start, driven mainly by larger clients. Contacts in insurance and financial services reported challenges finding qualified talent. "We recently hired two support staff and were able to do so easily by going outside of our industry to find them. But the pay is more than expected, and their training path will be longer," said a contact. A Minnesota specialty engineering services contact reported increased demand driven by high investments in water and sewer infrastructure and pointed out that ongoing supply chain issues and rising costs were stretching project timelines.
Construction and Real Estate
Commercial construction grew moderately since the last report. Industry data showed that both new projects and active projects in January were higher than the previous two years. Firms reported that current demand was healthy and was expected to continue. However, many noted operational challenges related to lack of labor, including workers sidelined by Omicron, as well as higher materials costs and supply chain problems. A Wisconsin firm was projecting a very strong year ahead, but "if inflation is not curbed and supply chain issues are not resolved, the outlook is very pessimistic." Residential construction was flat overall. Single-family permitting was strong in January in Minneapolis-St. Paul compared with a year earlier. However, permitting in other District markets was lower over the same period.
Commercial real estate was flat overall. Industrial space continued to see strong demand, while office and retail vacancy rates continued to climb in many markets, including Minneapolis-St. Paul, and subleasing activity was also rising. Residential home sales remained slow in a majority of District markets amid very low inventories.
Manufacturing
District manufacturing activity increased moderately. Manufacturing survey respondents continued to report solid recent revenue trends, strong demand, and positive near-term outlooks. An index of regional manufacturing conditions indicated increased activity in Minnesota and North Dakota in January compared to a month earlier, while activity decreased in South Dakota.
Agriculture, Energy, and Natural Resources
District agricultural conditions improved since the previous report. Farm incomes increased through the end of 2021, according to a survey of agricultural credit conditions. While contacts expressed concern about rising input costs, producers' finances benefitted from strong commodity prices. District oil and gas exploration activity increased since the previous report.
Minority- and Women-Owned Business Enterprises
Reports from minority- and women-owned business enterprises remained optimistic overall. A professional working with minority entrepreneurs in the Twin Cities said that the volume of microloans issued for new and existing businesses remained strong. Well established food service businesses began investing in expansions and were looking to invest in commercial real estate. To address labor shortages, businesses have reportedly continued to adjust hours of operation, employee pay, and schedules. New entrepreneurs reported that they had reduced working hours or quit their jobs to prioritize their businesses. A food delivery service contact working with ethnic-specific restaurants said that many clients have adjusted their menus, portions, and prices in response to higher costs.
For more information about District economic conditions visit: minneapolisfed.org/region‐and‐community