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Minneapolis: June 2022

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Beige Book Report: Minneapolis

June 1, 2022

Summary of Economic Activity
Ninth District economic activity grew moderately since mid-April. Labor demand remained strong since the last report, but overall hiring was restrained by tight labor supply. Wage and price pressures remained elevated, and added costs were being passed on to consumers through higher selling prices. Consumer spending grew slightly, remaining at high levels; tourism and hospitality activity increased slightly from a year ago despite unfavorable weather. Commercial construction grew slightly, commercial real estate was mixed, and residential construction and real estate slowed, with rising interest rates a factor in each of these sectors. Agricultural conditions remained strong. Reports from minority- and women-owned business enterprises were mixed, as demand for services improved but margins narrowed.

Labor Markets
Employment grew strongly since the last report. Demand for labor was even higher, but hiring was restrained by tight labor supply. Several surveys found continued strong hiring demand by employers. Among more than 200 Minnesota hospitality and tourism firms, three of four were hiring in some capacity, and close to half were hiring more year-round staff. In the construction sector, 40 percent of firms were hiring to increase headcount, and a majority were hiring to replace turnover. Labor demand in the sector was also expected to accelerate in coming months. In a cross-sectoral pulse survey, significantly more firms saw an increase in labor needs over the previous month compared with those that saw a decrease. However, employee headcounts have grown more slowly than labor demand, as firms continued to report significant difficulty in hiring workers for open positions.

Wage pressures remained strong. A large majority of manufacturing firms reported increases of at least 5 percent. More than half of hospitality and tourism firms reported wage hikes of 5 percent or more. In the construction sector, roughly one-third said wages have risen by more than 5 percent, which was notably higher than a similar poll six months earlier. A large Minnesota manufacturer said turnover in low-skilled "is very high. They keep chasing wages and don't show up for their job. It's hard to keep a low-skilled job filled for one year."

Inflationary pressures remained elevated since the previous report. About 70 percent of respondents to a District-wide business survey reported that their nonlabor input prices increased in April from a month earlier. More than half said they increased their selling prices over the previous month; a slightly lower proportion expected to increase prices in May. About three-quarters of manufacturers at a recent event indicated that their input prices have risen faster since the beginning of this year than last year, compared with fewer than 10 percent who reported that prices increased at a slower pace. Retail fuel prices in District states increased swiftly since the previous report. Agriculture contacts continued to report significant increases in prices for both agricultural commodities and agricultural inputs.

Worker Experience
Individuals moving through the labor market were mainly looking for better pay. Some workers were considering taking second jobs to meet the higher cost of living but faced constraints with balancing existing responsibilities. Preliminary results from a survey of workers in South Dakota indicated that rising prices have significantly strained family budgets. Most said they were mainly experiencing pressure from fuel, grocery, and electricity prices. Several reported forgoing activities like eating out or traveling for leisure to reduce expenses. Overall, workers saw their cost of living increase. A worker in the finance sector said that "a 3 percent raise is not keeping up with the cost-of-living.…We are definitely living more of a paycheck-to-paycheck lifestyle than a year ago." A construction industry job seeker shared that gas prices were further reducing his mobility and employment options.

Consumer Spending
Consumer spending grew slightly since the last report, remaining at high levels. Retail contacts reported modestly higher revenues compared with the previous month, but somewhat lower profits. Tourism and hospitality firms said that recent activity was slightly improved compared with the same period last year, but an unseasonably cool spring dampened what might have otherwise been stronger activity. The summer outlook was quite positive, contacts said, though travelers were booking later than normal, and COVID-19 surges and gas prices created some uncertainty. Airports also reported rising passenger levels, including rebounding business travel. Consumer and business contacts said it was still too early to gauge the net effects of interest rate increases on consumer spending. A vehicle dealership said new car sales were more affected by inventory shortages than interest rates.

Construction and Real Estate
Commercial construction grew slightly since the last report. Marginally more firms reported higher recent revenue than those reporting a decrease. However, the general pace of activity appeared to be slowing due to persistent supply chain problems, high input costs, higher interest rates, and lack of labor. Contacts reported a noticeable increase in project cancellations, and delays continued to worsen. New projects out for bid held mostly steady with some increase in public projects; in general, contacts were optimistic heading into the summer season. Residential construction was flat. The sector reported higher levels of project cancellations and delays; however, new permitting activity remained healthy, particularly for multifamily units.

Commercial real estate activity was mixed. Several industry contacts said rate increases have started to negatively affect deal pricing by as much as 10 percent. Industrial space has seen less impact due to the current strength of that market. Contacts also expected more sales to come into the market over the next month or two in order to beat expected future rate hikes. At the same time, some sales have been pulled off the market due to a decrease in the number of bids and active buyers. Residential real estate fell moderately. Closed sales in April fell across most markets, the result of low inventories, rising prices, and higher mortgage rates. Several contacts said that they expected some demand to get pulled forward to get ahead of rate increases. Contacts reported an increase in the use of adjustable-rate mortgages.

Manufacturing activity was strong since the last report. A regional manufacturing index indicated increased activity in Minnesota, North Dakota, and South Dakota in April relative to the previous month. Manufacturers generally reported robust demand; however, a greater share of firms noted decreased new orders in April than in recent months. Industry contacts continued to report long delivery times and difficulty securing inputs, such as aluminum, stainless steel, and packaging.

Agriculture, Energy, and Natural Resources
District agricultural conditions remained strong. According to the first-quarter (April) survey of agricultural credit conditions, 87 percent of respondents reported increased farm incomes relative to the same period a year earlier. Farmland values increased briskly. However, due to an exceptionally cold and wet spring, crop planting and progress were well behind schedule in much of the District, except for Montana and western portions of the Dakotas, where drought conditions were rampant. District oil and gas activity increased modestly since the last report, as drilling and production gradually responded to surging crude prices.

Minority- and Women-Owned Business Enterprises
Reports from minority- and women-owned business enterprises (MWBEs) in the District remained mixed. Warmer weather brought increased traffic to many service industry businesses, but input costs continued to put downward pressure on their margins. A restauranteur in the Minneapolis–St. Paul region expressed concerns about their ability to continue raising menu prices, as customers faced higher inflation. A restaurant equipment distributor noted healthy demand from their MWBE clients and highlighted a slight loosening of supply chain bottlenecks. A media company executive said that finding competent talent was a barrier to their growth, highlighting the persistent hiring challenges faced by many. Nonprofit finance contacts shared that demand for loans was down overall because entrepreneurs were feeling uncertain about the economy.

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