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Minneapolis: November 2022

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Beige Book Report: Minneapolis

November 30, 2022

Summary of Economic Activity
The Ninth District economy grew modestly overall since the previous report. Employment grew slightly since the last report, with some moderation in job openings. Wage pressures remained high. Price pressures remained strong amid signs of deceleration. Business survey respondents reported decreased sales in October on balance from a month earlier. Activity increased in consumer spending, tourism, commercial real estate, energy, and manufacturing. Commercial and residential construction decreased, and residential real estate activity continued to decline. District agricultural conditions generally remained strong through harvest season. American Indian-owned business enterprises reported disproportionately acute challenges with labor availability and input costs.

Labor Markets
Employment grew slightly since the last report. Total job openings have softened, but labor demand continued to be healthy overall. Significantly more firms reported plans to hire more workers compared with those cutting staff. Among those holding back on hiring, some pointed to lower sales, but a far greater share said lack of available labor was a bigger factor. Fewer than 20 percent businesses reported that they would lay off workers in the face of a moderate revenue decline. Half reported that total headcount would remain steady or rise if revenues dropped, and the remainder would reduce headcount by attrition. Construction firms reported that recent and future activity was slowing, yet one-third reported that they have been looking to hire more full-time, year-round employees, and a negligible share had cut workers.

Wage pressures remained high. A majority of businesses across different sectors said they were increasing wages and salaries for most job categories, and increases were larger than in the past. Separate polls of construction and professional services firms found high shares reporting average wage increases of more than 5 percent, though expectations for future increases were modestly lower. A staffing contact said that holiday hiring has pushed seasonal wages notably higher, with entry-level shelf-stocking positions reaching $25 an hour. "This is craziness."

Price pressures were persistently strong since the previous report amid some signs of deceleration. Most firms responding to a business conditions poll reported raising final prices in October from a month earlier, but there was a slight increase in the share who reported dropping their prices. Two-thirds of respondents said their nonlabor input prices increased in the past month. While lumber prices continued to decrease over the reporting period, construction firms reported that prices for most other building materials remained high in recent months; most contractors identified input costs as one of their top challenges. Manufacturing contacts noted that while certain raw materials prices were decreasing, prices for most electrical components and other parts increased further. Survey respondents and other contacts reported sharp increases in employee health insurance rates for 2023. Home heating costs were forecasted to increase sharply in the region this winter, largely due to a significant spike in natural gas prices over the last year. Retail fuel prices in District states decreased moderately since the last report.

Worker Experience
Participants in a roundtable discussion shared that American Indian workers and households had seen their budgets tighten, as prices that were already disproportionately higher on reservations continued to climb. Childcare, transportation difficulties, and COVID-19-related disruptions were reasons why many reservation residents could not find or maintain employment. Some graduates of tribal police training were reportedly taking off-reservation jobs because the pay was much higher. Many workers leaned on their elders and social networks to curb reservation challenges and scarcities. "We take care of each other here; we find a way to get what we need," shared a participant. "We're lucky."

Consumer Spending
Consumer spending grew slightly since the last report, remaining at high levels. Early reports on holiday spending were cautiously upbeat, with consumer sentiment expected to be solid despite budget pressures from inflation and rising interest rates. Sales in retail and other consumer segments in Minnesota and South Dakota remained robust. Montana lodging and accommodation tax collections in October were strong, and hotel occupancy in most Minnesota markets was at very healthy levels. Vehicle sales were slow, with some signs of falling demand compounded by low inventories. A Minnesota import-auto franchisee noted that "daily traffic of customers has decreased significantly." Recent passenger activity at District airports remained healthy because of strong leisure demand.

Construction and Real Estate
Commercial construction fell slightly since the last report and showed signs of future slowing. Industry data suggested that construction spending and overall activity held up relatively well, but firms reported that backlogs had shrunk compared with the same period last year. Firms also reported a notable decline in new projects out for bid. Industrial and multifamily segments reported steadier activity and outlooks, and government contract work was also reportedly more active. Labor demand remained healthy overall. Residential construction was widely lower and more pessimistic in its outlook. Single-family permitting levels were notably below year-ago levels in most parts of the District.

Commercial real estate rose slightly overall since the last report, with continued divergence in different segments. Vacancy rates in industrial and multifamily sectors remained low despite significant new construction. Retail vacancy rates have declined in some markets thanks to comparatively little new construction. Office vacancy continued to increase. A Bozeman, Montana, contact said professional employees were not returning to the office, putting downward pressure on demand and increasing subleasing activity. Residential real estate continued to decline. Closed sales in October were widely lower across the District compared with last year, and often by sizable amounts, including 31 percent across Minnesota. Contacts in Montana reported that banks were laying off several dozen staff related to slowing mortgage activity.

District manufacturing activity increased moderately since the last report. A regional index of manufacturing conditions indicated increased activity in Minnesota, North Dakota, and South Dakota in October from a month earlier. Contacts mostly reported solid recent sales and/or strong backlogs, but some noted softening new orders, and a few reported steep recent declines. Printing industry contacts generally reported solid recent demand; one contact noted that the inflationary environment has allowed them to widen their profit margins by increasing their prices more than their input costs. A producer of semiconductor manufacturing equipment noted that overseas sales dropped precipitously following new restrictions on sales of such equipment to China, a major export market.

Agriculture, Energy, and Natural Resources
District agricultural conditions remained strong through harvest season. According to the Minneapolis Fed's October agricultural credit conditions survey, nearly three-quarters of lenders reported farm incomes increased from July through September compared with the same period a year earlier. Farm household spending, capital spending, and loan repayment rates also increased on balance, while demand for loans fell. However, cattle ranchers in Montana reported culling herds due to high feed costs and lack of available hay in the drought-stricken state, and were reportedly reducing their planned capital expenditures for 2023. District oil and gas exploration activity increased slightly since the last report, while output increased moderately.

Minority- and Women-Owned Business Enterprises
American Indian businesses reported being impacted by widespread hiring and retention challenges but faced disproportionate struggles with offering competitive wages and benefits. A tribal leader shared that despite offering wages above $30 an hour, casinos were having difficulties attracting blackjack dealers and were paying for the few inexperienced applicants to take classes. The CEO of a food-processing firm on a District reservation shared that the price of essential packaging inputs had increased threefold and shipping costs for them increased fivefold, in the last two years. "It has been a struggle," they commented. "If prices keep going up, I will go out of business."

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