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Beige Book Report: Minneapolis

April 17, 2013

The Ninth District economy grew moderately. Increased activity was noted in consumer spending, tourism, professional services and manufacturing. Construction and real estate grew at a fast pace, the energy and agriculture sectors were steady at high levels, while mining slowed. Labor markets tightened somewhat, and wage increases were moderate. Overall price increases were modest.

Consumer Spending and Tourism
Consumer spending increased moderately. March sales at a Minneapolis-St. Paul area restaurant chain were up about 6 percent from a year ago; demand for catering services was very strong. Sales activity at a Montana mall was level from a year earlier, but warmer weather was helping boost traffic over the past few weeks. Meanwhile, same-store sales at a Minneapolis area mall were down slightly, while cold, wintry weather during March reduced traffic levels. A Minnesota auto dealer noted a solid start to 2013, and is cautiously optimistic for a very good year. Truck sales were strong at dealerships in eastern North Dakota.

The winter tourism season finished stronger than last year. Ample snow cover and cold temperatures kept winter tourism active during March in northern Minnesota and Wisconsin. A travel agency in Minnesota noted that leisure travel to warm-weather destinations was softer than last year as airfare was up from a year ago; however, bookings to Europe were higher.

Construction and Real Estate
Commercial construction activity continued to increase at a very fast pace since the last report. The value of March commercial permits in Billings, Mont., increased over 900 percent from last year. In Sioux Falls, S.D., March permits were $14 million, up from nearly zero a year ago. A contact at a Fargo, N.D., real estate company noted that "the medical field is building like crazy." Residential construction increased rapidly from a year ago. The value of March residential building permits in Billings nearly doubled from last year, and the value of March permits in Sioux Falls was up over 63 percent from a year ago. In the Minneapolis-St. Paul area, March residential permits were up 21 percent compared with March 2012.

Activity in commercial real estate markets increased since the last report. A Minneapolis-St. Paul area commercial real estate broker noted increased strength in the office and industrial markets. Minneapolis-St. Paul office vacancy rates during the first quarter of 2013 were down 1.9 percentage points from a year ago to 17.7 percent. A Fargo broker noted that recent activity has increased a "fair" amount and that office vacancy is at 4.8 percent and warehouse vacancy is at 1.6 percent. Residential real estate market activity increased at a strong pace. Recent home sales were up 12 percent from the same period a year ago in the Minneapolis-St. Paul area; the inventory of homes for sale was down 30 percent, and median sale prices rose 16 percent. In the Sioux Falls area, March home sales were up 5 percent, inventory was down 18 percent and the median sale price increased 6 percent relative to a year earlier.

Activity at professional business services firms increased at a moderate pace since the last report. A home inspector noted an increase in business due to more homeowners who were considering selling. A Minnesota travel agency noted an increase in business travel compared with a year ago. A Minnesota freight trade group expects volumes and rates to increase this year. A financial institution noted a significant increase in demand for loans.

The District manufacturing sector continued to grow since the last report. A March survey of purchasing managers by Creighton University (Omaha, Neb.) found that manufacturing activity increased in Minnesota and the Dakotas. A Minnesota architectural glass producer announced a $30 million expansion at a plant. A transportation vehicle maker in Minnesota was expanding its facilities. A sawmill in Montana restarted production after sitting idle for more than four years. Meanwhile, a paper mill in Minnesota cut production.

Energy and Mining
Activity in the energy sector was steady at high levels, while mining slowed. Late-March oil and gas exploration decreased slightly in Montana and North Dakota from the last report, but production remained near record levels. A $2.2 billion modernization of Minnesota's electrical grid is under way, with an estimated $1 billion to be spent this year. A diesel refinery broke ground in North Dakota, and a separate $400 million refinery that will break ground this year was also announced. A copper-nickel mining development in the Upper Peninsula halted construction in response to "economic headwinds" and volatility in metals markets. An iron ore mine in the Upper Peninsula idled at the end of March.

The District agricultural sector remained in strong condition heading into the planting season, though persistent drought remained a threat. Early indications of planting intentions suggest District farmers plan to increase corn, soybean and hay acreage this year, with a reduction in wheat acres. An agricultural cooperative announced $50 million in investments in the District, including a grain terminal in North Dakota and a fertilizer depot in Minnesota. Prices received by farmers increased in March from a year earlier for wheat, corn, soybeans, hay, chicken, milk and eggs; prices decreased for cattle, hogs, turkeys and dry beans.

Employment, Wages, and Prices
Labor markets tightened somewhat. A company recently announced plans to add 300 information technology consultant jobs in South Dakota and North Dakota. A retailer recently announced plans to build a distribution center in Minnesota that would create 300 jobs. Businesses in eastern Montana noted continued challenges attracting and retaining quality workers due to competition from the nearby oil-drilling region. A record number of companies participated in a job fair in eastern South Dakota, reflecting the relatively high availability of jobs in the area. However, a Minnesota food company laid off 125 workers.

Overall wage increases were moderate. According to a recent St. Cloud (Minn.) Area Quarterly Business Report, 48 percent of respondents expect to increase compensation over the next six months, while 49 percent expect no change. In last year's survey, 42 percent expected to increase compensation, while 54 percent expected no change. A contract agreement was recently reached with a union representing janitors in Minnesota that would improve wages and health care coverage.

Overall price increases were modest. Minnesota gasoline prices decreased about 20 cents per gallon from late February to early April. Some metals prices also decreased since the last report. Meanwhile, bank directors noted increases in health care insurance costs. Prices for framing lumber have increased steadily over the past couple months.