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Beige Book Report: Minneapolis

April 18, 2018

Summary of Economic Activity
The Ninth District saw moderate economic growth since the last report. Employment increased modestly, constrained by a tight labor supply. Wage and price pressures were moderate. Growth was noted in consumer spending, tourism, services, commercial construction, commercial real estate, manufacturing, energy, and mining. Home construction was generally flat, while commercial real estate was mixed and residential real estate was slow. Agricultural conditions were stable at low levels.

Employment and Wages
Despite healthy labor demand, employment grew modestly since the last report, muted by tight labor supply. A survey of large Minnesota businesses found that about half were hiring to increase total head counts. Three other surveys also showed healthy hiring sentiment in District states. Several job-tracking databases showed generally strong labor demand. February job ads in Michigan's Upper Peninsula and North Dakota were higher compared with a year earlier. In Minnesota, figures released at the end of March showed job vacancies at an all-time high, increasing 16 percent over a year earlier. However, in South Dakota, both new and total advertised jobs declined in February relative to a year earlier. Tight labor markets were evident across the District. Initial and total unemployment insurance claims continued a downward trend through mid-March compared with last year. A western Montana staffing contact said labor orders were "up in all of our markets. Our biggest struggle is lack of candidates." A Minneapolis-St. Paul workforce contact said more companies are turning to job fairs and local workforce centers for help, but "attendance has been down at hiring events," and foot traffic at job centers has been slow. Participants in dislocated-worker programs "are getting jobs so much faster than in the past. Many are exiting the program in two or three months."

Wage pressures were moderate since the last report. A survey of Minnesota businesses found that wage increases coalesced a little below 3 percent. There were signs of stronger increases for some workers. Union construction workers in Minnesota were seeing wage increases of 3 percent to 4 percent. Montana high tech firms expected wages to increase by 5 percent in 2018. Wage increases in the public sector were weaker. In South Dakota, state workers received an increase of 1.2 percent, while 30,000 state workers in Minnesota received a 2 percent increase this year, though roughly half were also eligible for other increases.

Price pressures were moderate overall since the last report, but wholesale prices increased more briskly. Multiple contacts reported dramatic increases in the prices for steel products, partly attributable to recently announced tariffs; a manufacturer of tractor trailers said they "can't raise prices as fast as material costs." Retail fuel prices in most District states as of late March were slightly higher than in the previous reporting period, while prices for heating oil and propane in late March--their usual seasonal peak--saw double-digit percentage increases relative to a year earlier. Prices for construction materials continued to increase briskly.

Consumer Spending and Tourism
Consumer spending grew moderately since the last report. Gross sales in South Dakota saw a notable increase in the first two months of the year, and Wisconsin also saw a rise in gross sales. Retail closures continued, including nine stores across the District from a single chain. But they appeared to be due to shifts in consumer buying habits rather than soft overall demand, as retail vacancy rates remained healthy overall. A convenience store chain announced plans to open 11 new locations in Minnesota this year, though that expansion was smaller than in years past. Gaming revenues in Deadwood, S.D., to date have been flat compared with the same period a year earlier, but hotel occupancy rates improved. After a boom related to the Super Bowl, hotel occupancy rates and average room revenue in Minneapolis-St. Paul returned to more normal levels, which were softening due to a major expansion of new space. Passenger boardings at Minneapolis-St. Paul International Airport for the first two months of 2018 were 2 percent higher than the same period in 2017, and cargo volumes rose more than 6 percent.

Activity in the professional services industry increased briskly since the last report. An electronic components distributor was preparing for a $300 million expansion. Demand for information technology services was strong, according to sources. A civil engineering contact in Montana reported that demand for work was up briskly. A distributor of office products described recent sales as strong. Contacts in transportation generally described freight demand as steady, though some trucking firms were reporting substantial increases in business.

Construction and Real Estate
Commercial construction saw moderate growth since the last report. An industry database showed continued growth in new projects and total active projects through mid-March compared with the same period a year earlier. Most industry contacts were also upbeat. A Minnesota contact said firms were reporting a "pretty strong" pipeline for 2018, fueled by robust activity in K-12 school and multifamily housing construction. An Upper Peninsula source said overall activity there was "very strong," with a number of large energy, healthcare, and infrastructure projects. At the same time, construction has slowed recently from very high levels in Sioux Falls, S.D. Residential construction in the single-family market was generally flat across the District. Numerous sources noted that high and rising labor and materials costs were a major constraint. However, multi-family construction was strong in multiple District markets.

Commercial real estate sales grew modestly since the last report. Vacancy rates continued to remain low and stable in many real estate sectors across the District. However, the multifamily vacancy rate in Sioux Falls rose to its highest level in several years after a persistent expansion of supply. The city has also seen a number of restaurant and big-box store closures, pushing retail vacancies higher. Given the influx of new multifamily units, sources expected vacancy rates in Minneapolis-St. Paul to start rising. Residential real estate sales were slow, especially relative to demand, due to low inventories of homes for sale. Though most regions in the District have seen year-over-year sales remain flat or fall over the first two months of the year, tight inventories have persistently pushed median prices higher across the District.

District manufacturing increased moderately since the last report. An index of manufacturing conditions indicated increased activity in March compared with a month earlier in Minnesota and South Dakota; North Dakota fell to a level indicating contraction. Several contacts in the metal-fabricating industry reported strong demand. A producer of precast concrete products said demand had increased capital investment at their firm and across the industry. A maker of shipping and storage pallets also said demand increased notably. Several firms around the District were expanding facilities, including a construction equipment producer in North Dakota and a custom manufacturer in Minnesota. In contrast, an electrical equipment producer closed a plant in Wisconsin.

Agriculture, Energy, and Natural Resources
District agricultural conditions were stable at low levels. Though drought conditions abated slightly since the last report, most of the Dakotas and portions of Montana remained dry heading into the spring planting season. Activity in the energy and mining sectors increased. Oil and gas exploration activity was up; the drilling rig count in the District as of late March increased about 10 percent from the last reporting period. A large solar energy development was proposed in South Dakota and a wind farm in North Dakota was expanding. Contacts at nonferrous mines in Montana said the market for metals was strong, with one noting that they could not produce enough molybdenum to meet demand.