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Beige Book Report: Minneapolis

July 18, 2018

Summary of Economic Activity
The Ninth District economy grew moderately overall since the last report. Employment grew modestly, with robust hiring demand continuing to be restrained by tight labor supply. Wage and price pressures were moderate since the previous report. The District economy showed growth in manufacturing, residential construction, commercial real estate, energy, and tourism. But consumer spending and commercial construction were mixed, residential real estate slowed, and agriculture remained weak.

Employment and Wages
Employment grew modestly since the last report. Hiring demand remained robust, but continued to be restrained by tight labor supply. May job openings in North Dakota and the Upper Peninsula of Michigan were both notably higher than a year earlier. A jobs database for Minneapolis-St. Paul showed that new postings for the second quarter were up significantly over the same period last year. An ad hoc poll of large firms in Minnesota found that roughly half were currently hiring to add to head count and expected that to continue over the coming year. A May survey of manufacturing firms showed strong hiring sentiment among respondents in Minnesota and the Dakotas. However, tight labor restricted firms' ability to find workers. May unemployment rates dropped across the District compared with the previous month and a year ago. District states saw a 13 percent decrease in initial unemployment claims during the most recent six-week period (though mid-June) compared with the same period last year. Continuing claims also dropped slightly. State workforce development offices widely reported relatively stable or higher job postings, but fewer job seekers. In Montana, May job postings with the state rose by 2 percent over a year earlier, while active job seekers fell by 21 percent. A Montana staffing firm reported that "hiring demand and job orders are up, but [worker] candidates are down."

Wage pressure was moderate overall, though recent union contracts reflected larger increases. A Minneapolis Fed poll of South Dakota retailers found recent wage increases coalescing around 2 percent to 3 percent, with roughly similar expectations for the coming year. A poll of large Minnesota firms showed slightly stronger results. Four recent union construction contracts in Minnesota negotiated annual increases ranging from about 3 percent to 5 percent per year for three years. A new contract for union service workers at a Minnesota health care provider raised wages between 7 percent and 10 percent over three years; a contract for union utility workers in the Upper Peninsula awarded raises of 11 percent to 14 percent over three years.

Prices
Price pressures increased moderately relative to the previous report. Manufacturing contacts reported that steep increases continued in aluminum and steel material input costs in reaction to tariff announcements. Construction materials costs continued to increase briskly. A June survey of purchasing managers indicated that inflation expectations were elevated, but decreased slightly from the previous month. Retail fuel prices as of late June were mixed across District states relative to the previous reporting period; Montana and the Dakotas saw prices increase slightly, while prices in Minnesota and Wisconsin fell. Prices received by farmers for corn, soybeans, wheat, hay, chickens, and eggs increased in May compared with a year earlier; prices for hogs, cattle, milk, and turkeys decreased.

Consumer Spending and Tourism
Consumer spending was mixed since the last report. Official tax data suggested some slowing. For example, sales tax collections in May were 5 percent lower in Minnesota compared with a year earlier, while taxable sales were flat in South Dakota. A contact at a restaurant industry association described recent sales as generally up moderately.

Tourism activity increased moderately. A survey of Minnesota businesses revealed solid optimism for the summer tourism season, with significantly more respondents expecting higher revenues compared with those expecting lower revenues. Minnesota's hotel sector also had a very strong May, with demand increasing 7 percent over a year earlier. Said an industry contact, "It looks like this will be a good summer for the state's hotel industry." Lodging and accommodation tax collections in Montana have been higher every month this year, including May, compared with 2017. Gaming receipts from casinos in Spearfish, S.D., were down about 4 percent during the spring months, but summer bookings at hotels and campgrounds in the region were up, according to local officials.

Services
Activity in the professional services industry increased moderately since the last report. Respondents to the Minneapolis Fed's annual services survey indicated growth in sales, profits, productivity, and employment over the past year, with expectations for more growth in the coming 12 months. In contrast, several architecture contacts said business had decreased recently.

Construction and Real Estate
Commercial construction was mixed since the last report. An industry database showed that commercial and heavy construction spending in May rose overall compared with a year earlier, particularly in North Dakota and Minnesota, while South Dakota was flat. A contractor in southeastern Minnesota said current activity levels were "much better" compared with last year. However, another database of new and active projects across multiple states in the District showed that recent activity levels through mid-June were slightly lower than the same period a year earlier. The value of commercial permitting in May was also mixed among the District's larger cities. Residential construction rose modestly overall, though activity varied. Single-family permit values rose in Bismarck, N.D., Billings and Missoula, Mont., and the Minneapolis-St. Paul region; but permit values were flat in Rapid City and Sioux Falls, S.D., and lower in Fargo, N.D., and Rochester, Minn.

Commercial real estate grew modestly since the last report. In Minneapolis-St. Paul, multifamily vacancy rates continued to be low despite strong delivery of new units to the market, though lease rates have been mostly steady. Despite the continued closure of large retail stores in Minneapolis-St. Paul, this space was being absorbed and "keeping vacancies tight," according to an industry source. Residential real estate fell, with a few isolated exceptions. May home sales in Minnesota dropped 11 percent compared with a year earlier and also fell in western and northern regions of Wisconsin, and in Bismarck. Sioux Falls sales were flat, and Montana metro markets were mixed, with slower May sales in Great Falls and Helena, but higher sales in Bozeman and Missoula.

Manufacturing
District manufacturing activity increased briskly. An index of manufacturing conditions indicated increased activity in June compared with a month earlier in Minnesota and the Dakotas. Contacts from across the manufacturing sector reported very strong activity so far this year. A dealer of stamping and metal forming machinery said that the market for capital equipment was as busy as they'd ever seen. Producers of hydraulic equipment reported similarly strong demand, with some seeing double-digit growth this year.

Agriculture, Energy, and Natural Resources
District agricultural conditions were stable relative to the previous report. Despite a late start to the planting season, crop progress in District states as of late June was generally in line with five-year averages, and the majority of crops were rated in good or excellent condition. However, some areas of the Dakotas and Montana were experiencing dry or moderate drought conditions. Activity in the energy sector increased slightly. District oil and gas exploration activity as of late June was roughly unchanged from the previous report; oil and gas production as of April increased from a month earlier. District iron ore mines continued to operate at near capacity.