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Beige Book Report: Minneapolis

October 24, 2018

Summary of Economic Activity
The Ninth District economy grew moderately overall since the last report. Employment grew moderately, with strong hiring demand but tight labor supply. Wage and price pressures were both moderate. The District economy showed growth in manufacturing, real estate, residential construction, professional services, consumer spending, and tourism. But commercial construction and energy slowed, and agriculture remained weak.

Employment and Wages
Employment grew moderately since the last report despite continued labor constraints. Hiring demand was robust. Ad hoc surveys of human resources professionals in Minnesota and Montana, conducted by the Minneapolis Fed in mid-September, found that a large majority of respondents' firms were currently hiring; roughly 40 percent said their firms were hiring both to add headcount and to replace worker turnover. Data from state workforce centers showed that job postings were up 9 percent across Ninth District states. Job tracking by a Minnesota trade group also showed strong growth in STEM jobs in September compared with a year earlier. Seasonal hiring was also beginning, with several announcements of major hiring, including 1,700 workers across the Minneapolis-St. Paul metro for a transportation firm. However, tight labor supply restrained overall hiring. In Montana and Minnesota, the number of job openings at workforce centers in August outnumbered those seeking work by a roughly two-to-one margin. Over the most recent six-week period (through late September), initial unemployment claims in the District dropped by 10 percent over the comparable 2017 period, and continuing claims were 12 percent lower. However, an external survey of fourth quarter hiring expectations was notably softer, but still positive, for District states, and the percentage of employers expecting to increase staff levels fell virtually across the board compared with last quarter and last year.

Wage pressures were moderate since the last report. The aforementioned survey of human resources professionals found that 40 percent of Minnesota respondents reported wage growth of 3 percent or more at their firms over the past 12 months, while 25 percent of Montana firms responded similarly. Wage expectations in both states for the coming 12 months were slightly higher. A general business survey, conducted by the Minneapolis Fed in October, found that a strong majority of firms raised wages relative to a year earlier, and future increases were also expected. South Dakota retailers reported only modest wage increases despite reports of very tight labor. Two Minnesota sources also reported that higher wages have allowed some workers to cut back on hours worked.

Prices
Price pressures increased moderately relative to the previous report. A Minneapolis Fed business survey indicated that firms had increased prices in the third quarter relative to a year ago; two-thirds planned price increases in the last quarter of 2018. In a separate survey, 60 percent of South Dakota retailers indicated that customer prices rose by less than 2 percent but that wholesale price increases were larger. Retail fuel prices in District states as of early October were moderately higher than a month earlier. Numerous manufacturers reported that rising prices for certain raw material inputs due to trade conflicts were partially passing through to final output prices. Prices received by farmers for corn, wheat, hay, and eggs increased in August compared with a year earlier; prices for soybeans, hogs, cattle, milk, and turkeys decreased.

Consumer Spending and Tourism
Consumer spending grew moderately since the last report. Growing activity in the Bakken oil region was again spilling into higher retail sales in the region and state; North Dakota sales tax collections were 26 percent higher than anticipated in August. However, retailers in South Dakota reported sluggish late summer sales into September. Tourism activity also grew. A survey of Minnesota lodging properties described a "strong" summer, with about 50 percent of respondents seeing higher revenue compared with about 25 percent that saw lower revenue. Expectations for fourth quarter tourism were positive, but more modest. Minnesota hotel demand in August increased by 3 percent over a year earlier; occupancy rates were unchanged, but increases were seen in average daily rates and revenue per available room. However, a late-summer drop in national park visitors suggested some slowness in Montana and South Dakota, which hold a majority of the District's larger national parks. Visits to the District's northeastern region saw healthy increases.

Professional Services
Activity in the professional services industry increased moderately since the last report. Several contacts in insurance and financial services indicated that demand was up moderately. A construction engineering firm was expanding in Minnesota and the Dakotas. Contacts in agricultural transportation reported that the year through September had been strong, but there was much more uncertainty heading into a new marketing year.

Construction and Real Estate
Commercial construction activity contracted slightly since the last report. Industry data suggested that commercial construction was down in August across much of the District compared with a year earlier. Other industry data showed that both new projects and total active construction projects near the end of September were modestly lower than at this time last year. Commercial permitting in September was mixed among the District's larger markets. Residential construction activity was moderately higher. September single-family permitting was higher in a majority of District metros compared with a year earlier, and some locations continued to see strong multifamily permitting, including Rochester, Minn.

Commercial real estate saw modest growth since the last report. In Minneapolis-St. Paul, demand for industrial space continued to show strength, with vacancy rates falling slightly from already low levels and despite significant new construction. Office vacancy rates and asking rents were generally stable there as well, while sales of office space have been trending upward and were expected to continue to rise in the fourth quarter. Despite a strong increase in new units, multifamily vacancy rates in Minneapolis-St. Paul remained low. Apartment occupancy rates were also strong in western North Dakota, thanks to increased activity in the Bakken oil region. Residential real estate activity fell. Closed sales in September were lower compared with a year earlier in many of the District's larger markets.

Manufacturing
District manufacturing activity increased slightly. An index of manufacturing conditions indicated increased activity in September compared with a month earlier in Minnesota and North Dakota; the index for South Dakota indicated flat activity. Numerous manufacturers across the District reported strong output demand and production so far this year, but their outlook for the remainder of this year and for next was flat due to rising input costs and uncertainty over trade policy. A producer of industrial and mechanical equipment said recent demand and production were up moderately. A solar panel plant opened in Minnesota, and a producer of composite structural members was expanding a plant.

Agriculture, Energy, and Natural Resources
District agricultural conditions remained weak overall. Persistent rain in early fall delayed or slowed harvests in some areas. Very strong harvests were expected around the District, including potential record yields in some cases. However, commodity prices remained weak, and greater production was not expected to completely offset the negative impact of low prices on farm incomes. International demand for crops, particularly soybeans, has fallen dramatically, according to contacts. A producer of dry beans reported that a large regular annual order from European Union countries was cancelled due to tariffs. A substantial number of dairy operations have exited the business since the beginning of the year. District oil and gas exploration activity as of early October decreased slightly from the previous report. District iron ore mines were operating at capacity. Contacts in nonferrous mining described activity as up slightly.