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Beige Book Report: Minneapolis

March 6, 2019

Summary of Economic Activity
The Ninth District economy grew modestly overall since the last report. Employment grew slightly, hampered by tight labor and some signs of weakness. Wage and price pressures were moderate. The District economy showed growth in services, manufacturing, residential construction, commercial real estate, energy, and mining. However, consumer spending and commercial construction were mixed, and agriculture remained weak.

Employment and Wages
Employment rose slightly overall since the last report, with some signs of weakness. Recent job postings data (December or January, depending on the state) were mixed among District states compared with a year earlier. North Dakota and Montana both saw healthy increases in job postings, but declines were seen in Minnesota, South Dakota, and the Upper Peninsula of Michigan. Several January polls of Minnesota businesses by the Minneapolis Fed generally found solid hiring demand. A poll of large employers found moderate hiring at in-state operations, yet more aggressive hiring at operations outside the state. Labor markets continued to be tight. Initial unemployment insurance (UI) claims fell in most District states during the first five weeks of 2019 compared with the same period a year earlier; Minnesota was an exception, seeing a 3 percent increase. Continuing UI claims fell 13 percent across District states over this period. There were also some signs of employment weakness. A Minneapolis-St. Paul staffing contact saw job orders and total hours in December and January fall by the “high single digits.” Two major retailers announced plans to close dozens of stores across the District by this spring. And an eastern North Dakota manufacturer announced that it will close a facility, affecting 300 workers, though a contact there said most workers “should be able to find employment elsewhere.”

Wage pressures rose moderately. A Minnesota staffing contact noted that there was “still a lot of wage pressure,” estimating that wages had risen 5 percent over the past year. Recent polls by the Minneapolis Fed found that annual wage increases continued to average around 3 percent, with variations higher and lower depending on sector and geography. For example, average wage increases reported by South Dakota retailers were lower than those of Minnesota construction firms. However, five polls each revealed expectations that wages for the coming year would rise at a slightly slower rate than the previous year.

Prices
Price pressures were moderate overall since the last report, but input costs increased faster than overall prices. Nearly a third of respondents to a recent survey of large firms reported input price increases of more than 3 percent from a year ago, while a slightly larger share reported increases of 2 percent to 3 percent. The pace of increase in steel prices stabilized recently, according to contacts in manufacturing and utilities. Retail fuel prices in District states as of mid-February increased slightly from the previous reporting period but remained substantially lower than their level a year earlier; natural gas prices remained elevated. Prices received by farmers for corn, wheat, and hay increased in November compared with a year earlier; prices for soybeans, milk, eggs, hogs, cattle, and turkeys decreased.

Consumer Spending
Consumer spending was mixed since the last report. A vehicle dealership with multiple locations in the District said total sales of both new and used vehicles were lower in January compared with a year earlier. A District contact noted that RV sales saw a slowdown in the second half of 2018 and that he anticipated “2019 being down again” by roughly 5 percent due to higher interest rates and higher unit costs. Sales and other consumer taxes in North Dakota were notably higher in December, but flat in January compared with a year earlier. A poll of South Dakota retailers showed flat sales in the fourth quarter compared with a year earlier, with only slightly higher expectations for the first half of 2019. However, District airports generally showed higher enplanements in January; in Bozeman, Mont., January passengers rose 20 percent over a year earlier, and car rentals were also higher. The ski season in northwestern Montana was “going really well,” according to a local source, and lodging sales taxes across the state were higher in January compared with a year earlier. Minnesota hotels saw an up-and-down performance. December occupancy and revenue per available room rose slightly, but January figures declined.

Services
Activity in the services sector increased briskly. Contacts in banking and financial services generally described conditions as strong, with bullish sentiment among corporate clients. Demand for loans was strong even as the cost of credit was increasing. Rail freight demand was solid, according to industry sources. Domestic shipments on the Great Lakes nearly doubled in January relative to a year earlier; total volume for the season was up 4 percent.

Construction and Real Estate
Commercial construction was mixed since the last report. An industry database showed that the cumulative value of construction starts in December rose across the District compared with the same period a year earlier; however, January values declined slightly, possibly influenced by extreme weather. A Minnesota source noted that the pace of projects was moderating, but added, “That’s not a bad thing” given the previous pace. He also noted that the rising pace of construction costs created “a shrinking pool of projects that make economic sense.” Residential construction was slightly higher across the District; a modest increase was seen in Minneapolis-St. Paul in January compared with a year earlier, while Billings, Mont., and Rochester and St. Cloud (Minn.) saw small declines.

Commercial real estate grew moderately since the last report. Industrial property vacancies remained low in the Minneapolis-St. Paul region despite significant new construction, and average price per square foot remained healthy. Office vacancy rates in the region were stable at somewhat elevated levels. Multifamily vacancy rates have stayed low throughout much of the region, while new construction continued. Retail vacancies have risen in many District markets, as major bankruptcies continued to roll through the chain-retail industry. Residential real estate was widely lower. January home sales registered a decline across most of the District’s larger cities, with a number seeing double-digit drops compared with a year earlier.

Manufacturing
District manufacturing activity increased modestly since the last report. An index of manufacturing conditions indicated increased activity in January compared with a month earlier in Minnesota and South Dakota; the index for North Dakota indicated flat to slightly decreased activity. Two small firms began expansions at facilities in Minnesota. In contrast, a supplier of capital equipment reported that customers were cutting back on investments. A filtration plant in Minnesota announced that it was cutting around 100 workers.

Agriculture, Energy, and Natural Resources
District agricultural conditions were stable at low levels. Crop production estimates indicated that 2018 was a strong year throughout the District, with new records in some states. However, producers continued to struggle with low commodity prices and expressed concerns about the effects of trade tensions. Respondents to the Minneapolis Fed’s fourth-quarter (January) survey of agricultural credit conditions indicated that farm income and capital spending decreased relative to a year earlier, with further declines expected for the coming three months. Oil and gas drilling in North Dakota and Montana as of mid-February increased from a month earlier. District iron ore mines continued to operate at near capacity.