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Beige Book Report: Minneapolis

July 17, 2019

Summary of Economic Activity
The Ninth District economy grew at a modest-to-moderate pace since the last report. Employment grew modestly, while wage pressures were moderate and price pressures were modest. The District economy saw growth in consumer spending, services, commercial and residential construction and real estate, and manufacturing. Energy activity fell slightly, and agriculture worsened from an already weak position.

Employment and Wages 
Employment grew modestly since the last report. Recent surveys by the Minneapolis Fed and others suggested that labor demand continued at a healthy pace. A quarter of respondents to the Minneapolis Fed's annual survey of professional services firms planned to increase staffing levels over the coming year, while only 5 percent expected to cut head counts. A poll of greater Minnesota firms showed that 63 percent were hiring, about half of whom were expanding head counts; only 3 percent were cutting employees. A poll of staffing firms, most of them in Minneapolis-St. Paul, found that total job orders and clients have risen modestly over the past two months compared with the same period a year ago; expectations for job orders over the remainder of the summer were slightly higher. Larger employment gains were restrained by low labor supply. Unfilled job orders have risen modestly among staffing firms, and many said labor market tightness was getting worse. "Toughest market I have ever seen," said one. A health care contact in Montana said, "We flat out cannot find enough workers." Four of five respondents to the poll of greater Minnesota firms said that tight labor was negatively affecting business. Some softness was also present in the job market. Initial unemployment claims rose by 3 percent over the most recent six-week period (ending in early June) compared with a year earlier; each District state saw an increase. However, continuing claims trundled lower, falling by almost 8 percent over the same period.

Wage pressures were moderate overall, but varied. Despite strong hiring demand and tight labor, nearly 70 percent of respondents to the ad hoc poll of greater Minnesota businesses said wages rose less than 3 percent over the past 12 months, and a notable share said they rose less than 1 percent. Their wage expectations for the coming 12 months were slightly lower. Among professional services firms, two-thirds reported wage increases of 3 percent or more, but their wage outlook for the year ahead was also lower. Minnesota staffing firms reported stronger wage growth, with almost half reporting 12-month wage growth of 5 percent or more. However, expectations of future wage increases were somewhat lower.

Prices 
Price pressures since the previous reporting period were modest. A third of respondents to the annual professional services survey indicated that they increased final prices over the past year, compared with only a quarter who expected to increase prices in the year ahead. A majority of respondents reported increases in input costs, however. A separate Minneapolis Fed business conditions survey indicated that firms increased output prices slightly on average in the second quarter of 2019 relative to the same period a year earlier; a strong majority expected to leave prices unchanged in the third quarter. A larger share of firms reported input price pressures. Contacts reported substantial increases in trucking costs and health insurance premiums. Retail fuel prices in District states as of early July were moderately lower relative to the previous reporting period. Prices received by farmers in May increased from a year earlier for hay, hogs, milk, and turkeys, while prices for corn, wheat, soybeans, eggs, and chickens decreased; prices for cattle were unchanged from a year ago.

Consumer Spending
Consumer spending rose slightly overall since the last report, with some mixed activity. Gross sales in Wisconsin were flat in May compared with a year earlier, but rose by 7 percent in South Dakota. New and used vehicle sales were lower in May and moved sideways in June in western areas of the District. Resort operators in northern Minnesota reported strong bookings. However, a Montana contact noted that spending from Canadian tourists was down due to the strong U.S. dollar. Airline passenger traffic was strong in May across many of the District's airports, with some seeing double-digit growth. But hotel occupancy rates in Minnesota were slightly lower in May, and lodging and accommodation taxes in Montana were also lower after seeing robust gains in previous months. Total gaming revenue in South Dakota rose 3 percent in May over a year earlier. However, national park visits Districtwide over the same period were notably slower. Monthly traffic across the Mackinac Bridge in Michigan's Upper Peninsula was flat compared with last year.

Services
Professional services grew moderately. Respondents to the Minneapolis Fed's annual services survey reported growth in sales, productivity, profits, and employment over the past year. Expectations for the coming 12 months were slightly stronger. Contacts in the trucking industry generally reported increased freight volumes, with demand far outstripping the supply of drivers. However, some trucking contacts reported major disruptions due to flooding.

Construction and Real Estate
Commercial construction grew moderately since the last report. The value of construction starts across the District saw a healthy rise in May compared with a year earlier after several months of flat or declining activity. A second database that tracks construction projects found that new and active projects in the District through mid-June were moderately higher than last year. Commercial permitting figures suggested that future activity might remain spotty, with May permitting values lower compared with a year earlier in many of the District's larger markets, including Minneapolis-St. Paul. Residential construction rebounded after several lackluster months, with May housing permits rising across much of the District compared with last year. June permit data were not widely available at deadline, with the exception of Minneapolis-St. Paul, which showed strong single- and multifamily activity in May and June.

Commercial real estate grew modestly since the last report. Multifamily vacancy rates in Minneapolis-St. Paul continued to be among the lowest in the country, and office and industrial vacancies remained steady. Retail vacancy rates there were expected to rise slightly in the future, but would be helped by a "thin" pipeline for new construction, according to an industry source. Residential real estate activity rose moderately in most of the District after several slow months. Closed sales in May rose across Minnesota compared with a year earlier, as well as in western and northern counties of Wisconsin. But closed sales were mixed in North Dakota and Montana markets.

Manufacturing
District manufacturing activity increased modestly. An index of manufacturing conditions indicated increased activity in June compared with a month earlier in Minnesota and the Dakotas. A steel manufacturer reported solid demand that they were unable to meet due to labor force constraints. Several diversified contract manufacturers described activity as stable, with demand from nondurable goods generally stronger than from consumer products. However, some manufacturing contacts reported concerns about a slowdown in the sector. Producers of agricultural equipment continued to report reduced domestic demand.

Agriculture, Energy, and Natural Resources
District agricultural conditions worsened from an already weak position. Heavy rainfall and flooding substantially delayed crop planting in many areas of the District. In some areas farmers switched from corn to soybeans or other crops that could start growing later, while in other areas crops did not get planted at all. Contacts in affected areas expressed concerns that the impacts could be severe. District oil and gas exploration activity as of early July was down slightly relative to the previous report. District iron ore mines continued to operate at near capacity. Contacts in nonferrous mining described activity as stable.