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Beige Book Report: Minneapolis

April 19, 2017

Summary of Economic Activity
The Ninth District economy grew modestly overall since the last report. Employment grew moderately, wage pressures picked up, and price pressures were modest overall. Activity increased in construction, manufacturing, energy, and mining, while commercial real estate activity was flat at strong levels. Tourism activity was mixed, while consumer spending and residential real estate were down, and agriculture remained weak.

Employment and Wages
Employment grew moderately since the last report, checked by tight labor conditions. From February to mid-March, initial unemployment claims were 14 percent lower relative to a comparable period a year earlier, dropping in every state except South Dakota. Continuing claims were also lower overall. A Minnesota staffing firm contact said job orders for seasonal workers in landscape and construction started rising due to the relatively warmer weather. Firms catering to tourists in the Black Hills region reported difficulty finding labor, especially seasonal immigrant labor they have traditionally used. A Montana source said many firms are hiring, "but there's not enough workforce for all of the openings." The oil-producing region of North Dakota saw an increase in hiring, according to a state contact. Employer booths at recent job fairs there were sold out and had double the job openings of the previous year, including one company looking to hire 200 to 300 certified drivers. There were some notable job losses, including 55 at a Minnesota construction firm and 100 at a South Dakota senior care organization, along with those affected by numerous retail closures across the District. But overall, said one source, "the good news certainly seems to be outweighing the bad news right now." A survey of employers in District states found that their second-quarter hiring outlook was solidly positive and more optimistic than a similar, first-quarter survey.

Wage pressures were moderate to strong since the last report. A staffing firm in Minneapolis-St. Paul reported that wages have increased by more than 3 percent from a year ago; reports from staffing firms in Montana and Wisconsin suggested even larger increases. A contact at a South Dakota human resources firm said more companies were asking for competitive wage analysis and, as a result, compensation increases were "above normal." A manufacturing consultant said clients were predicting "more aggressive" wage increases than in past years. While wages in the Bakken oil region remained below their peak, housing allowances and daily stipends have come back after being eliminated during the oil downturn, according to a source there.

Prices
Price pressures were modest overall since the last report. A survey of commercial contractors indicated acceleration in the price of building materials. A contact at an electric utility reported that a proliferation of wind energy developments put downward pressure on electric rates. Most prices received by farmers decreased in February from a year earlier, with the exception of soybeans, milk, chickens, and hogs.

Consumer Spending
Consumer spending was down modestly since the last report. A national department store chain closed 20 stores across states in the Ninth District. In Grand Forks, N.D., alone, three mall-based department stores closed--in one case, the closure was due to bankruptcy. These and other retail store closures, referred to as a "mall quake" by one industry expert in Minnesota, reflected the larger national trend of sales gravitating away from brick-and-mortar stores to online sales. A national food distributor based in Minneapolis-St. Paul saw a 5 percent decline in sales in the most recent quarter, and the third straight quarterly decline. In contrast, craft breweries in Montana saw record revenue increases in sales since the last report and were characterized as an "economic engine" for the state. Several new grocery stores opened in Minneapolis-St. Paul as a new national chain has moved into vacant retail locations.

Tourism
Tourism conditions were mixed since the previous report due to the range of weather conditions across the District. Bountiful snowfalls in the mountains of Montana extended the ski season for most resorts. However, states bordering the Great Lakes experienced unseasonably warm weather in February and early March, shortening the winter tourism season by a month. Small-town ice festivals and Nordic ski races in many northern state communities lost weeks of anticipated revenues. Hotel occupancy rates in Wisconsin have slowed since the last report, according to state officials, while in Minnesota, lodging revenue exceeded 6 percent annual growth for the fourth consecutive year.

Construction and Real Estate
Construction activity was up modestly since the last report. New construction projects out for bid over the most recent six-week period (through late-March) increased more than 10 percent over a similar period a year earlier, according to an industry tracker. A second industry database showed strong January-February growth in heavy and other nonbuilding construction sectors. "We're anticipating quite a bit of business this year," said a construction material supplier in South Dakota. However, commercial construction permitting was lower in most District metros compared with the same period a year earlier. Residential construction was mixed. Many metros have seen fewer units permitted in the first quarter compared with a year earlier, but Minneapolis-St. Paul saw a strong increase in both single- and multifamily units.

Commercial real estate was flat, but remained solid by most measures. Office vacancy rates in Minneapolis-St. Paul have ticked higher after significant new office development. There were reports of more preleasing before new projects move into the construction phase. A Minneapolis-St. Paul source noted that retail vacancies had crept up to 6 percent, but that "is still considered very low. Prime retail areas are very tight and have high rents." Despite significant new construction in recent years, office and industrial vacancy rates in Sioux Falls, S.D., remained low, while apartment vacancies have risen thanks to an influx of new units. Residential real estate was lower overall. Some Montana regions saw growth in home sales, but sales elsewhere in the District were lower, the result of low inventories, according to numerous sources, which were leading to quicker sales and higher prices. In Rapid City, S.D., said one source, sellers "can expect to get full market value."

Services
Professional services activity was up modestly. Information technology and software firms in Sioux Falls indicated continued growth in sales since the last report. Accounting firms across the Ninth District reported a normal, seasonal uptick in activity given the tax season. Several law firms in the Minneapolis-St. Paul region experienced modest growth since the last report, and one law firm is appealing to startup companies by providing cut-rate legal advice to compete with online legal tools. A public relations firm in Minnesota reported "steady work," as did an architectural firm in Fargo, N.D.

Manufacturing
District manufacturing activity increased moderately since the last report. An index of manufacturing conditions produced by Creighton University indicated increased activity in March compared with a month earlier in Minnesota and the Dakotas. A medical device maker announced an expansion at a Minnesota facility. A Michigan firm noted that recent orders were "almost double" expectations. Several contacts across the District reported increased capital expenditures by manufacturers.

Agriculture, Energy, and Natural Resources
District agricultural conditions remained weak since the previous report. Most of the District remained drought-free heading into planting season. Activity in the energy and mining sectors increased modestly since the last report. District oil and gas drilling as of late March increased from low levels a month earlier. Some contacts in the oil-producing region of the District expected an increase in activity in April. A copper mine and a gold mine were slated for opening later this year in Michigan's Upper Peninsula.