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Beige Book Report: Minneapolis

March 7, 2018

Summary of Economic Activity
The Ninth District economy grew moderately overall since the last report, with employment, wages, and prices all seeing moderate growth. The District economy showed growth in consumer spending, tourism, commercial construction, manufacturing, real estate, energy, and mining. However, residential construction slowed, and agriculture remained weak.

Employment and Wages
Employment grew moderately since the last report, as hiring demand appeared robust, but tight labor restrained stronger hiring. An ad hoc survey of Minnesota staffing firms found that hours booked in the first six weeks of 2018 rose for most firms over the same period a year ago. Rural hiring sentiment increased notably over the previous month in Minnesota and the Dakotas, according to a February poll of rural bankers and other firms. Online job openings in January increased slightly in North Dakota over a year earlier; only the third increase in the past 18 months, but the second increase in the past four months. Tight labor markets, however, were limiting hiring. The number of job seekers registered with state workforce offices in January was 11 percent lower in North Dakota and 29 percent lower in Montana compared with a year earlier. Initial unemployment claims in the District over the first five weeks of 2018 fell almost 7 percent compared with a year earlier, though Minnesota's decline was less than 2 percent. Continuing claims fell by 8 percent. A Montana contact said that "many fear a better economy will exacerbate labor problems." There were several notable layoff events, including one at a Minnesota manufacturer that cut 900 workers. But sources suggested that job opportunities were available for those affected.

Wage pressures were moderate since the last report. A number of one-time bonuses were reported, stemming from recent changes in federal tax policy. Several contacts, including a Montana banker, also said raises were more likely because tax reform "provides a way to pay for increased wages" without increasing prices or reducing profits. A Minnesota construction contractor said wages "are going up because we are seeing an increase in productivity." A Montana ski resort contact said that tax savings would allow the company to raise wages, and a Montana construction contact believed tax changes would provide a sizable, single-step increase in wages. However, a number of public union contracts--covering South Dakota county employees, Minnesota and Wisconsin state employees, and higher education service workers in Minnesota--all settled for increases of 2 percent or less.

Prices
Price pressures were moderate since the last report. About three-quarters of respondents to a January survey of firms from around the District reported that they expected the prices they charge for their products or services to increase only slightly or not at all in the next three months. Retail fuel prices in District states as of late February were slightly higher than in the previous reporting period. Building materials prices continued to increase faster than overall prices. Prices received by farmers for wheat, hay, hogs, cattle, chickens, and eggs increased in December compared with a year earlier; prices for corn, soybeans, milk, and turkeys decreased.

Consumer Spending and Tourism
Consumer spending grew modestly since the last report. Closures of big-box and other franchised retail stores continued across the District. A large salon franchise headquartered in Minnesota announced the closure of 600 locations across the country. However, consumer spending has continued to grow. North Dakota sales tax revenue in January rose by 14 percent over a year earlier. Gross retail sales in South Dakota over the same period grew by 2 percent, though overall gross sales were much stronger, at 9 percent growth. Gross retail sales in Wisconsin were slightly higher since the last report.

Tourism saw moderate growth, boosted by activity from the Super Bowl, hosted in Minneapolis in early February. Retailers, especially those in or near downtown, reported strong revenue, and hotels saw outsized gains for the period. Elsewhere, Montana snow conditions were good, and a resort said the number of skiers so far this season was ahead of last year's record pace. A source in the Upper Peninsula of Michigan said that "things have been going well" for winter tourism so far, and February snow conditions in northern Wisconsin were reportedly excellent for snowmobiling, downhill skiing, and cross-country skiing.

Construction and Real Estate
Commercial construction saw strong growth since the last report. An industry report on January construction spending showed robust growth in District states compared with a year earlier, and every District state registered at least a small increase. Another industry database showed strong growth in new projects and total active projects over the first seven weeks of 2018 compared with the same period a year earlier. Commercial permitting activity was higher in many of the District's largest cities and particularly so in Sioux Falls and Rapid City, S.D. Residential construction was mixed; permit values were down in Minneapolis-St. Paul and Sioux Falls, but up in Billings, Mont., Rochester, Minn., and Rapid City. Total multifamily units permitted in January were lower than a year earlier.

Commercial real estate grew moderately, remaining at strong levels in Minneapolis-St. Paul. Occupied retail space continued to expand, with vacancy rates hitting their low for the year in the fourth quarter, due in part to the Super Bowl. Multifamily construction, unit sales, and rent increases continued at a healthy pace in Minneapolis-St. Paul, and an industry source said the market "defies gravity." Construction of new industrial space also has been strong while vacancy rates remained stable. The office market was somewhat softer due to a trend in smaller corporate footprints, but overall vacancy has been mostly unchanged. Residential real estate fell moderately. January home sales were lower across most of the District, with the notable exception of northern Wisconsin, where an 18-county rural region posted a 6 percent increase in sales, continuing a persistent growth trend there.

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. A major fertilizer plant began operations in North Dakota. A solar-panel producer announced an expansion at a facility in Minnesota. An appliance manufacturer announced that it will close a plant in Minnesota.

Agriculture, Energy, and Natural Resources
District agricultural conditions were stable at low levels. 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. Most of the Dakotas and portions of Montana were experiencing below average snowfall over the winter, with concerns that drought conditions could persist into the spring planting season.

Energy and mining activity increased briskly from the previous report. Oil and gas drilling in North Dakota and Montana as of mid-February increased from a month earlier, though cold weather slowed recent oil production. Contacts at nonferrous mines had a positive outlook, driven by increases in prices of gold, copper, and molybdenum. Development continued at a new copper mine in Michigan's Upper Peninsula. Iron ore mines in northern Minnesota were operating at high capacity. Output from Wisconsin sand mines increased in recent months, due to greater demand from hydraulic fracturing.