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Beige Book Report: Minneapolis

October 16, 2019

Summary of Economic Activity
The Ninth District economy grew at a slight pace since the last report. Employment was flat, while wage pressures were moderate overall and price pressures remained modest. The District economy saw growth in tourism, services, commercial construction and real estate, and energy. Consumer spending and residential construction and real estate were mixed. Manufacturing decreased slightly, while agricultural conditions remained weak.

Employment and Wages
Employment was flat since the last report. August employment rose over the previous month in three District states, but fell in two others. Hiring demand remained healthy, but there were some signs of softness. Separate polls of human resources contacts in Minnesota and Montana showed that the large majority of firms were hiring, and virtually none were cutting staff. Construction firms in Minnesota reported strong demand for skilled trades workers, but lower demand for other staffing needs. Staffing contacts in Minnesota saw slight growth in job orders overall in the third quarter compared with last year, but several reported significant decreases. Expectations for the fourth quarter were mostly flat, with many expecting an increase in unfilled job orders due to very tight labor conditions. A strong majority of respondents to a survey of Ninth District firms indicated that they planned to leave employment unchanged or increase it slightly over the coming three months. August job postings were lower in Minnesota, Montana, and North Dakota; flat in Michigan's Upper Peninsula; and up slightly in South Dakota. Hiring sentiment in two regional indexes fell notably for respondents in Minnesota and the Dakotas; one index fell into contraction for all three states. Initial unemployment claims rose slightly overall among District states over the most recent six-week period (ending mid-September) compared with a year earlier, with Wisconsin and the Dakotas seeing the largest increases.

Wage pressures were moderate overall. A solid majority of human resources poll respondents in Minnesota and Montana said that wages rose by 3 percent or less over the past 12 months, and wage expectations for the coming 12 months were softer. Wage growth was stronger among construction and staffing contacts in Minnesota, but each group also expected wage pressure to lessen somewhat in the coming year. A staffing contact in Montana said wages for entry-level positions continued to rise, and those who raised wages last year to stay competitive were re-evaluating additional increases. A North Dakota staffing contact noted that while wages were rising overall, some clients were intentionally not raising wages for unskilled labor because it "does not make much difference" in the workers they attract or retain, "unless they raise pay scales significantly."

Prices
Since the previous report, price pressures remained modest. Most respondents to a survey of firms across the Ninth District indicated only flat or slight increases in input costs over the previous quarter, with a similarly subdued outlook for the final three months of the year. However, firms continued to note faster growth in health insurance premiums. Retail fuel prices in District states as of early October were roughly unchanged relative to the previous reporting period. Prices received by farmers in August increased from a year earlier for corn, potatoes, hogs, cattle, milk, and turkeys, while prices for wheat, soybeans, hay, eggs, and chickens decreased.

Consumer Spending
Consumer spending was mixed since the last report. South Dakota gross sales in August grew by 5 percent compared with a year ago, and the state's gaming handle was almost 4 percent higher. Conversely, gross sales in Wisconsin were flat, and North Dakota sales tax collections were 5 percent lower than a year earlier. Assisted by good weather, the Minnesota State Fair in late August and early September saw record attendance. A vehicle dealership with multiple outlets in the western Dakotas and Montana saw new-vehicle sales grow by 4 percent in August, while used cars fell by 4 percent. Another dealership with outlets across the eastern portion of the District saw strong sales over the summer, including August and September, with sales slightly stronger in used versus new vehicles. According to industry sources, marine and recreational vehicle sales in District states have been lower this summer compared with last year, but powersport sales have been on par.

Tourism saw growth overall in the most recent period. In northern Wisconsin, tourism businesses reported strong activity at the end of the summer, with lodging facilities seeing solid bookings through mid-September. A large campground in the region reported modestly more summer bookings and higher average customer spending. Hotel occupancy rates in Minnesota were slightly higher in August compared with a year earlier, and revenue per room was 3 percent higher. Total passengers at District airports increased compared with a year earlier: August passengers through Minneapolis-St. Paul were up 3 percent, and seven other regional airports saw increases ranging from 4 percent to 20 percent. However, among nine major national parks in District states, only two registered an increase in August visitors compared with a year earlier.

Services
Activity in the professional services sector increased moderately. Several engineering firms reported large backlogs of work. Regional hospital systems and clinics continued to plan large capital expenditures for expansions over the medium term. In contrast, contacts in the trucking and rail transportation sector reported a slowdown in freight volumes.

Construction and Real Estate
Commercial construction rose moderately since the last report. A construction database showed that August construction starts in the District were higher than a year earlier. A second industry database showed that new and active projects in the District over the most recent six-week period (ending September 27) were roughly on par with the same period a year earlier. A number of subcontractors in Minnesota reported large backlogs. Industry contacts in Montana also reported healthy activity. Residential permitting for single-family units in August was flat or lower across the large majority of metros in the District compared with a year earlier. While single-family construction lagged, however, some regions continued to see strong multifamily permitting, including Minneapolis-St. Paul.

Commercial real estate grew modestly since the last report. Despite steady delivery of new units, multifamily housing vacancy rates in Minneapolis-St. Paul remained among the lowest in the country for major metropolitan regions, leading to rent increases. Industrial space in the region continued to see low vacancy rates and healthy expansion. New retail construction in Minneapolis-St. Paul has declined, although grocery has continued its expansion in the region, and vacancy rates remained fairly stable. Residential real estate was mixed. Closed home sales in August fell compared with a year earlier across Minnesota, as well as in Missoula, Mont., Sioux Falls, S.D., Grand Forks, N.D., and northern Wisconsin. However, closed sales rose in Bozeman and Helena, Mont., Fargo, N.D., and western Wisconsin.

Manufacturing
District manufacturing activity decreased slightly relative to the previous report. An index of manufacturing conditions indicated decreased activity in September compared with a month earlier in Minnesota and South Dakota and flat activity in North Dakota. Multiple contacts in custom manufacturing and metal fabrication reported a slowdown in new orders, and several said they expect a slower fourth quarter. In contrast, producers of heavy equipment and building materials noted increased demand from the construction sector.

Agriculture, Energy, and Natural Resources
District agricultural conditions remained weak. Heavy rains that hampered crop planting this season have persisted into the fall and may complicate harvests in some areas, according to sources. Recent forecasts indicated that corn and soybean production in District states may decrease 10 percent and 20 percent, respectively, in 2019 compared with last year. District oil and gas exploration activity increased moderately relative to the previous report. The number of active drilling rigs rose as of September from a month earlier, but industry contacts reported that demand for workers and materials was little changed. District iron ore mines continued to operate at near capacity.