June 1, 2016
The Ninth District economy grew modestly since the last report. Growth was noted in construction, real estate, manufacturing, and professional services. Consumer spending and tourism were mixed, mining was flat, and agriculture and energy were down. Labor markets remained tight, wage pressures were moderate, and price pressures remained low.
Consumer Spending and Tourism
Consumer spending was mixed. A mall manager in Minnesota reported that occupancy increased 5 percent from this time last year. Malls in the Minneapolis-St. Paul area and Sioux Falls, S.D., have both expanded and renovated some shops to account for growing demand. At the same time, a business supply products distributor closed a branch in Minnesota due to "changing customer purchasing habits." A national high-end restaurant chain will open in Sioux Falls in late May, while a Minnesota-based restaurant chain reported its first decline in restaurant sales in six years. A home construction supply dealer closed in western North Dakota after three years due to the oil-related slowdown. A car dealership in central South Dakota reported that sales over the last quarter were up 60 percent since this time last year; used car sales have nearly doubled.
Tourism activity was mixed across the region. In northwestern Wisconsin, tourism spending was up more than 3 percent year over year. In the first three months of the year, tourism spending in Duluth, Minn., was up almost 8 percent from this time last year. An indoor-outdoor entertainment complex in Minneapolis-St. Paul was expanding to a second location within three years of opening its first complex. However, gaming revenue dropped in Deadwood, S.D., attributed to layoffs in coal mining and decreased agricultural income.
Construction and Real Estate
Commercial construction activity grew modestly since the last report. Nonresidential construction spending rose in Minnesota and Montana in March and April over the same period a year earlier but dropped in North and South Dakota, according to an industry report. A Minnesota trade union representative reported that its members were working record hours. Ground was broken on a $40 million multi-use office building in Bismarck, N.D., and construction is underway for a $70 million corporate office in western South Dakota. Residential construction overall rose modestly. Total residential units permitted in Minneapolis-St. Paul rose 2 percent in March and April over a year ago, with single-family permits increasing by 17 percent. In Rochester, Minn., single-family permits rose by more than 20 percent during this period, but they were flat in Fargo, N.D., and fell in Grand Forks, N.D.
Commercial real estate activity was modest since the last report. Office, industrial, and retail vacancy rates in Minneapolis-St. Paul either remained steady or dropped slightly, and first-quarter office and industrial rents rose less than 2 percent over a year earlier. More than 1 million square feet of space re-entered the Rochester market after a firm consolidated its offices. In western North Dakota, a source said some hotels had 25 percent occupancy rates with the regional slowdown in oil drilling. Residential real estate activity was moderate. Minnesota home sales in March and April rose almost 3 percent over a year earlier, with median prices rising almost 7 percent. Sales in St. Cloud, Minn., grew 20 percent, while sales in Minneapolis-St. Paul rose less than 2 percent, possibly held back by low home inventory. Home sales in District areas of Wisconsin over this period rose by about 6 percent. In the Flathead Valley region of Montana, March sales dropped by 9 percent but rebounded in April by 19 percent over a year earlier.
Services
The services sector grew modestly since the last report. A Minnesota telemedicine services company acquired a national software company, marking the fourth acquisition in the past 18 months. Due to increased demand, a Minneapolis-St. Paul information technology company experienced 75 percent growth in its contract business since this time last year. Brookings, S.D., recently opened a shared community workshop and creative space (referred to as Makerspace) and has 30 paying members.
Manufacturing
Manufacturing increased modestly since the last report. An April index of manufacturing conditions indicated expansion in South Dakota but contraction in Minnesota and North Dakota. In a separate survey of Minnesota manufacturers, 90 percent were optimistic for 2016. A producer of window and door components unveiled plans for a $10 million plant in Sioux Falls, and two different food manufacturers in Minnesota announced separate $100 million plant expansions. A custom contract manufacturer reported that orders from industrial customers were up since the beginning of the year, but demand from agricultural equipment producers remained weak.
Energy and Mining
Conditions in the energy sector weakened, while mining activity held steady at low levels. The number of active drilling rigs in the District continued to fall through mid-May, reaching its lowest level in more than 10 years. North Dakota daily oil production as of March was down 7 percent from a year earlier. In contrast, a large solar development was under way in South Dakota, a large wind farm development in Montana began a major transmission line upgrade, and a Minnesota wind farm announced an expansion. Mining activity was stable overall. An idled Minnesota iron mine will resume production later this year. Meanwhile, an iron mine in Michigan that had been temporarily idled will close indefinitely. Production at a platinum-palladium mine in Montana was up more than 3 percent in the first quarter from a year earlier.
Agriculture
District agricultural conditions remained weak, despite favorable weather going into the growing season. Nearly all respondents to the Minneapolis Fed's first quarter survey of agricultural credit conditions reported that farm incomes were down from a year ago, and more than 80 percent expected them to fall further in the second quarter. Planting progress and early emergence for corn, soybeans, sugar beets, and small grains as of mid-May were well ahead of five-year averages in most of the District. Prices received by farmers fell in March from a year earlier for corn, wheat, soybeans, hay, hogs, cattle, chickens, eggs, and milk; prices increased for turkeys.
Employment, Wages, and Prices
Employment grew modestly since the last report, hampered by poor labor availability. An owner of staffing offices in Minnesota and Wisconsin said job orders were the same or better than a year ago, but "it's a battle every day to find workers." A Montana Job Service office had over 900 job openings, which was "close to our all-time high" in 2007, said an official. A food retailer was hiring over 50 workers to fill management-level positions in Minnesota. In May, more than 400 iron ore workers in northeastern Minnesota were called back to work, and an April job fair in Duluth, "had good turnout...and anecdotes of employers hiring on the spot," said a local source. But job losses were also seen, including 110 after the closure of a Minneapolis-St. Paul hotel and several dozen at two idled Wisconsin frac sand mines. A North Dakota higher education institution was eliminating 138 positions due to budget cuts.
Wage pressure was moderate. A survey of District businesses in May found that most believed wages would increase between 2 percent and 3 percent in 2016. A bank with locations in North Dakota and Minnesota reported merit increases of 3 percent for 2016. Recent service union contracts at hospitals across Minnesota negotiated 2 percent annual wage increases, according to a representative. There was, however, some evidence of greater wage pressure. Thanks to higher state aid, wage increases of 10 percent or more were expected for South Dakota teachers in 2016. Price pressures remained low. Since March, average gas prices have risen, but more slowly in Minnesota and the Dakotas than the national average. A Minneapolis-St. Paul transportation services company reported that prices "have not increased in over 10 years." In South Dakota, college tuition and fees for in-state residents were frozen for next year. North Dakota municipalities reported that construction bids were coming in under budget, thanks to an increase in bidders due to a construction slowdown in oil country.