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Beige Book Report: Minneapolis

October 18, 2017

Summary of Economic Activity
The Ninth District economy grew modestly since the last report. Employment fell since the last report, but hiring demand remained strong, held back by tight labor markets. Wage pressures were moderate, while price pressures were modest overall. The District economy showed growth in services, manufacturing, commercial real estate, residential construction, and energy. Consumer spending saw only slight growth, and commercial construction was flat; agriculture improved, but remained weak overall, and residential real estate slowed.

Employment and Wages
Employment fell since the last report, but hiring demand remained strong, held back by tight labor markets. Seasonally adjusted August employment levels fell across the District, continuing an up-and-down pattern in recent months. However, a staffing contact in southeastern Minnesota said hiring "is still robust. I have no issue getting clients. If I had 100 people, I could put them all to work." A Minnesota labor contact said worker demand in hospitality was "stronger than usual going into the winter season" for both union and nonunion businesses. A large Minnesota entertainment and hospitality firm said it had 150 job openings on a steady basis at two locations. A Montana source said booth registrations at recent career fairs were up 7 percent, "indicating more employers are looking to hire." Two September business conditions indexes showed strong hiring sentiment in Minnesota and North Dakota, but some softness in South Dakota. In Montana, the number of job seekers visiting state workforce centers in September fell compared with August figures, while the number of open job positions grew. A September survey of South Dakota retailers by the Minneapolis Fed found that more than half were hiring, but most often to fill turnover. Contacts in hospitality and construction also noted an increase in overtime for workers.

Wages rose moderately since the last report, with some mixed signals, but overall showing signs of strengthening. A staffing contact said one client has raised starting wages three times since June. A South Dakota construction contact estimated wage increases of 3 percent to 5 percent over last year and expected similar increases in the coming year. A Minnesota labor union source in the services industry reported increases of 3 percent "in most of our units." In a survey by the Minneapolis Fed, 40 percent of South Dakota retailers reported wages rising between 1 percent and 3 percent over the past year, but with equal percentages above and below those levels. Said a Minnesota workforce contact, "I get very mixed signals. I hear that wages are going up, but when I press, I still see a lot of wage increases in the 2 percent to 3 percent range."

Prices
Price pressures remained modest since the last report. After spiking in late August, retail fuel prices in District states decreased over the following month, but remained slightly higher than the previous reporting period. A survey of Minneapolis-St. Paul home builders indicated increased price expectations for building materials and land. Prices received by farmers for corn, wheat, hay, milk, hogs, and eggs increased in August compared with a year earlier; prices for soybeans, cattle, chickens, and turkeys decreased.

Consumer Spending
Consumer spending rose slightly overall since the last report. Automotive sales were reportedly solid, and a Minnesota dealer announced a major expansion of dealerships in Minneapolis-St. Paul and nearby Wisconsin markets. Despite recent closures, especially among legacy retailers, new retail stores continued to open. Tourism also saw growth. Among the 14 national parks in District states with significant summer attendance, total August visitors were up 8 percent over a year earlier, to more than 3 million—the third consecutive month of a visitor increase of at least 5 percent. August hotel demand in Minnesota increased by 1 percent from a year earlier, with Rochester and Minneapolis-St. Paul growing by 4 percent and 2 percent, respectively.

However, there were some signs of softness. A September survey of North Dakota and South Dakota retailers by the Minneapolis Fed showed generally softer sales over the previous two months compared with the same period a year earlier. Gross sales were softer this summer in Wisconsin and South Dakota compared with last year, and the total August handle at South Dakota casinos fell by about 3 percent.

Services
Activity in the professional services industry increased moderately since the last report. A biotech firm broke ground on a large research facility in Minnesota. A consultant noted a growing backlog of work related to merger and acquisition activity in the second half of the year. Freight rail contacts reported that shipments had grown slightly but consistently during this year. August shipments from Great Lakes ports increased from a year earlier; iron ore shipments increased 10 percent.

Construction and Real Estate
Commercial construction was flat since the last report. An industry database of construction spending showed no growth over the latter half of summer compared with a year earlier. Industry tracking of new construction projects showed lower levels over the most recent six-week period (end of September) compared with a year earlier. A South Dakota contact said construction there was "a little slower" compared with last year, especially outside of metro areas. Limited figures on commercial construction permits in September showed activity was higher in Sioux Falls, S.D., but considerably lower in Billings, Mont. August permit figures were mixed. Residential construction was up modestly overall. Limited September data on residential construction showed activity was higher in Minneapolis-St. Paul and Billings compared with a year ago, but slightly lower in Sioux Falls. August permitting was generally flat to lower across the District compared with a year ago, with the notable exception of Minneapolis-St. Paul.

Commercial real estate grew modestly since the last report. In Minneapolis-St. Paul, office vacancies have risen slightly, while retail vacancies fell slightly after rising in previous quarters. Most metros continue to see multifamily development in light of low vacancy rates. Minneapolis-St. Paul maintained one of the tightest vacancy rates in the nation despite 5,000 units coming online in the past 12 months. Residential real estate slowed, with closed sales lower across the District. Thanks to low inventories, median prices were universally higher, including a 14 percent year-over-year increase in Bozeman, Mont. A contact there said real estate agents "are not seeing any slowdown in buying. They feel it's only a matter of time before the markets slow, simply because of the lack of available inventory."

Manufacturing
District manufacturing activity increased moderately since the last report. An index of manufacturing conditions produced by Creighton University indicated increased activity in September compared with a month earlier in Minnesota and North Dakota; the index for South Dakota indicated a slight decrease in activity. Several firms noted an increase in demand for equipment related to oil and gas extraction. A lubrication equipment producer reported an increase in orders from the military. A producer of hydraulic cylinders said sales were up over last year and current orders were solid.

Agriculture, Energy, and Natural Resources
District agricultural conditions improved slightly since the previous report, but remained weak overall. Though drought conditions eased, large areas of Montana and the Dakotas remained exceptionally dry, and much of the damage to crops had already been done. Early indications were that the wheat harvest might be better than expected in these areas, but still well below average. Areas not affected by drought were generally expecting good yields, but saw harvests delayed by rains. Activity in the energy and mining sectors increased slightly since the last report. District oil and gas exploration as of late-September was roughly unchanged from a month earlier. Output at District iron ore mines was up substantially from a year earlier.