U.S. Federal Reserve Beige Book: Minneapolis District (Text)

The following is the text of the Federal Reserve Board’s Ninth District-- Minneapolis.

NINTH DISTRICT--MINNEAPOLIS

The Ninth District economy grew at a firm pace since the last report. Strength was noted in consumer spending, professional services firms, commercial and residential real estate and construction, manufacturing, energy and mining, and agriculture. Lack of snowfall reduced tourism activity. Some more firms announced plans to expand hiring, while wage increases were modest. Overall prices were level, but some increases were noted.

Consumer Spending and Tourism

Consumer spending was solid. Same-store sales at a Minnesota- based retailer increased about 4 percent in January compared with a year ago. A Minneapolis area mall manager reported relatively strong traffic during January. A Minnesota-based restaurant and bar chain reported that same-store sales were off to a good start in January and February. A fast food chain recently announced plans to add more restaurants in Minnesota. A representative of an auto dealers association in Montana noted that recent vehicle sales were higher than a year ago and that availability of new and used cars has improved. Repair shops in eastern Montana were very busy repairing oil-drilling-related vehicles. However, due to the surprisingly mild winter, many District auto repair shops reported a decrease in business because of fewer snow- and ice-related accidents.

Tourism was down due to low snowfall in much of the District. The lack of snow in Minnesota and Wisconsin has stymied snowmobiling and cross-country skiing. Snowmobile dealerships reported a sharp drop in sales from a year ago. However, a Minnesota travel company reported strong demand for both corporate and leisure travel in January; interest in traveling to Europe and other overseas destinations was up. Another travel agency noted that recent corporate travel sales were up almost 25 percent compared with a year ago.

Construction and Real Estate

The unusually warm weather aided construction activity. The value of commercial building permits in the Sioux Falls, S.D., area was up in January from January 2011. A major Minnesota- based commercial real estate company expects more construction of retail and warehouse structures. Residential construction increased from a year ago. The value of residential building permits increased significantly in the Sioux Falls area in January. The number of single-family building permits increased in Minnesota and North Dakota in December 2011, compared with December 2010. Multifamily construction in the Minneapolis area is in a “boom,” according to a major real estate firm.

Commercial real estate market activity increased. A large warehouse property manager noted increased transaction activity over the past few months. A major Minnesota-based broker noted increased leasing of office space. Home sales in January were up from the same period a year ago in the Minneapolis-St. Paul area, and the inventory of homes for sale continued at low levels. Several brokers noted that the low end of the market appeared to shift to a “sellers’ market.” The multifamily market continued to strengthen in the fourth quarter of 2011 as rents increased and vacancy rates decreased in many markets, according to a real estate research firm.

Services

Activity at professional business services firms increased at a solid pace since the last report. Of the 33 firms that responded to a mid-February ad hoc survey, 63 percent saw revenues increase over the past three months, while only 16 percent experienced revenue drops. Over the next three months, 59 percent expect increased revenues and only 6 percent expect sales to drop. A human resources consulting firm noted increased activity with “more proposals and opportunities.” An architectural firm noted increased activity and demand, but said the competition remains “fierce.”

Manufacturing

District manufacturing expanded at a firm pace. A January survey of purchasing managers by Creighton University (Omaha, Neb.) found that manufacturing activity increased in Minnesota and the Dakotas. An electrical equipment producer is opening a new facility in Minnesota. An aerospace firm announced plans to locate a plant in Montana. A producer of automotive cooling systems is expanding operations in South Dakota.

Energy and Mining

Activity in the energy and mining sectors continued at strong levels. District oil and gas exploration increased since the last report. In Montana, construction began on what will be the state’s largest wind energy development. In addition, regulators in Montana approved an $86 million wind energy project. Iron mines in northern Minnesota were operating at near capacity. A Canadian mining company discovered large iron and titanium deposits near Duluth, Minn., but any mining operations are several years away.

Agriculture

Agriculture remained strong. January prices received by farmers for corn and cattle increased. Prices declined somewhat for wheat, soybeans, hogs, dairy products, eggs and poultry, but all prices were above their January 2011 levels. According to preliminary results from the Minneapolis Fed’s fourth-quarter (January) survey of agricultural credit conditions, 67 percent of District lenders reported that farm incomes increased in the previous three months; 10 percent reported decreases. However, drought conditions spread in Minnesota, the Dakotas and District portions of Wisconsin. Low snowfall combined with erratic temperatures were having an uncertain effect on the District’s winter wheat crop.

Employment, Wages and Prices

Some more firms announced plans to expand hiring. An airplane manufacturer announced plans for a new facility in northwestern Wisconsin that will initially create 300 jobs. A marketing company plans to expand its operations in Minnesota and eventually hire 200 more workers. Also in Minnesota, a clothing supplier will add 150 employees at a new facility, and a boat manufacturer expects to rehire former employees laid off during the recession.

However, some employment cutbacks were announced. A Minnesota- based food retailer will cut about 200 jobs at the company’s headquarters. A bank will lay off almost 70 employees at an auto-debt-collection unit in South Dakota.

Wage increases were modest. Workers at two food operations recently agreed to a new contract that includes some wage increases over a five-year period. Bank directors recently reported that business contacts expected wage increases between 2 percent and 3 percent in 2012 compared with 2011 after remaining level over the past couple of years. Larger increases were noted in the oil-drilling area of western North Dakota and eastern Montana, particularly for welders who were in short supply.

Overall prices were level, but some increases were noted. Minnesota gasoline prices were up 15 cents per gallon since early January. Bank directors noted that health insurance costs were up between 6 percent and 8 percent over a year ago, with some reports of steeper increases.

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