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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 modest to firm pace since the last report. Strength was noted in consumer spending, tourism, professional services, real estate, construction, manufacturing, energy and mining, and agriculture. Firms reported difficulties hiring qualified candidates, although wage increases remained modest. Price increases were generally subdued.

Consumer Spending and Tourism

Consumer spending increased modestly. Same-store sales at a Minnesota-based retailer increased just over 1 percent in April compared with a year ago; the soft gains were attributed to an earlier Easter holiday and warmer weather in February and March, which likely pulled sales earlier into the year. Recent sales were up slightly at a Minneapolis area mall where a number of stores were undergoing or planning renovations. A Montana bank director reported that vehicle sales were up from a year earlier and a representative of an auto dealers association in North Dakota reported strong sales during the past two months, particularly in the western part of the state. Recent sales at grocery stores owned by a Minnesota-based company were down slightly. Meanwhile, a Minnesota-based electronics retailer announced plans to close six stores in Minnesota.

Tourism officials and businesses were cautiously optimistic about the upcoming summer season. According to a survey of Minnesota lodging and camping properties, 39 percent of respondents expect summer occupancy to be up, while 15 percent expect decreases from a year ago. Officials in South Dakota reported an increase in the number of tourism information requests; early warm weather increased visits to a number of attractions.

Construction and Real Estate

Construction activity increased from a year ago. The value of commercial building permits in the Sioux Falls, S.D., area was up in April from a year earlier. The value and number of new commercial permits increased in Fargo, N.D., during 2012 compared with the same period in 2011. Several new commercial building projects are under consideration in the Minneapolis area. However, respondents to the University of St. Thomas’s semiannual Minnesota Commercial Real Estate Survey (May) expected higher land and building costs, which could dampen growth in construction. Residential construction increased from a year ago. The value of residential building permits increased significantly in the Sioux Falls area in April. The number of single-family building permits increased in Minnesota in March 2012, compared with March 2011. Numerous new multifamily projects were planned for several parts of the District.

Commercial real estate market activity increased. According to the aforementioned University of St. Thomas survey, respondents expected growth in commercial rents and occupancy. Several large Minnesota companies recently renewed or signed new leases for additional office space. A real estate consultancy reported that industrial vacancy rates in the Minneapolis area decreased in the first quarter of this year compared with the fourth quarter of last year; however, office and retail vacancy rates increased. Increases in residential real estate sales continued across most of the District. Home sales in April were up 7 percent from the same period a year ago in the Minneapolis-St. Paul area; the inventory of homes for sale was down 29 percent and the median sales price rose by 12 percent. In the Sioux Falls area, April home sales were up 11 percent, inventory was down and the median sales price rose 4 percent relative to a year ago.

Services

Activity at professional business services firms increased slightly since the last report. An engineering and design firm near oil producing areas of the District reported extremely strong demand for construction developments. Preliminary results of the Minneapolis Fed’s annual survey of professional services companies in May showed that sales revenue, space usage, and profits are expected to increase over the next year. A medium- sized Minnesota services firm commented that they “feel optimistic and are trying to improve efficiency.”

Manufacturing

Manufacturing activity continued to expand since the last report. An April survey of purchasing managers by Creighton University (Omaha, Neb.) found that production expanded in Minnesota and the Dakotas. A light industrial manufacturer in South Dakota reported the strongest capital expenditure levels in 10 years as it developed a successful niche business line. A cement factory in Rapid City, S.D., is considering a $100 million expansion. A steel mill in Minnesota announced a $50 million investment in upgrades.

Energy and mining

Activity in the energy and mining sectors grew. Oil and gas exploration activity increased in North Dakota and Montana since the last report. A biodiesel refinery in Minnesota announced a $20 million upgrade to switch feed stocks from soybean oil to waste fats. District iron ore mines continued to operate at near capacity. Montana hard-rock mines were also busy, with numerous expansions underway across the state. However, District limestone quarries were still suffering from reduced cement demand.

Agriculture

The agricultural sector maintained its strength. Warm spring weather allowed farmers to get into fields early and plantings of corn, spring wheat and soybeans in mid-May was well ahead of average in District states. In addition, recent rains alleviated drought conditions that had persisted until recently in Minnesota and the Dakotas. The Minneapolis Fed’s first quarter (April) survey of agricultural credit conditions indicated that most lenders saw continued increases in farm household income and capital spending, though respondents expect growth to moderate over the next three months. Agricultural output prices have come down somewhat recently. April prices received by farmers for soybeans, cattle and chickens increased from a year earlier; prices declined for wheat, corn, hogs, dairy products and eggs.

Employment, Wages and Prices

A number of employers with open positions noticed tightening in the labor market. Manufacturers in several areas reported difficulty recruiting skilled workers, particularly welders. Agriculture operations in the western part of the District noted difficulty finding workers for certain positions. An aircraft maintenance company recently confirmed plans to expand its operations in Minnesota with potential hiring of up to 225 people. In North Dakota an equipment manufacturer announced plans to create 200 jobs and in northwestern Wisconsin a recreational vehicle manufacturer will add almost 90 jobs.

In contrast, a surprising number of lay-offs were reported recently. A food manufacturer announced plans to cut over 400 positions in Minnesota as part of a restructuring strategy. Also in Minnesota a medical devices company will lay off 220 employees and a cleaning products manufacturer laid off 70 information technology workers. An aerospace manufacturer will close a plant in northwestern Wisconsin, affecting 130 workers.

A larger number of businesses reported wage increases, but the size of increases remained modest. According to a recent Minneapolis Fed ad hoc survey of business contacts, 65 percent reported that their companies were facing higher wages. Larger wage increases were reported in the oil drilling region of western North Dakota and eastern Montana.

Price pressures were generally subdued since the last report, although 73 percent of respondents to the Minneapolis Fed’s ad hoc survey reported upward input cost pressures. Late-May Minnesota gasoline prices were about 15 cents per gallon lower than mid-April and 35 cents per gallon lower than a year ago. A number of metals prices decreased since the last report. A recent budget proposal for the University of Minnesota includes a 3.5 percent increase for in-state undergraduates, the smallest percentage increase in 12 years.

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