March 3, 2004 Federal Reserve Districts Ninth District--Minneapolis

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From early January through late February the overall Ninth District economy showed firm growth. Residential real estate, manufacturing, consumer spending, mining and tourism were up, while commercial real estate, energy and agriculture were mixed. District employment grew slightly. Wage and price increases were generally modest; however, significant price increases were noted in steel, health insurance and home heating. Construction and Real Estate Commercial construction activity was mixed. In Duluth, Minn., a property listing service representative said the office market has recently stabilized after office vacancy rates increased to 17 percent. In contrast, a representative of an economic development office in the Eau Claire, Wis., area noted that there wasn't a lot of open office space. According to a report by a commercial real estate firm, industrial development activity is expected to be somewhat slow in 2004, while retail building is expected to be active for the Minneapolis-St. Paul area; however, development won't be as strong as in 2003. Housing permit activity was strong, but sales slowed. A representative of a contractors association in Montana reported that residential building remains healthy, especially high-end homes in resort areas. Permits for new housing construction in the Minneapolis-St. Paul area were up 15 percent in January compared with a year ago, but recent construction slowed due to cold and snowy weather. The number of closed home sales was down 20 percent in January in the Minneapolis-St. Paul area, with the median price 5 percent greater than in January 2003. Consumer Spending and Tourism Overall consumer spending grew moderately. A major Minneapolis-based retailer reported same-store sales during January were 5 percent higher than a year ago, while February sales were at the high end of plans. A mall manager in the Minneapolis area reported solid traffic during January and early February, with particularly strong traffic on Valentine's Day weekend. Retail sales were strong during January and early February at a mall in North Dakota, including a 14 percent increase the week of Valentine's Day compared with last year. Traffic at a Montana mall was up 7 percent in January and 4 percent for the first part of February compared with last year, according to the mall manager. Traffic and sales were noticeably down at Minnesota auto dealerships in January and early February compared with last year, according to a representative of a car dealers association. Substantial snowfall in late January and early February boosted winter tourism activity in many parts of the district. A Minnesota ski hill reported near capacity ski crowds in early February. Mountain snow packs through January were 30 percent to 40 percent deeper than last year in Montana; one large resort reported skier numbers up 10 percent. However, a tourism official in the Upper Peninsula, which often reaps the benefit of being one of the few areas with snow, reported that recent activity was slower than last year because most Midwest areas have snow. Manufacturing Manufacturing activity increased. Preliminary results from a survey of district manufacturers conducted in late January and early February by the Federal Reserve Bank of Minneapolis and the Minnesota Department of Employment and Economic Development (DEED) revealed that businesses expect production, productivity and profits to increase in the first half of 2004 from a solid second half of 2003. In addition, a January survey of purchasing managers by Creighton University (Omaha, Neb.) indicated overall improved manufacturing activity in the Dakotas and Minnesota. Two meat processors in Minnesota plan to expand plants. A construction equipment manufacturer noted that recent strong orders are putting pressure on production capacity. A lumber mill plans to add a facility in western Wisconsin. Energy and Mining Activity in the energy sector was mixed, and the mining sector grew. Mid-February district oil and natural gas exploration amounts decreased slightly from early January levels; however, a refinery in Minnesota plans to spend $325 million to $400 million for upgrades. Most major district operating iron ore mines continue to produce at capacity, and prices for taconite are up significantly. In Montana, a mining official noted steady activities with several mining companies planning expansions or "kicking the tires" of potential sites. Prices remain strong for many metals and minerals. Agriculture Agricultural activity was mixed. Results of the Minneapolis Fed's Survey of Agricultural Credit Conditions revealed that a third of lenders expect above average farm income during the first quarter of 2004 compared with 20 percent that expect below average income. Grain and soybean prices remained strong while beef prices stabilized. However, the number of cattle on feed dropped for many district states. The discovery of avian flu in some U.S. flocks caused several countries to close their borders to imported poultry, which brought some distress to district turkey producers. Meanwhile, several snowstorms across the district eased drought conditions. Employment, Wages and Prices District employment increased slightly. Increases in employment include 60 job openings at a mine and 90 new positions at a state university in Montana. A Montana bank director noted a tight labor pool for entry-level positions. In Minnesota, a pork processing plant plans to hire at least 300 more employees over the next four years, and an insurance and benefits group recently announced plans to add 100 employees in the state. A Minnesota director reported a significant pick up in recruitment of information technology professionals in all sectors. Preliminary results of the survey of district manufacturers conducted by the Minneapolis Fed and DEED showed that 28 percent of respondents expect to increase employment over the next six months; 14 percent expect to decrease staff. According to a recent survey of Minnesota businesses across industry sectors conducted by DEED, 82 percent of respondents expect employment to remain the same for the first half of 2004, while 13 percent expect to hire new workers. An informal survey of businesses in southwestern Minnesota during early February showed that two-thirds of respondents expect flat employment while the remaining third expect modest increases in staff levels. Employment reductions include over 120 employees recently laid off at a bus assembly plant in North Dakota. A Minnesota-based retailer will eliminate 70 positions at its headquarters and distribution centers. Increases in wages were moderate. Recent wage increases have generally stayed within 2 percent to 3 percent, according to a bank director. Labor representatives in the Minneapolis-St. Paul area noted that health care benefits are the top issue in collective bargaining talks. While overall price increases were modest, significant increases were reported in steel, health insurance and home heating. According to preliminary results of the survey of district manufacturers, 31 percent of respondents expect to increase prices, and 10 percent expect to decrease prices. A steep hike in some steel prices was noted, including a 30 percent climb in steel wire and tubing. A bank director noted that health insurance rate increases remained in the double digits. Prices for heating homes in the Upper Peninsula were reported as high as 50 percent above year-ago levels. Return to top St. Louis Kansas City