March 8, 2000 Federal Reserve Districts Ninth District - Minneapolis

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As spring approaches, the Ninth District economy continues to look very strong. Construction, manufacturing and consumer spending remain robust, energy and iron mining are making a rebound, and even agriculture shows some signs of improvement. Of the major industries, only tourism exhibits little growth. The economic strength continues to be reflected in labor markets, which remain tight, and with businesses reporting some wage pressures. However, while input prices have been rising, there are still few signs of accelerating inflation. Construction and Real Estate Commercial construction remains bustling. Contract awards for construction projects in Minnesota and the Dakotas increased over 20 percent for the three-month period ending in January compared to a year earlier. A materials supplier in Great Falls, Mont., is unusually busy this winter, partially due to favorable weather for building. A commercial real estate firm reports that the downtown Minneapolis retail and entertainment sector is expected to expand with the addition of new hotels and increased residential development. Residential construction is also strong. Due to low vacancy rates, the outlook for Minneapolis/St. Paul apartment building is promising, according to a commercial real estate firm. Rental rates are up about 10 percent in the Minneapolis/St. Paul area compared to a year earlier. Home prices finished 1999 up 5 percent to 9 percent compared to a year earlier for several district cities, including a 9.3 percent climb in Minneapolis/St. Paul. District housing units authorized in 1999 finished with the second highest fourth quarter of the decade. Consumer Spending Retailers remain optimistic about current and prospective sales. A major Minneapolis/St. Paul-based discount and department store retailer reports same-store earnings for January up 5.7 percent compared to a year earlier. Electronics retailers in Billings, Mont., expect 12 percent gains in 2000 compared to last year, according to a Helena branch director. South Dakota new car and truck registrations are up 10 percent for January from a year earlier. A Montana dealership reports sales up 20 percent for January compared to a year ago. Tourism is expected to finish flat overall, with gains in areas with normal or above normal snowfall, and losses where snowfall came late in the season. A ski area in northern Montana reports excellent snow conditions and a 35 percent increase in business compared to last year. In contrast, tourism businesses in parts of Minnesota with light snow cover are concerned. Below normal snowfall in South Dakota has stifled winter sports. "We would have a lot more business if we had more snow," says a tourism official. Manufacturing Manufacturing in the Ninth District remains strong, although some weakness is reported in North Dakota. A January purchasing manager survey by Creighton University indicates languishing manufacturing conditions in North Dakota; however, the same survey reports a strong manufacturing sector in Minnesota and South Dakota. Examples include a 50 percent increase in sales from a year ago for a Minnesota construction materials producer, a 5 percent increase in sales from year-earlier levels for an industrial equipment company and strong sales at a Wisconsin industrial glass maker. In addition, a diecasting component manufacturer plans to build a new plant in the Upper Peninsula of Michigan. "The outlook for investment in plants is substantially stronger than earlier in the year," notes a bank director. In contrast, a North Dakota pasta cooperative reports it is shutting down its plant, and a Minnesota printing plant and a metal processing facility plan to close this year due to industry consolidation. Mining and Energy The iron ore industry has rebounded from its slump, while Montana gold mining continues to struggle. An iron ore industry spokesperson reports full production and strong demand. November iron ore production was 1.5 percent above year ago levels, while inventory levels are down 16 percent from a year ago. In Montana, a gold mine plans to reduce production and lay off 70 workers. Meanwhile, Ninth District oil exploration has increased as oil prices have risen. In February, nine rigs were operating in North Dakota compared to one a year ago. In addition, estimated February oil production in North Dakota was up 5 percent from year-ago levels. However, in Montana only three rigs were operating compared to five a year ago and Montana oil production is down 9 percent from a year ago. Agriculture "Government payments have again helped our local producers get through another year," reports a North Dakota agricultural lender. Farmers' financial condition continues to improve based on preliminary results of the Ninth District's first quarter (February 2000) survey of agricultural credit conditions. Farm income improved as 46 percent of respondents reported that farm income is below normal levels compared to 64 percent of fourth quarter 1999 survey respondents and 86 percent of the third quarter 1999 respondents. Looking ahead, a continued warm winter has farmers worried about lack of snow coverage for winter grains and a possible drought next summer as a result of dry soil conditions. Moreover, some ranchers tell of problems getting water to their animals, but the mild winter continues to reduce stress on livestock. Employment, Wages, and Prices Labor markets remain taut. Shippers in Duluth, Minn., complain about "sailing short," with a smaller crew than called for by union contract during the past year. Minneapolis/St. Paul temporary employment agencies are offering free training and starting to offer an array of benefits. Companies are still looking for workers. A telecommunications company based in Superior, Wis., will add more than 300 jobs by early March. A major electronics retailer based in Minneapolis/St. Paul recently announced plans to add 2,000 workers at its headquarters over the next five years. Wages continue to creep higher. An informal survey of Upper Midwest businesses conducted in January reports that wages are generally about 2 percent to 4 percent higher than last year. A major Minneapolis/St. Paul-based airline increased the bonus pay to mechanics with specialized licenses by $1.50 an hour; custodians and cleaners received $500 bonuses. A Fargo, N.D., hospital is offering $4,000 signing bonuses for registered nurses. While overall prices are not accelerating, input prices and transportation costs are increasing. Surveys of manufacturers show that input prices are higher compared to a year earlier. The Creighton University survey reports that an index of input prices for January in Minnesota and South Dakota is almost twice as high as a year ago. Through January, the Upper Midwest business survey reports that an average of 41 percent of respondents over the past five months have reported higher input prices compared to 22 percent for the first eight months of 1999. Rising oil prices have affected transportation costs, but businesses aren't showing noticeable concern. Return to top St. Louis Kansas City