May 2, 2001 Federal Reserve Districts Ninth District - Minneapolis

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The long winter, high energy costs and spring floods have taken a toll on the Ninth District economy. Manufacturing, mining and agriculture activities are down. Consumer spending is flat, and tourism and construction are growing at a slow rate. However, the energy sector is expanding at a solid pace. Labor markets are loosening and wage increases are moderating. Overall, prices are mixed, with decreases noted for some construction materials and increases for energy and housing. Investment in buildings and machinery has slowed in most sectors during the past 12 months. Construction and Real Estate Commercial construction is mixed. Construction contracts awarded in the Dakotas and Minnesota increased 16 percent for the three-month period ending in February compared with the same period last year. However, a Minneapolis-area construction equipment dealer reported that its sales slowed during the past six months. A building official in Sioux Falls, S.D., claims that local contractors and architects are busy, but commercial construction will likely finish 2001 at lower levels than in 2000. Growth in homebuilding slowed. Housing units authorized were down 10 percent in the district for the three-month period ending in February compared with a year earlier. However, as lots become scarce in cities, homes are sprouting up in outer ring suburbs. A development in a northern suburb of Minneapolis plans to break ground on 1,000 new homes, and a subdivision near Missoula, Mont., plans to add 200 homes. Consumer Spending and Tourism Overall retail sales are flat to increasing slightly. A major Minneapolis-based department store retailer noted that March same-store sales were up 2.4 percent compared with a year earlier and expects to open 90 new stores this year. A national retailer based in Menomonee, Wis., reports same-store sales down 1.9 percent in March compared with a year ago. This retailer has opened about 30 new stores this spring and plans to open 26 new stores in the fall. A mall manager in Duluth, Minn., reports March sales slightly ahead of year ago. A Minneapolis-area used computer and component dealer noted that the demand for used computers has increased during the past three months. Spring tourism activity is moderate. Tourism activity in Duluth is up about 4 percent over a year ago, according to a tourism official. The Duluth convention center opened 60,000 feet of new space during the past two months, but overall investment in new hotels and restaurants has slowed during the past year. A Montana ski resort is undertaking a $300 million expansion beginning this summer. Manufacturing Manufacturing activity is depressed in most parts of the district. A March purchasing manager survey by Creighton University indicated slower manufacturing activity and weak new orders in Minnesota. As evidence, a Minnesota power equipment plant is cutting production and a die-casting manufacturer plans to close a factory this summer. Manufacturing activity in the Dakotas is mixed. A high-fructose sugar facility in North Dakota reopened after a two-month shutdown. A lumber mill in South Dakota will reopen after being closed for five weeks. In contrast, a bank director noted weak manufacturing activity in South Dakota. Manufacturing business investment is weak. An Upper Midwest machine tool distributor reports that manufacturers are uncertain about the economic future and, therefore, are stalling on capital equipment purchases. According to an informal survey of manufacturers, many firms are waiting for increased sales before they add capacity. However, several saw mills in Wisconsin and the Upper Peninsula of Michigan plan to purchase fixed equipment this year even though inventories are building. Mining and Energy The energy sector has strengthened, while the mining industry weakened. District oil and natural gas exploration remains above year-ago levels as prices for these products continue at high levels. North Dakota's fourth quarter 2000 sales tax revenues for oil extraction were up 49 percent from year-earlier levels. Meanwhile, mining production is decreasing due to softening demand and high energy costs. Two iron ore mines in the Upper Peninsula of Michigan plan to temporarily shut down this year. A Montana mining industry spokesperson said that all mines are concerned about high diesel and electricity costs. Agriculture Spring flooding, higher input costs and low prices are a concern for many district agricultural producers. Several Minnesota farms were under water due to near-record spring flooding, and many district farmers have delayed fieldwork due to surplus moisture. The U.S. Department of Agriculture (USDA) reports surplus topsoil moisture in over a third of the Dakota farm acres. According to a North Dakota dealer, fertilizer prices have gone up 10 percent since January. Meanwhile, the USDA projects continued low prices for wheat, corn and soybeans. In addition, still hurting from drought, many Montana ranchers are hauling food and water to animals. The outlook for capital equipment purchases is weak, based on results of the Ninth District's first quarter (February 2001) survey of agricultural credit conditions. Below normal levels of machinery loans are expected in the next quarter by 38 percent of lenders. In addition, 61 percent of lenders expect farm capital spending to be below-normal levels over the next three months. Employment, Wages, and Prices Layoff announcements are in the news. For example, an advanced circuits company plans to lay off 500 employees at four Minneapolis/St. Paul-area plants. A major food wholesaler and retailer will cut almost 300 Minnesota jobs in a restructuring move to improve earnings. A circuit board plant will lay off 200 workers in Minneapolis. A smelter in Montana will close, leaving 238 people looking for work. The number of people on unemployment insurance benefits in Minnesota was about 25 percent higher in March compared with last year. Nevertheless, a recent survey of Minnesota's largest firms shows that hiring and retaining workers remains the most important factor to their businesses, above wage rates and state taxes. A poll by a major temporary staffing agency showed that 27 percent of respondents in Minneapolis-St. Paul are planning to add staff during the next three months compared with 11 percent who plan to reduce staffing levels. Overall increases in wages are modest, with higher increases sought in some contract negotiations. Only 20 percent of respondents to a survey of manufacturers in Minnesota, Wisconsin and the Dakotas report higher wages in March compared with 58 percent a year ago. In contrast, a major airline reached a tentative agreement with its mechanics union that calls for pay raises of 13 percent to 24 percent. Price changes are mixed, with increases in energy and housing and decreases in building materials. A Minnesota chamber of commerce representative noted that electricity prices are higher and in some areas gasoline prices are over $2 per gallon. The amount owed on past-due accounts is 170 percent higher than last year due to an unusually long winter and high natural gas prices, according to a Minnesota utility. Home prices in Rochester, Minn., have increased 14 percent compared with a year ago, according to a local government official. In contrast, a bank director reported lower prices for drywall. Prices for framing lumber were down almost 20 percent in March compared with a year ago. 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