January 15, 2003 Federal Reserve Districts Ninth District--Minneapolis

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Ninth District economic activity was subdued from mid-November through early January. Tourism, agriculture and commercial construction activities were down. Consumer spending and energy were flat. However, manufacturing, home building and mining grew. Over this period, labor markets tightened slightly, while overall wage and price increases were modest. Significant price increases were noted in employee benefits, natural gas, and gasoline. Construction and Real Estate Commercial construction was down slightly. The value of contracts awarded for new construction projects in Minnesota and the Dakotas was down 1 percent for the three-month period ending in November compared with last year. In the Minneapolis-St. Paul area, commercial real estate market reports suggested that speculative construction of office and industrial space has essentially stopped, while office vacancy rates continued to increase. In contrast, vacancy rates for retail space in the Minneapolis-St. Paul area are relatively low; an estimated 26 percent more space is under construction for 2003 compared with the amount of new space added in 2002, according to a commercial real estate report. In Rochester, Minn., several permits were issued in November for new large commercial projects. Home building was up from a year ago. Housing units authorized in District states were up 5 percent for the three-month period ending in November compared with a year ago. In Minneapolis-St. Paul, demand for multifamily buildings has spurred construction, according to a builders association representative. A realtor in Sioux Falls, S.D., noted high levels of refinancing activity and remodeling during 2002 compared with 2001, and he expects fewer families to move during 2003. Consumer Spending and Tourism Overall holiday sales were soft. A major Minneapolis-based department store and discount retailer reported that same-store sales were above plan after Dec. 25, although December growth was far below the retailer's goal of a 3 percent to 5 percent increase over last year. A Minneapolis area mall manager reported that although traffic was solid, customers were buying less and therefore sales were down slightly from last year. In northeast Montana, holiday retail sales were about level with last year, while in the Dakotas sales were down at stores in rural communities, but some increases were noted at stores in larger cities, according to bank directors. In contrast, a chamber of commerce official in northern Wisconsin reported that area big box and downtown retailers had solid sales during the holidays. In North Dakota, a mall reported just under 5 percent growth in holiday sales, with particularly strong sales in gift certificates and jewelry. A Minneapolis mall manager reported strong traffic and sales after an extended remodeling project. Auto sales were generally slow. In Minnesota, auto sales were soft in December compared with a year ago, according to a representative of an auto dealers' association. After a period of slow November auto sales in South Dakota, sales picked up somewhat in the beginning of December, according to another auto dealers' association representative. Winter tourism got off to a very slow start due to the lack of snowfall across the District. Business was down substantially in the Upper Peninsula of Michigan and northern Wisconsin at establishments that rely on snowmobile traffic. In the Black Hills of South Dakota, downhill ski areas reported fair lift ticket sales, but snowmobiling was off 70 percent from last year. A Montana ski resort reported slow lift ticket sales, but lodging reservations going forward are ahead of last year. Manufacturing Manufacturing activity was up slightly. A December survey of purchasing managers by Creighton University (Omaha, Neb.) indicated increased manufacturing activity in Minnesota and the Dakotas. A North Dakota heavy equipment parts manufacturer reported strong December sales at 140 percent of forecast. In Minnesota, a metal fabricator plans to open a plant, and a printed circuit board manufacturer expects to expand production. In Wisconsin, an ethanol plant also plans to grow. However a furniture production facility in Minnesota will close, and a baked goods manufacturing plant will close in western Wisconsin. Energy and Mining Activity in the energy sector was level, while the mining sector was up slightly. Late December District oil and natural gas production and exploration levels were about even with mid-November. Meanwhile, most District iron ore mines are operating at capacity. A Montana mining official reported overall steady and optimistic mining activity, with an uncertain palladium and platinum production and profit outlook, given the purchase of the only U.S. producer by a Russian company. Agriculture The agricultural economy was down due to lack of moisture and lower hog and milk prices. The lack of snow cover across the District threatened the winter wheat crop and topsoil. In addition, lack of moisture worsened the drought in Montana and the western Dakotas. Meanwhile, December hog and milk futures prices were down 5 percent and 3 percent, respectively, from late November to late December. Employment, Wages, and Prices Labor markets tightened slightly. After 15 consecutive months of declining employment levels in District states, employment increased slightly during October and November compared with the previous year. Furthermore, a metal fabricator will open a plant in South Dakota in the spring and plans to employ up to 125 employees. A new automobile parts distribution center in northwestern Wisconsin will employ up to 80 workers. However, some layoffs were reported. In southwest Minnesota a poultry plant recently announced its closing, affecting 162 jobs. A machine manufacturer shut down a plant in the Upper Peninsula that resulted in 90 layoffs. A tractor plant in North Dakota will lay off 30 workers early in 2003, after laying off 30 employees in October and November due to the slow farm economy. Wage increases were moderate. District wages for manufacturing workers were up 1.7 percent for the three-month period ending in November compared with last year. In Minnesota, wages for construction workers were flat from a year ago, while wages for workers in retail and wholesale trade were up 2.3 percent for the three-month period ending in November compared with last year. Overall price increases were modest, except for significant increases noted in employee benefits, natural gas, and gasoline. Bank directors reported that while overall prices are expected to remain relatively level in 2003, significant price increases are expected in employee benefits and natural gas. Health benefits for employees of businesses in the state of Wisconsin increased 15 percent in 2002. Recent gasoline prices in the Minneapolis-St. Paul area were up over 33 percent from a year ago. Return to top St. Louis Kansas City