January 14, 2004 Federal Reserve Districts Ninth District--Minneapolis

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From mid-November through December the overall Ninth District economy grew at a healthy pace. Residential real estate, manufacturing, consumer spending, mining and tourism were up, while commercial real estate was mixed and the energy and agricultural sectors decreased. Labor markets were stable. Wage and price increases were generally moderate; however, significant price increases were noted in heating costs and scrap metal, and significant decreases were noted in beef. Construction and Real Estate Commercial building was mixed. A commercial real estate firm report revealed that the amount of industrial space absorbed in the second half of 2003 exceeded the amount vacated by 1.1 million square feet in the Minneapolis-St. Paul area, the highest absorption rate during the past three years. While the vacancy rate for industrial space was large, absorption could top 2 million square feet in 2004, according to the report. Office vacancy rates remained over 20 percent, including sublease space, in the downtown areas of Minneapolis and St. Paul. A city official expects faster growth in commercial construction in Sioux Falls, S.D., during 2004 compared with 2003. Homebuilding continued to expand at a strong pace. Housing units authorized increased 9 percent in district states for the three-month period ended in November, compared with a year earlier. In Rochester, Minn., a city report showed stronger homebuilding activity in November compared with last year. Home sales were down slightly in the Minneapolis-St. Paul area from a year earlier; nevertheless, year-to-date gains had already surpassed total sales in 2002. Relatively high vacancy rates for apartment rentals were reported in the Minneapolis-St. Paul area. In Billings, Mont., November home closings were 16 percent higher than last year. Consumer Spending and Tourism Retail sales during the holiday season were generally up from a year ago. A mall in North Dakota reported same-store sales up about 3 percent during the holiday season compared with a year ago. A Minneapolis area mall manager reported about a 1 percent gain in sales overall, with some stores reporting no increase and others strong gains. Strong traffic from Canada boosted retail sales, according to a chamber of commerce representative in North Dakota. A Montana mall manager said sales were about even compared with a year ago. A major Minneapolis-based retailer reported same-store sales during the first four weeks of December were up from last year, but were running below its plan for a 4 percent to 6 percent increase. Bank directors reported solid new and used car sales, particularly for large SUVs and pickup trucks. A South Dakota auto dealer association representative noted that recent vehicle sales were higher than last year. Tourism activity was generally up from last year due to solid snowfall in several areas of the district. Downhill ski reservations in northwestern Montana were above a year ago. Early snowfall helped boost cross country skiing in northwestern Wisconsin, while a recent large snowfall in Montana and South Dakota has spurred a significant jump in skiing and snowmobiling compared with last year. A Minnesota ski resort reported strong visit numbers, about the same as last year. In contrast, a recent warming trend in Michigan's Upper Peninsula has drastically slowed winter activity; up to 80 percent of reservations in some areas were canceled during the holidays. Manufacturing Manufacturing activity increased. A December survey of purchasing managers by Creighton University (Omaha, Neb.) indicated overall improved manufacturing activity in the Dakotas and Minnesota. In addition, several manufacturers expect growth in sales and capital expenditures in 2004. A Minnesota capital equipment supplier noted that orders increased significantly over the last two months. An expansion at a milling plant in North Dakota was recently announced. A plastic product producer plans to expand in the Upper Peninsula. In Montana, an adhesive label company is building a manufacturing facility. However, a sawmill in Montana reduced production in December because of weather conditions. Energy and Mining Activity in the energy sector decreased slightly, while the mining sector increased. Mid-December district oil and natural gas exploration amounts decreased from early November levels. Most major district operating iron ore mines continue to produce at near capacity, and a previously shut mine reopened. The Great Lakes shipping season was extended for 10 days to accommodate additional taconite shipments. However, a mine in the Upper Peninsula temporarily shut down a kiln due to mechanical problems. In Montana, a molybdenum and copper mine reopened. Several mines reported strong prices for their products. Agriculture Agricultural economic conditions deteriorated. The cattle industry faced disruption as the U.S. Department of Agriculture discovered a cow infected with mad cow disease. Several countries closed their borders to importing U.S. beef and live animals. The price of cattle subsequently decreased. Due to the large crop harvest and shortages of storage space and rail cars, record amounts of grain were stored on the ground in North Dakota. Meanwhile, even with a late December storm, drought conditions continue to exist across most of the district. Employment, Wages and Prices November district employment was stable, although recent signs of growth were noted. Nonfarm employment was down almost 1 percent in district states in November compared with a year ago. Hiring announcements included a telemarketing business based in Duluth, Minn., that plans to hire as many as 100 employees. Two airline reservation centers in Minnesota will boost employment by about 200 workers due to company consolidation from another state. In South Dakota a financial services company will soon add over 150 jobs, a teleservices company will employ 130 new workers, and a marketing company plans to create 100 new jobs over the next year. A temporary staffing agency survey showed that 24 percent of employers in Minneapolis-St. Paul expect to hire more workers during the first quarter of 2004 and 13 percent expect to reduce payrolls. Last year 20 percent expected to increase payrolls; 16 percent planned reductions. In contrast, a plastics plant will soon shut down in southern Minnesota, affecting almost 100 employees. Previously announced plans to lay off about 700 workers at a South Dakota computer company are under way. Wage increases were generally modest. For example, according to a recent contract agreement at a freezer plant in Minnesota, employee pay is frozen during the first year of the contract and increases slightly in each of the following two years; the employee share of health insurance premiums won't increase, but copayments will. State employees in South Dakota will not receive pay increases in 2004. While price increases were generally modest, significant increases were noted for residential heating and scrap metal, while beef prices dropped. According to bank directors, overall price increases were modest. One director noted that commercial property insurance prices were leveling after a period of significant increases. Residential heating costs were up about 20 percent in November from last year, while scrap metal prices were up over 45 percent. Beef prices fell steadily following the discovery of mad cow disease in late December. Return to top St. Louis Kansas City