October 19, 2005 Federal Reserve Districts Ninth District--Minneapolis

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The Ninth District economy grew moderately during September and early October. Increases in activity were noted in consumer spending, manufacturing, real estate, and construction. Meanwhile, agriculture was mixed, energy and mining were stable at a high level, and tourism was slow. Some signs of tightening in labor markets were noted since the last report. Meanwhile, wages grew at a moderate pace. Significant price increases in energy, fuel, and some construction-related plastics were the most visible effects of Hurricanes Katrina and Rita on the district. Consumer Spending and Tourism Overall consumer spending increased since the last report. A major Minneapolis-based retailer reported same-store sales up almost 6 percent in September compared with a year ago. A mall manager in North Dakota reported that sales were soft in the early part of September compared with last year, but grew at near double-digit levels during the later part of September. August and September traffic at a mall in Montana was up over a year ago; retailers reported strong back-to-school sales. According to a Minnesota auto dealer, sales were brisk in August and early September, but slowed by late September. In western Montana, sales of domestic vehicles were slow during September compared with the summer due in part to a lack of supply. In addition, customers were shopping with more sensitivity to higher gas prices as sales of cars have picked up relative to trucks and SUVs. Early fall tourism activity was slower than a year ago. A tourism official in the Upper Peninsula of Michigan noted that tourism activity during late summer and early fall was slow compared with last year. In South Dakota, a tourism official reported that September activity was likely affected by higher gas prices; sales and traffic were off about 10 percent from a year ago. However, recent hotel occupancy and room rates were above year-ago levels in Minneapolis due in large part to stronger business travel. Construction and Real Estate Construction continued at a strong pace. In Minneapolis, developers announced plans to renovate a downtown skyscraper for mixed use, and a major hotel project was announced for Bloomington, Minn. Developers in Sioux Falls, S.D., announced plans for a $15 million waterfront redevelopment and a $32 million recreation center. August building permits in Grand Forks, N.D., were well above a year earlier. September residential permits for Minneapolis-St. Paul were above August levels, but below year-earlier levels. Real estate was mixed. A contact in Sioux Falls, S.D., who has been in business for 30 years said he has never seen a boom in commercial office and retail as strong as the city is currently experiencing. A Minneapolis Realtor said home sales are continuing to slow, in part due to seasonal trends; the pace of housing price appreciation is expected to slow, but still increase 7 percent over the next year. Realtors in Fargo, N.D., said the housing market boom continued there. Manufacturing Manufacturing activity expanded. A September survey of purchasing managers by Creighton University (Omaha, Neb.) indicated strong manufacturing activity in Minnesota and the Dakotas. In Minnesota, a glassmaker plans to expand capacity through additional capital investment. In North Dakota, a soybean-crushing facility is under construction. In South Dakota, a tool and die maker plans to double the size of its manufacturing facility. In the Upper Peninsula, a sewing business reported that "business is flourishing." However, in Minnesota, an automobile assembly plant temporarily shut down. Energy and Mining Activity in the energy and mining sectors was stable at a high level. Oil and gas exploration and production were about level from mid August through late September. Meanwhile, several new wind farms and ethanol plants were recently proposed or under construction. Mines in the western portion of the district were producing at near full capacity. However, taconite mines in northern Minnesota and the Upper Peninsula stabilized production in the face of softening demand. Agriculture Economic activity in the agricultural sector was mixed since the last report. Yields and production were large for most district crops. However, crop prices softened, and costs for many inputs grew. Some producers are delaying harvest to let the grain dry naturally in fields due to higher energy costs. In addition, barge transportation costs increased as Mississippi barge traffic was disrupted due to hurricane-damaged Gulf ports. Meanwhile, the first cases in 34 years of tuberculosis-infected animals were reported in three Minnesota cattle herds. Employment, Wages, and Prices Some signs of tightening in labor markets were noted since the last report. A local job service representative in Montana noted that there were more job openings than qualified people available. Bank directors reported that openings for mining and finance-related positions in Minnesota, call center positions in South Dakota, and construction trades in Montana were difficult to fill. Employment surveys indicate moderate hiring activity. According to a survey by a temporary staffing agency, 26 percent of businesses in Minneapolis-St. Paul expect to hire employees during the third quarter while 13 percent plan to reduce staffing levels. A year ago, 32 percent planned increases and 4 percent expected reductions. According to the recently released St. Cloud (Minn.) Area Business Outlook Survey, 32 percent of respondents plan to increase staffing levels during the next six months; 11 percent anticipate decreases. A recent survey of about 100 business leaders in the Upper Peninsula showed that employment was expected to grow, but at a relatively sluggish pace. In contrast, the number of initial claims filed for unemployment benefits in Minnesota increased 15 percent in September compared with a year ago. A Minnesota-based airline recently announced plans to lay off 400 pilots and 1,400 flight attendants companywide. A hair care product plant closed in St. Paul that affected over 100 jobs. Overall wage increases were moderate. For example, a South Dakota county recently announced plans to give county employees 3 percent raises next year. Results from the St. Cloud Area Business Outlook Survey show that just more than half of respondents expect to increase employee compensation over the next six months. However, a bank director noted that a fast food restaurant in southwestern Montana was recently offering starting wages of $10 per hour. Significant price increases in energy, fuel, and some construction-related plastics were the most visible effects of Hurricanes Katrina and Rita on the district. Home and commercial heating bills recently increased 27 percent in Montana; similar increases are expected in other district states. During the first week of October, average gasoline prices in Minnesota were 92 cents higher than a year ago, but down 8 cents from their peak in early September. Surcharges were common at various stages of production for several goods, ranging between 3 percent and 12 percent. Prices for construction-related plastics, including PVC pipe, have increased significantly. Return to top St. Louis Kansas City