July 26, 2006 Federal Reserve Districts Ninth District--Minneapolis

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The Ninth District economy grew moderately since the last report. Increases in activity were noted in consumer spending, manufacturing, mining, energy, agriculture, and commercial real estate. Meanwhile, residential real estate and construction softened. Tourism and commercial construction were steady. Since the last report, labor markets showed signs of tightening and wage increases were moderate. Significant price increases were noted for fuel, shipping, and brass. Consumer Spending and Tourism Overall consumer spending increased slightly. A major Minneapolis-based retailer reported same-store sales up almost 5 percent in June compared with a year ago. A manager of a Minneapolis-area mall reported that recent sales were about 4 percent higher than a year ago; apparel sales were particularly strong. In Montana, a mall manager noted that most stores posted sales gains in June compared with a year ago, and overall year-to-date sales were much higher than last year. A Minneapolis area domestic auto dealer noted weak June sales, but an uptick in early July; overall truck sales were slow. Recent domestic vehicle sales were very slow, while foreign car and light truck sales were relatively strong, according to an auto dealer in Minnesota. Despite higher gas prices, overall tourism activity was on a par with a year ago. A recent survey of Minnesota hotel and resort owners showed that about 75 percent of respondents expect the summer tourism season to match or exceed last year. A chamber of commerce official in northeastern Minnesota observed that traffic and lodging levels in May and June were about the same as a year ago. In the Upper Peninsula of Michigan, a tourism official said that tourism businesses are hoping for a summer as good as last year's strong season, but they don't expect to surpass it. A South Dakota tourism official reported that activity was level compared with last summer. Tourism officials in Montana expect the summer season to equal or surpass year-ago levels. Visits to Yellowstone National Park were up 2 percent in May from a year earlier, while Glacier National Park visits were down 23 percent because of late road openings due to heavy winter snowfall. Construction and Real Estate Commercial construction was steady, while residential construction slowed. Building began on two large biodiesel plants in North Dakota, at a combined cost of more than $100 million, and plans for a $120 million ethanol plant were announced. A 550,000-square foot multi-use development will accompany construction of a new hospital in a Minneapolis suburb. However, June year-to-date residential permits were down from 2005 levels in Rochester, Minn., and Grand Forks, N.D. In contrast, residential permits were up in Fargo, N.D., and Sioux Falls, S.D. Home building continues at a strong pace in western Montana, particularly for condominiums and rental properties. Residential real estate was slow, whereas commercial activity was brisk. June sales volume was down 14 percent from year-earlier levels in Minneapolis-St. Paul. Realtors in Fargo and Sioux Falls reported slower sales than at this time last year. A director in western Montana reported softening as homes stayed on the market longer and prices remained level. Meanwhile, the Minneapolis-St. Paul industrial market finished its sixth consecutive quarter of positive absorption. An analyst characterized the office market there as having finally left its recovery phase and headed into an expansion. Manufacturing Manufacturing activity expanded. A July survey of purchasing managers by Creighton University (Omaha, Neb.) indicated robust growth of manufacturing activity in the Dakotas and Minnesota. A western Wisconsin paper mill that closed in March due to bankruptcy may reopen under new ownership by the end of the summer. A digital billboard maker in South Dakota is greatly expanding production due to strong demand. To keep up with increased orders, a Minnesota metal fabricator is doubling the size of a factory. However, due to weak sales, a light truck assembly plant in Minnesota has temporarily shut down. Energy and Mining Activity was up slightly in the energy and mining sectors. Oil and gas exploration and production in the District increased since the last report. In addition, expansion in the alternative energy industry continued. Mining production is robust across the District. An official from an iron mining company expects strong production at District mines throughout the year. Several companies continue to explore new mining sites throughout the District. Agriculture Agricultural activity improved since the last report. Crop progress is ahead of last year and the five-year average for most District crops. In addition, the number of cattle on feed increased from a year ago. Prices increased for most District agricultural products, especially for wheat and calves. However, lack of rain has increased dry conditions from central Montana through the Upper Peninsula of Michigan. In addition, exceptional drought has hit the central portion of the Dakotas and is stressing small grain production. Employment, Wages and Prices Since the last report, labor markets showed signs of tightening. A temporary staffing agency survey of Minneapolis-St. Paul companies showed that 33 percent of respondents expect to increase staffing levels during the third quarter, while 13 percent expect declines. A medical device manufacturer plans to transfer 300 jobs to Minneapolis over the next two years. An architectural and engineering firm in northern Minnesota reported difficulty filling open positions. Results of a recent St. Cloud (Minn.) Area Business Outlook Survey indicated the tightest local labor market conditions since December 1999. A Montana bank director noted that skilled and unskilled workers are in short supply in a number of areas. In contrast, a financial services company recently announced plans to close a Minnesota call center due to company restructuring that will lay off 450 workers. A Minneapolis area hospital recently announced plans to cut 250 jobs in response to stagnant patient admissions and low government reimbursement rates. Overall wage increases were moderate with a slight increase in trend for lower-skilled jobs in some parts of the District. The aforementioned St. Cloud survey shows that 51 percent of respondents expect to increase employee compensation over the next six months. Employers hiring workers for low-skilled positions in Billings, Mont., have recently raised pay to attract qualified applicants. Price increases were noted for fuel, shipping, and brass. Early July gasoline prices in Minnesota were more than 80 cents a gallon higher than a year ago. Two manufacturers in the Minneapolis-St. Paul area noted that fuel surcharges have increased shipping costs between 10 percent and 20 percent. Liquified petroleum gas prices were about 30 percent higher than a year ago. Brass prices were up significantly compared with a year ago. Several bank directors noted a slowing in the increase in health care costs over the past year for companies in their area. Return to top St. Louis Kansas City