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Ninth District--Minneapolis

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The Ninth District economy grew moderately from mid-January through February. Growth was evident in consumer spending, manufacturing, energy, and mining. However, agriculture was steady, construction and real estate were mixed, and tourism was soft. Employment grew modestly, and wage increases were moderate. While overall price increases were modest, significant increases were noted in heavy equipment and health insurance.

Consumer Spending and Tourism
Overall retail sales increased since the last report. A major Minneapolis-based retailer reported same-store sales up 9.4 percent in January compared with a year ago. A women's clothing retailer based in Minnesota reported same-store sales up 19 percent in January from last year; however, a leather products retailer, also based in Minnesota, reported same-store sales down 1 percent. According to respondents to a survey of district retailers in February, 44 percent expect sales revenue to increase during the first half of 2005, while 27 percent expect decreases. A Montana mall manager noted that January traffic started strong, but tapered toward the end of the month; gift certificate purchases were up over a year ago. A mall manager in South Dakota noted that sales were about even for February from a year ago after increasing slightly in January. In contrast, a Minneapolis area mall manager noted that traffic was down 10 percent in January compared with a year ago.

After strong sales during the holidays, Minnesota car and truck sales were soft in January compared with a year ago, according to a representative of an auto dealers' association. However, a Montana association representative indicated that car and truck sales were up in January and early February compared with a year ago.

Tourism conditions were soft in several parts of the district due to a lack of snow. An official in South Dakota noted slow winter tourism activity, and a Montana bank director reported slow snowmobiling activity. Meanwhile, recent spending was up 5 percent to 6 percent over a year ago in the Upper Peninsula of Michigan due to favorable snow conditions compared with neighboring areas.

Manufacturing activity increased. Preliminary results from a survey of district manufacturers conducted in late January and February by the Minneapolis Fed and the Minnesota Department of Employment and Economic Development revealed that businesses expect production, productivity, and profits to increase in the first half of 2005 from a solid second half of 2004. In addition, a February survey of purchasing managers by Creighton University (Omaha, Neb.) indicated increased manufacturing activity in the Dakotas and Minnesota. In North Dakota, an equipment producer is expanding a production facility, and in South Dakota, a medical supplies maker is adding capacity at a manufacturing facility. A Minnesota food processor is expanding operations; however, a freezer factory shut down for a week to reduce inventories.

Construction and Real Estate
Commercial real estate and construction were mixed. Demand for office space in Minneapolis-St. Paul continued to grow, in particular for offices in the suburbs and downtown Minneapolis. A Minneapolis real estate firm forecast a rebound in 2005 for the metropolitan office market, and a doubling of the rate of absorption for industrial space. However, contracts awarded for large construction projects in Minnesota and the Dakotas decreased 14 percent for the three-month period ended in January compared with a year ago. A regional construction industry publication reported an uncertain forecast for the year ahead due to public funding issues.

Residential construction and real estate were down slightly. January building permits declined 23 percent in the Minneapolis-St. Paul area from a year earlier and decreased in Rochester, Minn., as well. However, construction began on a $10.5 million senior living apartment complex in Sioux Falls, S.D. Development officials there reported a strong start to the year for residential construction, with 80 single-family housing units and 10 townhomes permitted through February. In Minneapolis-St. Paul, the number of listings on the market fell in January, and sale times continued to increase, but median sale prices were up 9.8 percent from a year earlier.

Energy and Mining
Activity in the energy and mining sectors increased. Several ethanol plants and electricity generating facilities are under construction or planned across the district. Oil and gas exploration and production were about level from early January through mid-February. Meanwhile, several mining companies submitted permits to expand or open new operations. Iron ore production was solid. A bank director noted that capital expenditures in the Montana mining sector were strong.

Economic activity in the agricultural sector was steady. Lenders responding to the Minneapolis Fed's fourth quarter (January) agricultural credit conditions survey expected that overall agricultural income would be flat in the first quarter of 2005, but capital spending would increase from the first quarter of 2004. The U.S. Department of Agriculture forecast firm 2005 prices for the district's main agricultural commodities--corn, soybeans, wheat, dairy and meat.

Employment, Wages and Prices
Employment grew modestly since the last report, with signs of labor market tightening in some sectors. Welders and machinists were in short supply recently in northern Minnesota as several manufacturers ramped up production to fill increased orders. According to results of the survey of district manufacturers, 38 percent expect to hire more workers during the first half of 2005; 10 percent expect decreases. In contrast, results of the survey of district retailers show that 10 percent plan to hire more workers during the first half of 2005, while 17 percent expect to decrease staff levels. In addition, the number of Minnesota job openings in the fourth quarter 2004 was about the same as in the fourth quarter 2003, according to a state survey of businesses.

Wage increases were generally moderate. Hired farm workers in Minnesota, Wisconsin, and Michigan were paid slightly less in January compared with a year earlier. Wages for district manufacturing workers recently increased over 3 percent compared with a year ago--a moderate gain, but the highest year-over-year increase since spring 2002. In contrast, a Minneapolis law firm recently raised the starting salary for associate lawyers more than 10 percent after more than four years of relatively level salaries.

While overall price increases were modest, significant increases were noted in heavy equipment and health insurance. Bank directors noted that increases in consumer prices for the three-month period ended in January were relatively modest. Agricultural, construction, mining and railroad equipment, and machinery prices posted notable increases from December to January. A bank director in Montana reported that over the past year, increases for health insurance ranged from 10 percent to 30 percent. Prices for natural gas, oriented strand board, framing lumber, and iron and steel scrap have decreased during the past few months, but remain above year-ago levels.

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Last update: March 9, 2005