June 11, 2003 Federal Reserve Districts Ninth District--Minneapolis

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Ninth District economic activity increased slightly in late April and May. The residential real estate, manufacturing, consumer spending, energy, and agriculture sectors grew. Meanwhile, commercial real estate and mining were down, and tourism and labor markets were mixed. Overall wage and price increases were modest. Significant price increases were noted in insurance, gasoline, and tuition. Construction and Real Estate Commercial real estate activity was slow. Contracts awarded for large construction projects were down 10 percent for the three-month period ended in April compared with a year ago in Minnesota, North Dakota, and South Dakota. A commercial real estate firm predicts that vacancy rates for office buildings in the Minneapolis-St. Paul area will stay at historically high levels through the rest of the year, while rents are expected to decrease slightly. Another commercial real estate firm reported that a surplus of sublease office space weighed particularly heavy on the Minneapolis and St. Paul downtown areas. The same firm also noted that the current overall market for industrial space in the Minneapolis-St. Paul area was sluggish, but that the retail market was healthy. Homebuilding and residential real estate activity were solid. A homebuilder in Bismarck, North Dakota, noted that recent building activity was higher than a year ago. April home sales were up 8.7 percent compared with a year ago in the Minneapolis-St. Paul area. A real estate firm reported strong residential sales in Missoula, Montana. An advisory council member from the Upper Peninsula of Michigan expects sales of his manufacturing firm's bathroom fixtures to increase 5 percent for the first half of 2003 because of strength in residential homebuilding and remodeling. However, a real estate firm expects fewer permits for multiunit housing in 2003 compared with 2002 for the Minneapolis-St. Paul area, as the vacancy rate for apartments is predicted to reach 7.4 percent by year-end, up from 5.6 percent in 2002. Consumer Spending and Tourism Retail spending grew slightly in April and May. A major Minneapolis-based department store and discount retailer reported same-store sales in April up 3.9 percent compared with a year ago, while May sales were likely to exceed forecast. April sales were about 3 percent above last year, according to a Minneapolis mall manager, who also said that May looked good. A Montana mall manager reported April sales up 3 percent from a year ago. A North Dakota mall manager noted generally level traffic and sales in April, with increases in traffic during May. In contrast, another mall manager in Montana reported that April sales were down about 3 percent from a year ago, and May will also finish with a decrease, as shoppers spent more on clothing but less on gifts. Indicating soft consumer confidence, a recent University of North Dakota survey showed that 54 percent of residents in a forty-mile radius of Grand Forks expect that they will do worse financially over the next year, while 36 percent expect to do better. Recent auto sales were solid in North Dakota, according to a representative of an auto dealers association. Spring tourism activity was soft, but the outlook for the summer season is positive. An official in South Dakota reported tourism activity down about 12 percent in April but noted strong business on Memorial Day weekend. A tourism official in northwestern Wisconsin expects a solid summer season. Upper Peninsula tourism activity in May was about the same as last year, according to an official; inquiries for the summer activity were reported down during March and April, but they picked up since mid-May. However, a major airline based in Minnesota reported that it flew 5.5 percent fewer passengers in April compared with a year ago. Manufacturing Manufacturing activity was up slightly. A May survey of purchasing managers by Creighton University (Omaha, Nebraska) indicated significantly increased manufacturing activity in the Dakotas and some weakness in Minnesota. As evidence, a South Dakota truck equipment producer is building an additional manufacturing plant, and an industrial manufacturer reported strong sales. Several manufacturers reported increased capital spending plans for 2003 compared with 2002. However, a lumber mill in Montana will close because of low prices and difficulty finding timber. Energy and Mining Activity in the energy sector increased, while the mining sector was down slightly. Mid-May District oil and natural gas exploration levels increased from early April. Meanwhile, an iron ore mine in northern Minnesota closed because of financial difficulties, and intense rains disrupted a large power plant in the Upper Peninsula, which caused two iron ore mines to shut down because of lack of electricity. In addition, flooding caused a rail bridge to shut down, which disrupted iron ore shipments. However, a Montana mining official noted that mining was stable in the state, with some potential improvement in activity later this year. Agriculture Agricultural economic activity increased. Heavy rainfall during May across most of the District benefited farmers and ranchers. District farmers have planted most crops, and the majority of pastures and livestock are in good to excellent condition. The calf and lamb season is essentially finished, with little loss of life reported. April meat production is up slightly from last year in South Dakota. Meanwhile, milk prices remain depressed; Minnesota and Wisconsin milk production was down in April compared with March. Employment, Wages, and Prices Labor markets were mixed, as companies reported a combination of layoffs and employment increases. A mining company will shut down a mine and a processing plant in northern Minnesota, affecting 450 jobs. The Minnesota Department of Transportation recently laid off 160 workers. In Sioux Falls, South Dakota, a computer manufacturer recently announced plans to lay off 75 employees. According to a bank director, companies in southwest Minnesota are generally reluctant to hire additional employees. A labor economist for the state of Minnesota noted that the pace of layoffs hasn't picked up but that layoffs are at relatively high levels. Initial claims for unemployment insurance benefits in April increased less than 1 percent in Minnesota compared with a year ago. In contrast, a commercial cleaning and sanitizing company expects to add at least 150 jobs in downtown St. Paul over the next three years. A financial services company recently announced plans to add about forty sales staff in the Minneapolis-St. Paul area. An advisory council member expects that the demand for labor in the construction trades in the Minneapolis-St. Paul area will increase slowly into the summer. Wage increases were modest. According to a recent survey by the Quarterly Business Report in St. Cloud, Minnesota, 53 percent of respondents expect to increase employment compensation over the next six months. In last year's survey, 61 percent of respondents anticipated increases in compensation. Hired agricultural workers surveyed in April in Minnesota, Wisconsin, and Michigan earned about the same level of wages as a year ago. Overall price increases were modest, except for significant increases in insurance, gasoline, and tuition. Only 30 percent of respondents to the Quarterly Business Report survey in St. Cloud expect to increase prices over the next six months, down from 45 percent in last year's survey. An advisory council member reported that recent health insurance prices rose 25 percent from a year ago. As of May 19, Minnesota gasoline prices were up 9 percent compared with the same week a year earlier. Plans to raise tuition were reported by several colleges and universities in the District. For example, tuition will increase up to 19 percent at Michigan Tech University in Houghton, Michigan. Return to top St. Louis Kansas City