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Ninth District--Minneapolis

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Ninth District economic activity contracted since the last report. Decreased activity was noted in consumer spending and tourism, services, construction and real estate, manufacturing and mining. However, the energy sector was mixed and agricultural conditions improved since the last report. Labor markets continued to weaken. Overall wage increases were modest, while a number of product prices decreased.

Consumer Spending and Tourism
Consumer spending decreased. A major Minneapolis-based retailer reported that same-store sales in October were down almost 5 percent compared with a year earlier. Furthermore, a major Minnesota-based electronics retailer reported that October same-store sales were down almost 8 percent from a year ago. A North Dakota mall manager reported that sales during the first half of November were down but sales were up 3.5 percent in October. A number of retailers were pessimistic about the upcoming holiday sales season. According to preliminary results of the Minneapolis Fed's annual business outlook poll, 85 percent of respondents expect consumer spending to decrease in their communities in 2009 compared with 47 percent in last year's poll.

Tighter credit standards for auto loans hindered some vehicle sales. According to an auto dealers association in Minnesota, recent vehicle sales were down; smaller, fuel-efficient cars continued to gain market share, while larger SUVs and trucks lost. Early November auto sales were "awful," according to a Minnesota dealer of domestic vehicles.

Fall tourism was down modestly compared with a year ago, although some tourism businesses were cautiously optimistic for the winter season due in part to lower gas prices. In South Dakota, fall tourism was off slightly; some cancellations were noted at hunting reserves in the eastern part of the state, according to an official. Meanwhile, in northwestern Wisconsin, tourism activity was relatively strong, although some high-end restaurants and retailers noted sharp declines in business.

Activity in the services sector decreased since the last report. Services industry respondents to the Minneapolis Fed's business outlook poll expressed disappointing results and expect decreased sales, employment and capital investment in 2009. Contacts from architectural and information technology firms reported a slowdown in new business. However, professional business firms dealing with financially distressed companies and bankruptcy lawyers were the most optimistic and were experiencing a boom in business.

Construction and Real Estate
Construction activity decreased. Results from the business outlook poll indicated that 73 percent of construction industry respondents expect sales to be down in 2009, and 71 percent expect to decrease investment. In the Duluth, Minn., area, large projects that have been started are continuing forward, but projects on the drawing board have been delayed, according to a Bank director. Residential construction was down slightly. October residential permits in Sioux Falls, S.D., and Fargo, N.D., were down 13 percent and 21 percent, respectively. Residential permits in Minneapolis-St. Paul were flat from a year earlier.

Commercial real estate slowed. A contact from a Minneapolis-St. Paul commercial real estate firm said tighter financing is constraining sales, while a contact in Fargo said activity was flat. Residential real estate remained depressed. Home sales in Sioux Falls were down 8 percent, and a Realtor in western Montana estimated sales were down more than 20 percent. October closed sales in the Minneapolis-St. Paul area increased 12 percent from the previous year, but prices continued to slide.

Overall manufacturing activity was down since the last report. Based on results from the business outlook poll, respondents from the manufacturing sector expect decreased sales, employment and capital investment in 2009. According to preliminary results of a November survey of manufacturers by the Minneapolis Fed and the Minnesota Department of Employment and Economic Development, manufacturers expect declining orders, employment and production in 2009 after a flat 2008. Meanwhile, an October survey of purchasing managers by Creighton University (Omaha, Neb.) indicated significantly decreased activity in Minnesota, but increased activity in the Dakotas.

Energy and Mining
Activity in the energy sector was mixed, and the mining sector contracted since the last report. Oil and gas exploration continued at a strong pace, but showed some recent signs of weakening. Wind energy farms continue to be built; however, several bioenergy facilities were shut down due to lower output prices and high input costs. Several mines in the District reduced production due to decreased metal prices. For example, two iron ore mines in northern Minnesota cut production by 30 percent.

Agricultural conditions improved since the last report. Results of the Minneapolis Fed's third-quarter (October) survey of agricultural credit conditions indicated that lenders expect overall agricultural income and spending to be up in the fourth quarter. Even though the harvest is behind the pace of a year ago for most major District crops, production is expected to increase for corn and remain level for soybeans from last year's bumper crop.

Employment, Wages and Prices
Labor markets weakened since the last report, as a number of companies announced layoffs. For example, a Minnesota vehicle manufacturing plant will lay off 760 workers during December. Also in Minnesota, a health care provider announced plans to eliminate up to 350 jobs, a provider of semiconductor equipment recently announced plans to lay off 200 employees over the next 12 to 15 months and a lumber plant closed in October for an indefinite period affecting 140 workers. A residential window manufacturer announced plans to lay off 52 employees at a plant in northwestern Wisconsin. A Montana lumber mill laid off 23 employees. Initial claims for Minnesota unemployment insurance were up 31 percent in October compared with a year earlier. Employers in the Billings, Mont., area expect to keep staff levels about the same over the next six months. In contrast, contacts in North and South Dakota reported trouble finding skilled workers.

Wage increases were modest. More than 40 percent of business outlook poll respondents expect wages to increase 1 percent or less in their communities during 2009. The outlook for wage increases in most sectors is flat to up slightly.

A number of prices decreased since the last report. Minnesota gasoline prices in mid-November were more than $1.50 per gallon lower than prices at the end of September and $1.10 lower than a year ago. Lumber prices decreased from the last report and from year ago. A Bank director noted that agricultural input prices, including fertilizer and fuel, were recently decreasing, but so were agricultural commodity prices. Aluminum, copper and steel prices were also down. A Minnesota manufacturer noted success in passing along input cost increases to customers, but will likely lower prices going forward.

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Last update: December 3, 2008