Federal Reserve Bank of Minneapolis · Beige Book

Federal Reserve Bank of Minneapolis

Summary of Economic Activity

Economic activity in the Ninth District was slightly lower since early July. Employment grew moderately since the last report. Wage pressures were strong as labor demand remained healthy and labor availability was still tight. Price pressures were strong but eased slightly. Manufacturing and energy activity increased slightly since the last report. Consumer spending was flat overall with contacts reporting a wide variety of conditions. Commercial construction and real estate were flat, while residential construction and real estate declined. Agricultural conditions strengthened modestly, though drought threatened crop production in some parts of the District. Reports from minority- and women-owned business enterprises were mixed.

Labor Markets

Employment grew moderately since the last report. Multiple surveys from late July through the last half of August confirmed that labor demand from District employers remained very healthy. A large majority of employers were actively looking for labor in some capacity, including many hoping to add full-time, permanent workers to their total workforce. However, T1employers continued to report difficulty finding and hiring workers for open positions. Larger firms reported more success in hiring workers compared with smaller firms, but they were also experiencing rising turnover rates. Total job openings have dipped recently, but initial unemployment claims also fell over the most recent four-week period (through mid-August) compared with the previous four-week period.

Wage pressures remained strong. T2A large majority of employers reported higher wages, and those raising wages by more than 5 percent increased modestly from earlier in the year. A health care firm in Michigan's Upper Peninsula said that lower revenue might lead to potential staffing cuts. "But to keep good employees, we have to pay them more than the 5 percent raise we normally give." Among many strategies to attract labor, firms reported that raising wages was by far the most common strategy, followed by increased work flexibility, lowered job experience requirements, better benefits, and outsourcing more work.

Prices

T3Price pressures remained elevated but eased slightly since the last report. More than half of respondents to a monthly survey of Ninth District businesses said their nonlabor input prices increased in July compared with the previous month, while three-fifths said that prices they charged to customers were unchanged or decreased. While manufacturers continued to see strong price pressures for raw materials and transportation, several reported that steel prices have declined recently. "Metal markets are cooling off significantly," noted one contact. Prices for certain inputs such as lumber and copper also eased, according to contacts. Agricultural producers continued to report significant input cost pressures, particularly for fertilizer. Retail fuel prices in District states declined briskly since the previous report.

Worker Experience

Unemployed respondents to a recent survey in Montana were prioritizing higher wages, more flexibility, and better benefits as they looked for jobs. Employed job seekers were mainly looking for better pay and career advancement. Respondents listed child care costs and availability and the need for skills to meet job requirements as the top barriers to employment. "Lack of reliable childcare has caused many issues in finding and keeping a job," shared a recently unemployed survey participant. A social services job seeker expressed frustration at having applied for 28 jobs but only hearing back from one. A partially retired nonprofit worker was considering returning to full-time work due to inflation pressures and the declining value of retirement savings. Pressures from higher food and fuel costs were broadly spread among workers.

Consumer Spending

Consumer spending was flat overall since the last report, with contacts reporting a wide variety of conditions. T4Several shopping centers reported that sales at home furnishing stores, services firms, and restaurants were solid, while apparel and luxury retail sales dropped. Tourism businesses reported strong activity across much of Montana, but the southern region was still suffering from closed entrances to Yellowstone National Park. An August survey of Minnesota hospitality and tourism firms found modest revenue growth compared with the start of summer and with the same period last year. In southern Minnesota, "distilleries, wineries, [and] restaurants are banging right now." But some firms reported slowing sales, including an entertainment center whose customers were "not being as frivolous with spending" as earlier in the year.

Sales of cars, trucks, and various recreational vehicles have slowed, in some cases significantly, with lower demand and continued inventory shortages both playing a role. Contacts said business travel remained subdued.

Construction and Real Estate

Commercial construction was flat since the last report. Among several dozen contacts, revenue trends were modestly higher, which some contacts attributed to higher input costs getting passed on to customers. More than half said profits declined. Firms reported decent project backlogs but many challenges, including long product lead times and T5uncertain pricing that "make it hard to bid projects and not lose money," said one contact. Residential housing slowed. Recent single-family permitting was lower across the District's larger markets compared with a year earlier, T6with higher interest rates reportedly pushing some builders and buyers to pause projects.

Commercial real estate was flat overall since the last report. Real estate sources said that the office market continued to soften, with rising vacancy rates and subleasing activity. Office space sales also remained subdued with the increase in interest rates and related financing costs. However, demand for industrial space remained high, and low vacancy rates were spurring a host of new construction projects, including an increase in speculative developments, according to a source. Residential real estate activity fell. T7Closed sales of single-family homes were lower in markets across the District, with many seeing recent year-over-year sales decline by 10 percent to 30 percent.

Manufacturing

Manufacturing activity increased slightly since the previous report, with some signs of slowing. An index of regional manufacturing conditions indicated increased activity in Minnesota and South Dakota in July compared with a month earlier, while activity in North Dakota decreased. Manufacturing respondents to business surveys reported decreased new orders on balance. Expectations for the near future were generally positive, but about a third of manufacturers said their outlook for the second half of 2022 was somewhat or very pessimistic. A packaging producer announced the closure of a plant in Minnesota.

Agriculture, Energy, and Natural Resources

District agricultural conditions strengthened modestly since the previous report, with notable exceptions. A survey of agricultural credit conditions pointed to continued growth in farm incomes; 80 percent of farm lenders said incomes in their area increased in the second quarter from a year earlier. While lenders reported continued concerns about rising production costs, commodity prices were strong enough to offset them. However, T8wheat and small grains production in Montana will be severely impacted by drought for the second year in a row. District oil and gas exploration activity increased slightly since the last report. A regional electrical transmission operator announced a multibillion-dollar, long-term expansion to its grid infrastructure. Production at District iron ore mines was expected to decrease significantly in 2022 from the previous year, due largely to an idling at one facility along with reductions in output at others.

Minority- and Women-Owned Business Enterprises

Reports from minority- and women-owned business enterprises in the District were mixed. Services firms reported experiencing positive sales and profits while some retail and hospitality contacts had much lower sales compared to the same time last year. Hiring, prices, and the availability of input materials remained a challenge for many. Outlooks for the next four-week period were slightly more positive; contacts expected sales and profits to improve and other production pressures to ease. A contact in Minnesota noted that "supplier notifications of price increases slowed down significantly."

For more information about District economic conditions visit: minneapolisfed.org/region-and-community