Federal Reserve Bank of Minneapolis · Beige Book

Federal Reserve Bank of Minneapolis

Summary of Economic Activity

Ninth District economic activity increased moderately since mid-February. Employment saw moderate growth, as robust hiring demand continued to be restrained by tight labor supply. Wage and price pressures were strong, with particularly strong pressure on input prices. Growth was noted in consumer spending, commercial construction and real estate, manufacturing, and energy. Residential construction was flat and residential real estate slowed. Agricultural conditions improved heading into the planting season, with strong crop prices offsetting high input costs. Reports from minority- and women-owned businesses were mixed, while rural startup loans were on the rise.

Labor Markets

Employment grew moderately since the last report. Hiring demand remained strong according to both formal and ad hoc surveys of employers. Construction, hospitality, and manufacturing firms reported particularly robust labor needs. Most firms were interested in increasing the overall size of their full-time workforce, while a smaller share also noted openings to fill turnover or seasonal needs. However, firms struggled to fill open positions. T1Labor availability was considered poor by a majority of employers, with little expectation of near-term improvement. A North Dakota staffing contact said that for a job order of 10 workers, clients are told that "we'll try to get you two or three." Among firms using work visa programs, a majority reported significant difficulties in filling labor needs through such channels.

T2Wage pressures remained strong. Surveys suggested that a large share of firms were giving raises, particularly in construction and hospitality sectors, and the size of wage hikes was growing as employers competed for labor. A small Minnesota health care firm said the inability to find workers required higher salaries "to avoid [staff] poaching or resignations." T3Numerous contacts reported increased interest in automation to tackle growing wage pressure and lack of workers. Sources also reported that rapid wage inflation induced more turnover among lower-wage positions.

Prices

T4Price pressures intensified further since the previous report. Two-thirds of District firms responding to a survey said they increased their selling prices in March from a month earlier, while 70 percent reported that their non-labor input prices increased from February. Manufacturing contacts noted that after a brief slowing of price increases for certain raw materials, prices increased suddenly and steeply with the onset of the war in Ukraine. Retail fuel prices in District states increased briskly since the previous report. Prices received by farmers in February increased from a year earlier for corn, soybeans, wheat, canola, dry beans, potatoes, hay, hogs, cattle, turkeys, chickens, eggs, and milk.

Worker Experience

Labor supply remained tight across the District. A recent survey of workers in Minnesota and North Dakota showed that better pay and benefits, increased flexibility, and career advancement were the main priorities among respondents looking to make occupational changes. Staffing shortages put pressure on some workers. "My work life is stressful, we are understaffed, and I don't have the support I need to do my job," said an education industry worker. Many survey respondents reported making substitutions or reducing consumption of some food items and clothing in response to higher prices, but absorbing the added costs of more essential items such as medicine, rent, fuel, and electricity. Working parents struggled to find and afford childcare, and workers with student loans worried about their finances once the payment moratorium ends. A construction labor contact said that elevated vehicle and gas prices were of great concern to industry workers because of long commutes to working sites.

Consumer Spending

T5Consumer spending grew moderately since the last report. Overall, more hospitality and tourism firms reported higher revenues of late compared with those reporting a revenue decline. However, some reported that increased revenue was due to higher costs flowing through to customers. Firms in the Minneapolis-St. Paul region were more likely to report positive revenue growth, but many continued to report that revenues were below pre-pandemic levels. Nonetheless, these firms were expecting solid revenue growth in the coming months compared with last year. Retailers in general reported modestly higher sales, but noted higher costs were eating into profits and supply chain problems continued to hamper product inventory and related sales.

Construction and Real Estate

Commercial construction grew moderately since the last report. Overall, contacts were positive about recent revenues and reported a healthy pipeline of work to bid on. Activity was robust in South Dakota. T6Numerous contacts reported that activity would have been stronger were it not for high material costs, significant delays in obtaining materials, and a lack of skilled workers. T7Growth in residential construction showed signs of slowing. Single-family permits in February and March were mixed across the District's larger markets. A western South Dakota contact said that pricing and subsequent sales of speculative homes were being delayed until completion to keep up with rising costs.

Commercial real estate improved modestly since the last report. Downtown employers continued their return to offices, which helped nearby retail and other businesses. Industrial space remained at low vacancies despite considerable new construction. Residential real estate demand remained healthy, though overall sales were slow due to low inventories of homes for sale. An eastern South Dakota contact said that anything "remotely close to good condition" sells in less than 24 hours without having to list. Higher mortgage interest rates were expected to dampen demand, and sources reported slightly more home price reductions compared with the previous month.

Manufacturing

Manufacturing activity increased moderately, while contacts noted worsening input availability challenges. A regional manufacturing index indicated increased activity in Minnesota, North Dakota, and South Dakota in March relative to the previous month. Most manufacturing respondents to a survey of District businesses reported increased sales in March from the previous month, along with continued input cost and availability challenges. Several contacts noted that raw materials suppliers were only holding price quotes for 24 hours in some cases. A few contacts noted a decline in new orders because of price increases or limited inventory, while a metal fabricator reported a sharp drop in new orders since the Russian invasion of Ukraine.

Agriculture, Energy, and Natural Resources

T8District agricultural conditions improved moderately heading into planting season. Strong crop prices appeared to outweigh increases in input costs, bolstering incomes, according to contacts; however, livestock and dairy producers were seeing their margins squeezed. Early reports indicated a reduction in District corn acres planted and an increase in wheat and soybean acres in 2022. District oil and gas exploration activity was steady since the last report, despite a crude price surge. Industry contacts suggested that labor availability challenges were constraining oilfield activity and that drilling would respond only gradually to oil prices greater than $100 a barrel, even if sustained. An iron ore facility in northern Minnesota announced that it would idle operations in the spring.

Minority- and Women-Owned Business Enterprises

Reports from minority- and women-owned business enterprises (MWBEs) in the District were mixed. In Minneapolis-St. Paul, some downtown retailers were hopeful as more workers transitioned back to the office, but also uncertain about the impact of hybrid work. Staffing continued to be a challenge for MWBEs. "Employees are practically setting their own schedules; they otherwise don't take the job," shared a Minnesota contact. The director of a nonprofit serving MWBEs said it was also struggling to hire talent despite offering generous pay and benefits. The same contact reported higher entrepreneurship in rural areas. Higher input costs became reportedly harder to pass on to consumers among smaller businesses, as the cost of fuel and other necessities continued to rise and compete for people's budgets.

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