TEXT: Beige Book

Ninth District--Minneapolis

The Ninth District economy appears to have contracted slightly since the last report. Decreased activity was noted in residential construction and real estate, and consumer spending softened. Mixed activity was noted in services, manufacturing and commercial real estate, while commercial construction was flat. Growth was noted in tourism, energy, mining and agriculture. Overall, labor markets loosened, while wage increases were moderate. Significant price increases were noted for steel, plastics, fertilizer and energy.

Consumer Spending and Tourism
Consumer spending softened. A major Minneapolis-based retailer reported that same-store sales in January were down 1 percent compared with a year earlier. A manager at a Minneapolis area mall reported that traffic during January and early February was slower than a year earlier, but sales were steady. January traffic was down slightly and sales were about even at a South Dakota mall; early February was flat. Meanwhile, a number of national retail chains have recently moved into southwestern Montana.

Recent Minnesota vehicle sales were slow, and some dealerships have gone out of business over the past year, according to a representative of an auto dealers association. Overall, recent auto sales in Montana were down slightly, though a bank director there noted that area auto dealerships with access to at least one domestic and one foreign brand had solid sales.

Tourism activity increased from last year. Snowmobiling and cross country skiing activity was strong in northwestern Wisconsin, according to a tourism official. Lift ticket sales were higher than a year ago, while lodging was down slightly at a Minnesota ski resort; a representative of the resort was optimistic for the rest of the season. A Montana ski resort reported increases in revenue compared with a year ago. Tourism officials in South Dakota expect an increase in visitor spending during 2008, even if the national economy slows.

Services
Reports from the service sector were mixed. A Minnesota architectural firm reported some softening in business for larger projects. An executive search firm in Minnesota indicated that searches were down for construction and finance firms, while strong demand exists for the logistics and manufacturing areas. A Montana bank director noted increased activity for medical, dental and law firms. Contacts from the medical services sector reported continued strength.

Construction and Real Estate
Commercial construction was flat. Progress on an office building in suburban Minneapolis was halted due to uncertainty about demand. However, a number of expansions were under way at medical facilities in Minneapolis-St. Paul. Development began on a hospital research complex in Sioux Falls, S.D., that will eventually reach 2.5 million square feet. Residential construction was down. January new home permits fell 59 percent in the Minneapolis-St. Paul area from a year earlier and also dropped dramatically in Sioux Falls and Fargo, N.D. A bank director reported residential construction slowed slightly in Billings, Mont.

Commercial real estate was mixed; the medical sector grew, office and industrial were flat and retail was down. Recent office vacancy in the Minneapolis-St. Paul area was about the same as a year earlier, while industrial absorption fell and retail vacancy increased. In Sioux Falls, January commercial vacancy was about the same as a year ago. In contrast, Fargo saw declines in office and industrial vacancy, with increases in retail vacancy. Meanwhile, the market for homes continued its downward trend. The median sale price of homes in the Minneapolis-St. Paul area fell almost 9 percent in January from a year earlier, and closed sales were down 21 percent. In contrast, the housing markets in Fargo and Bismarck, N.D., saw strong sales.

Manufacturing
Manufacturing activity was mixed since the last report. A January survey of purchasing managers by Creighton University (Omaha, Neb.) indicated decreased activity in Minnesota and strong manufacturing activity in the Dakotas. Several wood product manufacturers closed or reduced production recently due to weak demand. In Minnesota, a pharmaceutical manufacturer recently announced plans to close a plant. In North Dakota, a new agricultural processing facility is planned and a tractor manufacturer is expanding capacity. A new pipe-making plant is planned in Montana to support the oil and gas industry.

Energy and Mining
Activity in the energy and mining sectors increased since the last report. Robust oil and gas exploration and production continued in the District. Additional power transmission lines are being built to handle increased wind energy production. Most mines remained operating at near capacity, and some expansions were under way. Continued exploration and permitting activity was in progress in a number of areas in the District.

Agriculture
Robust agricultural conditions were reported across the District. The U.S. Department of Agriculture reported strong increases in the value of agricultural production in 2007. Preliminary results of the Minneapolis Fed's fourth quarter (January) survey of agricultural credit conditions indicated that lenders expect overall agricultural income and spending to be up in the first quarter of 2008 due to higher selling prices, but are cautious about higher input costs for fertilizer and fuel affecting this year's spring planting. The price of farmland in the District continued to increase.

Employment, Wages and Prices
Overall, labor markets have loosened. Year-over-year employment levels in Minnesota were down in December. In addition, a recent announcement of an operations consolidation by a major department store will affect 950 jobs in Minnesota. A food processing facility in North Dakota will close, eliminating 125 jobs, and a financial services company in Montana will cut 80 positions. After Montana's unemployment rate dipped to 2 percent in March 2007, the rate increased to 3.6 percent in December. Nevertheless, labor markets continued to be relatively tight in a number of areas in the Dakotas and Montana. Bank directors noted that finding qualified workers remains a challenge for employers in the western part of the District.

Overall wage increases were moderate. The Minneapolis teachers union agreed to a two-year contract that provides a 2 percent wage increase and a slight increase in health insurance coverage. However, a union contract with workers at a South Dakota manufacturer negotiated an 8 percent increase in wages during 2008, followed by raises of just over 3 percent during the next three years. In addition, some low-skilled workers in southeastern South Dakota were receiving pay raises in excess of 8 percent.

Significant price increases were noted for steel, plastics, fertilizer and energy. District manufacturers reported increased prices for steel and plastics during the past two months, while farmers and ranchers noted high prices for fertilizer and fuel. While Minnesota gasoline prices in mid-February decreased slightly since the last report, they were 69 cents per gallon higher than a year ago.

CONTINUED

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