In spite of lingering global economic concerns, the U.S. economy continued to expand through the first nine months of 2016. According to the latest Beige Book, most districts indicated a modest to moderate pace of growth, and the overall economic outlook for the U.S. economy remains positive. Providing an optimistic outlook, labor markets remain tight, retail sales and real estate markets are healthy, and the oil and gas markets are beginning to demonstrate signs of stabilization.
Despite an encouraging overall outlook, commodity prices continue to be a source of some concern. Weakness in commodity prices continues to weigh on the manufacturing and agricultural sectors, with strong yields putting deflationary pressures on food prices. Although stabilizing around $45 per barrel, spot oil prices remain significantly lower compared to the close of 2013, putting significant pressure on energy-related firms. Weakness in the energy sector, combined with the strength of the dollar, continues to hold back growth and a more encouraging outlook for the manufacturing sector, with eight of the 18 manufacturing industries reporting contraction in October.
In the face of challenges within a number of industries, the manufacturing sector as a whole continues to keep its head above water. According to the ISM Report on Business®, the PMI® was recorded at 51.9% in October of 2016, up slightly from 51.5% recorded in the month prior and 50.1% noted in October of 2015. In comparison, economic activity in the non-manufacturing sectors expanded for the 81st consecutive month in October of 2016. The following graph presents the five-year historical PMI® and NMI® index readings.
Non-farm employment at the national level increased by 1.8% over the year ended September of 2016 on the net addition of nearly 2.5 million jobs. Job growth in the service-producing sectors is leading increasing overall payroll figures, with the most robust gains noted in the professional/business services and education/health services sectors. From a year-over-year perspective, payroll figures in the service-producing sectors increased by 2.0% in September, followed by the government/public sector (0.8%) and the goods-producing sectors (0.3%). The following graph presents overall national non-farm employment growth.
Employment gains noted across nearly all major markets continue to put downward pressure on unemployment rates. Nationally, the non-seasonally adjusted unemployment rate decreased to 4.8% in September of 2016, down 20 basis points from 5.0% recorded 12 months prior. In comparison, the non-seasonally adjusted unemployment rate in the state of Minnesota stood at 3.4% in September of 2016, down 40 basis points from 3.8% recorded in the prior month but up 20 basis points from 3.2% in September of 2015. From a statewide perspective, unemployment remains lowest in the Mankato and Rochester markets (2.8%), followed by the Twin Cities (3.3%) and St. Cloud (3.3%) markets. The following graph presents non-seasonally adjusted unemployment rates at the national, regional, and local levels.
In addition to a tight labor market, retail sales and real estate markets remain healthy to facilitate economic growth. Retail sales at the national level are up approximately 1.7% year-to-date through October. While fluctuating in the second half of 2015 and the first half of 2016, consumer confidence appeared to regain some momentum at the close of the third quarter. The University of Michigan Index of Consumer Sentiment stood at 91.2 in September of 2016, up from 89.8 in the prior month and 87.2 in September of 2015.
Meanwhile, though entering into a mature stage of the cycle, transaction volume and new construction activity in the real estate markets continues to drive further growth and underlying market fundamentals are generally encouraging. At the national level, the median home sale price in the for-sale residential sector increased to $240,900 in the third quarter of 2016, up 5.2% from $228,900 reported 12 months prior, as home sale activity remained relatively strong. In the commercial sector, fundamentals across all four major property types at the national level remain healthy to improving.
Twin Cities market
Conditions in the residential and commercial real estate markets within the Twin Cities market mirror national trends. In the Twin Cities for-sale residential market, the number of year-to-date closed home sales increased by 4.7% through October of 2016, while the median home sale price increased by 5.7% during this same period, rising from $220,000 in October of 2015 to $232,500 in October 2016. Further indicating healthy demand, the average days on market decreased by 15.8% and the percentage of original list price received increased by 0.9% during this same period, as available inventory remains relatively limited. The following graph presents historical median home sale prices in the Twin Cities market.
Conditions in the apartment market remain healthy, with underlying fundamentals in the Twin Cities apartment market among the strongest in the nation. While new construction activity in the Twin Cities market remains above historical norms, demand continues to exceed the pace of new additions to existing apartment inventory, keeping vacancy rates well below the market equilibrium of 5.0% and putting upward pressure on rental rates. Demographic trends suggest demand for apartment units will remain healthy over the long term, and a decline in the pace of new construction will put upward pressure on occupancy levels and asking rents. Benefitting existing apartment owners and operators, new apartment construction activity may have reached a cyclical peak, as year-to-date multifamily permitting activity is down nearly 20.0% compared to the first nine months of 2015. The following graph presents historical multifamily construction permitting activity in the Twin Cities market.
The region’s broad-based economy and employment growth continue to facilitate healthy demand within both the local for-sale residential and apartment markets. Non-farm employment in the Twin Cities metropolitan area increased by 2.0% over the year ended in September 2016 on the net addition of 38,000 jobs. Mirroring trends observed at the national level, growth in the Twin Cities market was strongest within the education/health services, professional/business services, and traditionally low-paying, other services sectors. These sectors combined to account for nearly 75.0% of job growth in the local market during this period. Further employment growth in the Twin Cities market was held back by year-over-year job losses in the manufacturing, trade/transportation/utilities, and information sectors. The following graph presents overall non-farm employment growth in the Twin Cities metropolitan area.
Improvements also continue to be noted within the industrial, office, and retail sectors in the Twin Cities market. Strong demand for industrial space exists within the Twin Cities market, and despite an uptick in new construction activity, vacancy rates within the local industrial sector remain resilient though it has caused some landlords to pause rent hikes. Similar to trends observed at the national level, demand in the Twin Cities industrial market remains strongest for warehouse and distribution space, yet the light industrial segments also continue to record healthy absorption. Secular trends, most notably including the rise of e-commerce, are driving much of the demand for warehouse and distribution space. Accounting for over 8.0% of total retail sales, e-commerce is anticipated to continue rising at a robust pace, and will continue to foster strong demand for warehouse and distribution space in the local, regional, and national industrial markets into the long-term. The following graph presents historical e-commerce retail sales as a percent of total retail sales.
Data referenced in this report was current as of November 13, 2016, and includes preliminary figures, which are subject to revision.