Wells Fargo Securities Economics Group: Minnesota Economic Outlook
Minnesota’s Recovery Is Being Hindered by Fiscal Cliff Concerns
Minnesota’s economic recovery has lost some momentum in recent months, as concerns about the fiscal cliff have increased and demand for goods and services, particularly from overseas, has softened a bit. Job and income growth has moderated as businesses have become more cautious about holding inventories, ordering equipment and hiring additional workers. Personal income grew at just a 3.2 percent annual rate in the third quarter, and that gain was helped out quite a bit by federal crop insurance payments. Corporate earnings for Minnesota-based firms have also come under pressure, leading to some belt-tightening at corporate offices. In addition, the new healthcare law presents some special challenges to the state, with new taxes set to take effect on medical device manufacturers. While Minnesota is still outperforming the nation by most economic measures, the gap has narrowed. The Federal Reserve Bank of Philadelphia’s Coincident Index for the state has decelerated to a 0.4 percent pace over the past three months.
Fortunately, Minnesota has enough momentum to weather the latest challenges. Nonfarm employment has increased 1.9 percent over the past year, and the unemployment rate has fallen 0.2 percentage points to 5.7 percent. While growth in the factory sector has slowed, it is holding its own, thanks to growth in the energy sector and medical products. Home sales and residential construction are also turning around. Moreover, the state dodged the worst of the drought this past summer and the corn and soybean harvests were some of the best ever. After moderating this fall and likely getting off to a slow start in the new year, we expect Minnesota’s economy to gradually regain momentum once an agreement is reached on the issues surrounding the fiscal cliff. Europe’s economy should also produce less of a drag on growth in 2013 than it did this past year. Finally, Minnesota’s housing market appears poised for stronger gains, with foreclosures and short sales having moderated and traditional buyers returning to the market.
The Eurozone Crisis Continues to Restrain Exports
International trade and investment are extremely important to Minnesota. The International Trade Administration notes that export-supported jobs account for 5 percent of Minnesota’s private sector employment and nearly one-fifth of all manufacturing jobs in the state. In terms of businesses, a total of 6,811 firms exported from Minnesota in 2010, with 89 percent of these firms being small or medium-sized businesses with 500 or fewer workers. Foreign-owned companies, which employ close to 90,000 workers in Minnesota, account for 3.9 percent of the state’s private sector jobs. The largest sources of international investment in Minnesota are Canada, the United Kingdom, Germany and France.
After posting strong gains in 2011, Minnesota’s export growth in 2012 has slowed to just 1.4 percent year-over-year in October from 8.6 percent a year earlier. Most of the pullback has been in Eurozone countries, while Minnesota’s non-Eurozone trading partners generally continued to increase their purchases of Minnesota-made goods. So far, China has led Minnesota export growth in 2012. Exports to China, Minnesota’s second-largest market, rose an impressive 10.6 percent this past year, and South Korea, the sixth-largest market, rose 2.7 percent, possibly bolstered by the recently passed free trade agreement between the United States and South Korea. Export growth to Minnesota’s largest trading partner, Canada, has grown 3.8 percent in 2012 compared to 8.4 percent a year earlier. In contrast, exports to Europe have grown more slowly, as exports to Germany, Minnesota’s fifth-largest market, and to the United Kingdom, the eighthlargest market, have fallen 3.5 percent and 8.0 percent, respectively. Shipments to Italy, Spain, Portugal and Greece, also declined but these countries account for a very small portion of the state’s exports.
Minnesota’s main exports fall into four major categories: computers and electronics, machinery, transportation equipment and food manufacturing. Computer and electronics exports, which constituted 18.9 of Minnesota’s exports in 2011, have risen 2.1 percent in the past year. Food manufacturing has seen the largest year-over-year improvement, up 7.8 percent. Another notable category was medical exports, which grew 11.8 percent. Minnesota has long been a hub for medical device companies, serving as headquarters for large companies such as Medtronic Inc. and St. Jude Medical Inc. and as a major regional center for Boston Scientific. Medical device exports likely will continue to grow as a share of Minnesota’s exports, especially as trade with Asia expands.
Even as trade slows with Europe, trade with Asia and other North American countries should help soften the blow. We expect growth in the Eurozone to improve slightly by the end of 2013 and look for modest growth 2014, which should revive demand for exports to Europe’s larger northern economies. Exports to China have remained strong, even though economic numbers from that nation have been mixed of late. We expect Chinese economic growth to pick up in the coming years, which should help to support further exports of Minnesota-made goods to this growing market. Exports to other Asian nations, most notably Japan and Singapore, weakened this past year, reflecting some slowing in the computer and electronics sector. We expect this weakness to be short-lived and look for shipments to rebound in 2013.
Slower Global Growth Is Weighing on Manufacturing
Manufacturing activity has long been important to Minnesota, and factories still employ 11 percent of the state’s workforce, compared to 8.9 percent nationwide. Minnesota boasts one of the most diverse mixes of manufacturers in the nation, with concentrations in industrial machinery, computers and electronics, medical devices and food products. Manufacturing activity helped lead Minnesota out of the recession, with factory-sector employment rising faster than overall job growth in 2010 and 2011. Growth has slowed more recently, however, reflecting weakening export demand and growing concerns about how the resolution of the fiscal cliff and implementation of the new healthcare law will affect operating earnings. Manufacturing payrolls have been essentially flat over the past year, but actually have fallen at a 5 percent annual rate over the past three months.
Aside from the recent let-up in manufacturing, Minnesota’s labor market appears to be maintaining solid momentum. Looking at the year-to-date changes, private sector payroll growth outside of manufacturing has averaged 1.5 percent over the past year. Businesses have added close to 33,000 net new jobs over this period, with the strongest gains occurring in construction, business and professional services and healthcare sectors, which have seen payrolls rise 5.1 percent, 4.0 percent and 3.3 percent, respectively. Although many service-producing sectors have contributed positively to employment, the leisure and hospitality sector is notable weak spot, with employment down 2.7 percent over the past year, reflecting job losses in arts and entertainment.
While roughly in line with the national figures, the latest employment data may understate the improvement in Minnesota’s labor market. The monthly employment data are revised early each year to reflect the latest data from the Quarterly Census of Employment. Those data currently suggest the nonfarm employment data will be revised up to around a 2 percent pace, which would translate into roughly 50,000 net new jobs.
The unemployment rate in Minnesota is quite low compared to the rest of the United States, coming in at just 5.7 percent on a seasonally adjusted basis in November. While lower than the nation, the Minnesota’s jobless rate appears to have hit somewhat of a plateau, falling just 0.2 percentage points over the past year compared to a full percentage point drop seen nationwide. Minnesota’s labor force participation rate has declined throughout the past few years, reflecting the retirement of older workers and relative paucity of attractive job opportunities for younger workers. The state’s labor force participation rate has fallen 0.8 percentage points over the past year to 70.7 percent, which is the lowest it has been since 1983.
While job growth has remained relatively modest, industrial development remains a bright spot. The North Star state continues to benefit from its diverse industrial mix, which includes the corporate headquarters of long-time industrial stalwarts such as 3M, Mosaic and H.B. Fuller Company. Target, Best Buy and Supervalu are also headquartered in the state, as are major food products companies such as General Mills, Hormel Foods and Cargill. Healthcare is a major component of Minnesota’s economy, which is home to the Mayo Clinic and United Healthcare, as well as major medical device makers such as Medtronic, St. Jude Medical and Starkey Hearing Technologies.
Businesses continue to relocate and expand operations in Minnesota. Recent arrivals include Capital Safety, which recently announced plans to relocate its headquarters from London to Minneapolis-St.Paul. In central Minnesota, Polaris Industries Inc. has begun construction on the expansion of its research and development facility, which when completed next year and should ultimately create 350 new jobs. Additional business development in northern and southern parts of the state should bring in up to 100 new jobs according to the Department of Employment and Economic Development. Expansion by existing firms, along with relocations of businesses from other areas, provides a true testament to the viability of Minnesota’s business environment.
Housing is Now Back on the Road to Recovery
With employment conditions improving, home sales are beginning to revive. Steady employment gains and lower unemployment have brought traditional buyers back to the market, while foreclosures and short sales continue to decline. The latest figures from the Minnesota Realtors’ Association reports sales of existing homes in November were 13.0 percent higher than last year. Sales are up a little less than that on a year-to-date basis, climbing 9.1 percent. Prices have increased over the past year, with the median home price rising 11.9 percent and the average home price increasing 10.6 percent. The improvement in home prices has been helped by a 14.9 percent slide in foreclosures and 2.7 percent drop in short sales.
Nearly all the key metrics of the housing market have improved over the past year. The time that it took for a new listing to sell dropped 17.4 percent over the past year, to 95 days, while the percentage of the original asking price realized at the time of sale rose from 89.3 percent to 92.1 percent. Affordability also remains exceptionally high. The one stumbling block remains inventory. New listings have fallen 7.6 percent over the past year, which has kept inventories relatively lean. One possible explanation for the drop in listings is that many potential sellers do not feel they have enough equity in their homes to make it worthwhile to trade up.
Homebuilding in Minnesota continues to plug along at a relatively sluggish pace. Single-family permits were running at a 10,700-unit annual pace in October. By contrast, single-family permits averaged a 26,000-unit pace between 1998 and 2003. Multifamily permits have seen a little more improvement, albeit from an even lower base. As we enter the winter months, homebuilding and home sales likely will slow but things should pick back up in the spring once the weather improves and proceed relatively in line with the rest of the nation. Homebuilders now face considerably less competition from foreclosures and should see more favorable business conditions this spring.
Summary and Outlook
Minnesota continues to quietly eke out solid economic gains, despite seeing industrial activity take a small hit from Europe’s economic woes. Employment and income grew in line with the nation this past year and the unemployment rate has fallen to just 5.7 percent. We suspect that job growth has been slightly understated and expect to see a significant upward revision to the data early next year, when the data are revised to the Quarterly Census of Employment. While the state’s factory sector has been affected by the global economic slowdown, we are beginning to see some encouraging signs out of Europe, and China’s economy appears to be on the mend. The fiscal cliff may also present some near-term challenges, but we expect some resolution on that front in early 2013, and growth should reaccelerate later in the year.
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