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2012 regional economy looking up, Fed says

The recovery is slowly picking up momentum across the upper Midwest as moderate economic and employment growth outpaces 2011 and stays ahead of the national economy.

The recovery is slowly picking up momentum across the upper Midwest as moderate economic and employment growth outpaces 2011 and stays ahead of the national economy. 

That optimistic outlook comes from the Federal Reserve Bank of Minneapolis’s annual forecast, which was released Tuesday.

The forecast is based on the Fed’s regional economic model as well as surveys of business leaders and manufacturing executives conducted in November across the six-state Ninth District, which stretches from Montana and the Dakotas, to Minnesota, Michigan’s Upper Peninsula and northwestern Wisconsin.

State-by-state forecasts show employment and personal income growth picking up across the region, and unemployment continuing to decline as it stays below the national rate everywhere except in Michigan’s Upper Peninsula, according to associate regional economist Rob Grunewald.

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North Dakota is projected to see unemployment dip slightly to 3.4 percent, the lowest in the region and likely nationally, as it posts the strongest employment growth in 2012, 4.8 percent.

At the other end of the spectrum, Michigan’s U.P. is projected to see unemployment of 9.4 percent, above a projected 8 percent nationally. Northwest Wisconsin is forecast to have the lowest rate of employment growth in the region, at 1.9 percent. Minnesota’s employment is expected to grow 2.8 percent and record a 6.5 percent unemployment rate.

As upbeat as the employment outlook is for the Ninth District, there is a possibility it could actually beat the current Fed forecast, which is based on actual quarterly data through September.

The projections have not included the large drops in the unemployment rate seen both nationally and in the region in October and November. So, for example, the Fed’s 2012 forecast for Minnesota’s unemployment rate is 0.6 of a percentage point above last month’s 5.9 percent reported rate.

Rob Grunewald, associate regional economist, acknowledged the likelihood of a positive revision once fourth-quarter data is incorporated into the Fed model. “Nothing says [unemployment rates] are going up, so they’ll be where they are now or a little bit lower. It looks like employment will increase a little bit faster” than the forecast, he added.

North Dakota’s economy continues to shine, driven by the oil boom in the western part of the state. Only Texas and Oklahoma have more active oil rigs, according to the Fed, and North Dakota has maintained the lowest unemployment rate through the recession and recovery.

The oil boom comes with some challenges as well. In stark contrast to the rest of the region, 94 percent of business executives surveyed in North Dakota report that securing workers is a challenge.

Manufacturers across the district enjoyed increased orders, production, exports and profits in 2011 and expect the trend to continue in 2012 at slightly higher levels, according to a survey of 474 manufacturing executives across the region.

Fed regional economist Toby Madden said manufacturers also anticipate increasing investments in plant and equipment and hiring more workers.

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Even with the upbeat outlook, two yellow flags were thrown up for the manufacturing sector. European economic turmoil continues to add uncertainty to the outlook for exports, Madden cautioned. In addition, 19 percent of manufacturing executives reported that credit conditions tightened in the third quarter, compared with only 8 percent who reported an improving credit climate.

A separate survey of 409 business executives across all sectors was also upbeat. Sixty-two percent reported optimism about their own local economies, with manufacturing and retail executives the most positive.

Source: Federal Reserve Bank of Minneapolis

Nearly one-third of respondents in those two sectors expect to increase the number of full-time employees, more than twice the number who expect employment declines. Hiring expectations in all other industry sectors, except agriculture, showed a similar pattern of growth expectations exceeding declines, although not with as wide a spread between the two.

While the agriculture sector is facing increasing drought conditions, particularly in Minnesota in 2012, Madden said, “As long as the drought doesn’t intensify, 2012 should be a pretty good year,” based on U.S. Department of Agriculture crop price forecasts.

The struggling construction sector provided the one sour note in the Fed forecast. Despite a slight pickup in homebuilding in 2011, Madden expects housing starts to decrease across the district next year.