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For a change, the economy in Greater Minnesota is looking stronger than business in the Twin Cities

FINANCIAL MELTDOWNBy Dan Haugen | Monday, September 22, 2008
Observers credit high commodity prices and a weak dollar for boosting farmers and manufacturers, while such Twin Cities economic sectors as retail, real estate and finance

It was a week of dire economic headlines: Failing banks. Plunging stocks. Freezing credit markets. Uncertainty. Bailouts.

But with all of the other concerns, it was easy to overlook the encouraging news from Minnesota’s Iron Range. On Friday, more than 1,000 people gathered for the groundbreaking of a $1.6 billion steel mill that will employ 700 people.

The event “ushered in a new era of business on the Range,” Mesabi Daily News Editor Bill Hanna wrote.

It’s anyone’s guess how last week’s financial turbulence will end up affecting the national and state economy. (PDF) But Bill Blazar, senior vice president for the Minnesota Chamber of Commerce, predicts the impact will be worse in the Twin Cities than in outstate communities.

That’s because high commodity prices and a weak dollar are helping boost profits for farmers and manufacturers. Meanwhile, the metro area depends more on the retail, finance and real estate sectors, all of which are struggling.

“You’ve got a situation we haven’t had in a long, long time, where the Twin Cities’ economy is weaker than what we’ve got in Greater Minnesota,” Blazar said.

That’s not to say Blazar thinks outstate businesses won’t be affected. Blazar thinks last week’s events will have a chilling effect on commercial lending. The ability to borrow money will depend on the individual company’s circumstances, he said, but he predicts the hurdles to be proportionally higher across the board.

It’s not a reflection of the quality of Minnesota companies, he said. He thinks lenders will be skittish about taking on new debt until they know how they are linked to the risky products that have crippled financial giants.

“Call the business banker at … you pick it. They are making loans. They’re just being more careful,” Blazar said. “The more careful part means they are probably doing less at the end of the day.”

Borrowing will become more difficult, he believes, and companies that can’t secure loans will put off hiring and equipment purchases. When that happens, the state’s economic growth will slow.

Community banks feel well-insulated
Minnesota bankers, on the record at least, aren’t worried about Wall Street’s problems spilling over onto their books. The banks in Minnesota are mostly locally owned and operated, and all of them are very well capitalized, said Brad Ruiter, spokesman for the Minnesota Bankers Association.

“The state’s economy as a whole is pretty well insulated from the Wall Street news of this week,” Ruiter said.

Al Obernolte, president of Americana Community Bank in Sleepy Eye, said he doesn’t think the Wall Street crisis will have much of an impact on Greater Minnesota’s community banks.

As of last week, the concerns have been about movement of wholesale funds among the “mega-banks.” Smaller community banks are typically far less dependent on those funds and instead rely on the money coming in from customers.

Americana Community Bank tightened lending standards last summer in response to falling home values and rising foreclosures. It usually requires a 20 percent down payment today, instead of the 10 percent it asked for a couple of years ago.

But the events of last week aren’t prompting any changes. “We’re not going to do anything this week or this month,” Obernolte said.

The indirect impact on his bank, which also has locations in Medford and the western metro area, will depend on how Minnesota’s economy responds.

“Certainly, there are pockets out there that have been really hit hard,” Obernolte said. “On the plus side, we in Minnesota have some pretty good diversity in our economy, including some sectors that are doing very well,” such as medical and agriculture.

Impact on average Minnesotans
Some investors took a hit last week, but for the average Minnesotan, the biggest impact of last week likely will be psychological, said Ross Levin, founding principal of Accredited Investors in Edina.

“I think the psychological impact is pretty significant,” Levin said. “I think people are reacting and responding to this in ways that are probably more significant than what is going on in their portfolios.”
(Our interview with Levin took place Thursday morning, before the stock markets had rallied back to the levels at which they started the week.)

If people are worried about their portfolios or job stability, they will spend less money, and that would soften an economy that already has retailers struggling. If the global economy continues to soften, companies like Target and General Mills might see declining sales.

The availability of credit for individuals has gradually tightened over the last several months, he said, but the turbulence on Wall Street last week didn’t cause any overnight changes.

“For the average individual, does it mean they can’t get a mortgage? Probably not,” Levin said. However, borrowers with bad credit or people trying to buy more than they can afford will have more difficulty, but, he said, “That’s probably the way it should be.”

Dan Haugen is a Minneapolis-based reporter who writes about business and other topics for MinnPost. He can be reached at dhaugen [at] minnpost [dot] com.