Minnesota’s economic outlook appears bleak for foreseeable future

The longest and deepest recession since World War II may be history by several measures, but Minnesota’s economy, as measured by state revenues, still is living the struggle.

The state’s sales tax receipts for the quarter ending Sept. 30 were 13.5 percent below the sums received for the same quarter last year, according to an economic update [PDF] issued Monday by the office of Minnesota Management & Budget.

Individual income tax withholding, which closely tracks wages, was down 7 percent from a year earlier. Corporate returns were down sharply, too.

“We may have stopped sliding downhill,” said State Economist Tom Stinson. “But these figures tell us that this has been a very difficult time for the Minnesota economy. … These are pretty big hits.”

Reasons for hope, though, are emerging on several fronts:

• Federal stimulus dollars have created at least 12,000 jobs in Minnesota, MMB also reported on Monday.

• Prospective home buyers, enticed by federal tax credits and rock-bottom interest rates, signed nearly 5,000 purchase agreements in September, up 23.5 percent from a year earlier, according to the Minneapolis Area Association of REALTORS. 

• Motor vehicle sales tax receipts for July through September spurted high above budgeted projections — thanks, no doubt, to the federal government’s “cash for clunkers” program.

But Minnesota can’t breathe easy until the private sector stops shedding jobs, until wages start growing rather than shrinking, until shoppers put to rest their fear and hit the malls again — until the state’s economy can stand on its own without life support from Washington.
Going in the wrong direction
Monday’s economic update also showed that state revenues are running behind projections set in February. The full impact on Minnesota’s fiscal picture won’t be known until a comprehensive forecast comes in December.

What’s known for now is that individual income tax receipts for this past quarter were $93 million short of budgeted expectations. Sales tax receipts fell $20 million short.

Summary of tax receipts

(July – September 2009)

Summary of tax receipts (July - September 2009)
Minnesota Management & Budget

In all, Stinson said, revenues are about $200 million short for the year. That’s not an eye-popping sum, considering that the state faced a shortfall of $4.8 billion at the start of this year’s budget process.

But it’s safe to say that everyone in Minnesota would like to see any discrepancies start going in the other direction.

“We thought we had a very pessimistic assessment when we finished the forecast in February, and we are actually running worse than that assessment,” said Sen. Majority Leader Larry Pogemiller, DFL-Minneapolis.

“This is not very good news, but it is unclear how bad the news is until we see another quarter,” he said.

If the trend continues, the state’s already bruised budget is likely to take further cuts next year, Pogemiller said.

In response to shortfalls this year, Gov. Tim Pawlenty cut nearly $3 billion in state spending through a controversial “unallottment” process, wiping out funding for some programs entirely. The governor’s office did not respond to a request for comment on Monday’s economic update, but other experts agreed the state may need to brace for more belt tightening.

Squeezing rather than cutting
The severe economic contraction outlined in Monday’s update makes further cutbacks in state offices almost inevitable, said David Vang, chairman of the Finance Department in the Opus College of Business at the University of St. Thomas.

“There has been such a huge change in the economy from last year to this year,” Vang said, that the state has yet to fully adjust.

“Some draconian one-time measures will likely be taken in some departments,” he predicted.

Minnesotans could see more big programs slashed entirely, Vang said, but state officials are more likely to use a scalpel than an ax next time around because “it is politically easier to squeeze” here and there.

Economic growth returns, but real GDP ends fiscal 2011 below February’s forecast

Economic growth returns, but real GDP ends fiscal 2011 below February's forecast
Minnesota Management & Budget

Yes, but isn’t the recession over? When Federal Reserve Chairman Ben Bernanke and other prominent economists say the recession has ended, they mean they don’t see things getting worse, Vang said.

“We could expect some economic growth from this point forward, but employment always lags — and that, in turn, means that income tax revenues will lag,” he said. “We might see some growth next year, but it is probably going to be very slow.”

Turning the mirror around
Another way to look at the state’s latest economic update is to see its reflection of our collective abilities to earn taxable incomes and buy goods that generate sales taxes.

The view from that perspective is likely to remain bleak for some time to come, said Elizabeth Peterson, director of research and planning for Greater Twin Cities United Way.

Because unemployment almost surely will rise even while recovery starts, “everything is going to be lagging,” she said.

“Sales taxes will be lagging because people still are afraid they are going to lose jobs,” she said. “Wages are going to be stagnant. It’s not pretty.”

It’s particularly ugly for at least one in 10 Minnesotans who are unemployed or underemployed at lousy part-time jobs. They are fighting grim, gut-wrenching hardship that many of their families never have seen before.

They are flocking to food shelves, putting off health care and bunking with relatives.

About half of Minnesotans are buying less food, according to a Northwest Area Foundation survey reported in September. And nearly half had lent money to family and friends.

More than one-fourth of those surveyed said they had problems paying for such basic necessities as mortgages, rent and heating. Twenty-three percent have had a friend or family member stay with them because money was short. And 32 percent had trouble affording health care.

By a national measure, nearly 36 million people nationwide received federal nutritional assistance in July this year (the most recent month reported), up from 29 million a year earlier.

“Food is one of the most flexible things in people’s budgets,” said Peterson at United Way. “Mortgage or rent tends to come first because you have to have a roof over your head, especially when you live in Minnesota and you get snow in October … As for outstanding bills, they juggle those — pay a little of this, pay a little of that and try to keep the creditors as happy as possible.”

Jobs recovery for U.S. will be slow

Jobs recovery for U.S. will be slow
Minnesota Management & Budget

But those strategies go only so far, and many more families are sleeping in homeless shelters. Hennepin and Ramsey county shelters provided 9 percent more shelter this summer than they had a year earlier, Peterson reported [PDF] in a recent economic assessment.

One striking difference in this recession, compared with other economic downturns, is that many people are seeking assistance for the first time.

“What we’re hearing in particular from food shelves is that people who used to contribute are now coming in as clients,” Peterson said. “It is very difficult for those people who used to be in a position to give and now are going to these same charities to receive. … They are not as familiar with social services, and they often require a lot more assistance in navigating what can be a very complex sector.”

United Way’s 2-1-1 help lines received about 13 calls a day for the first half of this year from people who had never called before but had recently lost a job or had a family member lose one. (The confidential help line connects callers with more than 40,000 community resources covering food, child care, transportation, housing and other needs. More information is here.)

Almost 12,000 jobs from stimulus funds
Meanwhile, state officials reported separately on Monday that more than $1.6 billion in federal American Recovery and Reinvestment Act funds have been received and spent in Minnesota.

Many argue that’s a slow start for the program that was to help quickly heal the economy. Even so, state officials estimate the stimulus funds have created or retained 11,800 jobs in Minnesota.

Minnesota Management & Budget officials expect eventually to receive a total of $4.7 billion for state-run programs. And the economy should benefit further from another $4.2 billion in income tax benefits pledged to individuals in Minnesota.

Implementing the massive new program within a relatively narrow time window posed a major challenge to state and local governments, MMB Commissioner Tom Hanson said in a statement.

“I’m pleased to report that Minnesota has met that challenge,” he said.

The overall impact of the stimulus spending was broad, according to the state report. But the biggest gains were in education (5,900 jobs) and public safety (1,200 jobs). Further, nearly 900 transportation jobs were created or saved, according to the Minnesota Department of Transportation.

The figures are preliminary, the report said. If anything, though, the federal stimulus program’s total impact on the state may be higher because this report does not reflect the effects of money awarded directly to cities, counties and individuals. It also leaves out Medicaid matching funds.

(More information about federal stimulus spending can be found on MMB’s website or the federal site.)

Sharon Schmickle writes about national and foreign affairs and science. She can be reached at sschmickle [at] minnpost [dot] com.

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Comments (7)

  1. Submitted by Ron Gotzman on 10/13/2009 - 11:25 am.

    How is that “hope and change” going for you?

  2. Submitted by Stephen Dent on 10/13/2009 - 12:37 pm.

    Yes, the economy in Minnesota does look bleak, but let’s look at what we lost during the Republican/Pawlenty years and beyond, shall we? First we lost a major national bank, which moved to San Francisco, then a major department store that first went to Chicago and then lord knows where. Then our hometown airline, a must in a global economy for Minnesota’s success, flew south to Atlanta. Before that, we lost the doughboy to London and back to General Mills, and the South Minneapolis Heating Registor Company, aka Honeywell, to New Jersey. And while we have grown some businesses, such as Medtronic, you cannot continue to bleed a community of its wealth and talent and expect the economy to thrive. Think of the number of $150,000. – $300,000. dollar a year jobs have left this area never to return. Minnesotans of all political stripes must recognize that we are in this place together and that if we are to re-build our economy, we must pull together. Perhaps a little socialism could go a long way by, say, growing Sun Country into a competitive airline and let it go international, or fund biotech or design projects to compete with London, Los Angeles or New York. We have people who love living here, now, let’s just free them up to use their talent to pull our state out of its duldrums. We’ve got the talent…now let’s give them the support and resources to accomplish their dreams. We will all be better off in the end.

  3. Submitted by dan buechler on 10/13/2009 - 02:06 pm.

    Well I see Ron has the answers and bless his soul. I agree more with Stephen in that there needs to be some “push” instead of all this individual and hence collective entrenchment. In what form this “push” comes in would be good fodder for all our fellow commentators out there to mull over. And pleeze all of youze don’t trot out the old same olds, same olds. Put on your arne carlson hat and put some good ideas out there. Please and thanks.

  4. Submitted by Bernice Vetsch on 10/13/2009 - 04:40 pm.

    Q. How much revenue was lost each year since Tim P. took office and cut income taxes for those who are our highest earners?

    A. $2 billion per year, I believe.

    Q. Wow. So we could have avoided all these cuts to social services and everything else and all the suffering the cuts have caused? Not to mention the continuing deficits to come.

    A. Looks that way.

  5. Submitted by Richard Schulze on 10/13/2009 - 07:12 pm.

    Because the state constitution requires the government to eliminate the deficit quickly, Minnesota has drawn down the reserve funds and has already begun to cut programs from healthcare to education. Cuts in state and local government outlays are sure to be a substantial drag on the economy in 2009 and 2010.

    Additional federal aid to state governments will fund existing payrolls and programs, providing a relatively quick boost. States that receive checks from the federal government will quickly pass the money to workers, vendors and program beneficiaries.

    Arguments that Minnesota should be forced to cut budgets because they have grown bloated and irresponsible are strained, at best. State government spending and employment are no larger today as a share of total economic activity and employment than they were three decades ago. The contention that helping states today will encourage more profligacy in the future also appears overdone. Apportioning federal aid to states based on their size, rather than on the size of their budget shortfalls, would substantially mitigate this concern.

    State and local government and education and health services benefit significantly from the stimulus plan, but the lift to employment is not as pronounced as in other sectors. Employment in these areas is approximately 1.5% higher with stimulus than without it, about half the percentage boost to employment experienced in the broad economy. I think it would be measurably higher if not for the stimulus package. The stimulus in my view is working. It’s just gotten overwhelmed by the magnitude of the economic crisis.

  6. Submitted by Thomas Swift on 10/13/2009 - 09:11 pm.

    I’m a glass half full kind of guy.

    Sure, we’re in for three more years of struggle and loss, but that’s one year less than we looked forward to last year.

    2012: Hope? No thanks, the mortgage company won’t cash checks you hope will clear.

    Change? Yeah, if you count getting back to work and digging out of this mess as change, you’ll get it.

  7. Submitted by Richard Schulze on 10/14/2009 - 07:28 pm.

    What we’re witnessing here is pretty simple: another bubble in financial assets. All that “liquidity” created by the Federal Reserve and other central banks has accomplished its task and prevented a global financial meltdown.

    Many analysts now look at the economy and conclude that unemployment is still way too high and the threat of inflation still way too low for the Fed to even think about beginning to raise interest rates again.

    The right policy response is for the Fed to begin withdrawing some of this extraordinary monetary stimulus even as the rest of the government steps up its effort to stimulate the real economy. That means more money for extended unemployment benefits; more aid to the states so that they can maintain the most vital public services; and more money to expand mass transit, state college and university systems, efficient energy production and basic scientific research.

    What would surely not be good policy, by the way, is to extend and expand the current tax break for first-time home buyers that is set to expire at the end of the year, as many in Congress are now advocating.

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