What’s happening with Minnesota’s economy?

As COVID-19 approached the United States, leaders in Washington D.C. wished to guard against a severe drop in GDP. To do this, they focused on two components of GDP.

First, the easiest and most directly in their control — government spending. As a result, we got coronavirus relief packages like the CARES Acts and the American Recovery Plan. Second, the component that has the most impact on the economy — consumer spending. It accounts for between 60 and 70 percent of GDP in any year. In turn, Congress authorized stimulus payments.

Wild ride of consumer spending

At the same time, the United States went on a wild ride of consumer spending. In March 2020, consumers pulled back out of a natural concern for the future. We all tend to conserve our cash when we are not sure if we will have jobs. In April and May 2020, consumer spending, especially for services dropped dramatically. Even if you wanted to get your hair cut, for example, the salons were closed.

Then summer 2020 arrived, with dropping COVID-19 case numbers and the ability to be outside, and consumer spending surged again. We continue to see consumer spending at higher levels than prior to the pandemic.

Particularly for manufacturers

Manufacturers, in particular, saw spikes in demand. Consumer spending on durable goods – like ATVs, bicycles, RVs, and boats — was up nearly 30 percent at the end of 2021 compared to 2019. Consumer spending on non-durable goods (toilet paper anyone?) was up by 15 percent.

Leading to a perfect story … demand is up, but fewer workers

As consumer spending surged, manufacturers did what businesses do best and ramped up their production. Supply chain pressures hampered manufacturers. Labor shortages compounded the issue, particularly in Minnesota. Labor force participation rates were down among two key demographic for Minnesota’s manufacturers – those over the age of 25 without a college degree and those over the age of 65.

More jobs than people looking for work

This put the state in the position where we had more jobs than people seeking work, particularly jobs that do not require education and or experience. In Central Minnesota, as an example, only 10 percent of jobs openings required a bachelor’s degree and 60 percent required less than a year of experience.

What do manufacturers do in these circumstances?  They are facing rising demand, but high competition for supplies and workers. The natural reaction is to raise prices. Higher prices can help the producer meet increasing costs of inputs and labor and cool consumer demand. 

The economy, on the other hand, is seeing two results from this pressure. First, there's inflation. Inflation is a natural outcome of the pressures on the economy.

Certain industries are struggling more

Second, there is increasing pressure on non-manufacturing sectors, especially around employment. Recovery has not been as strong in all industries, for example, leisure and hospitality demand remains relatively weak. These businesses do not have the ability to raise prices and pay higher wages. They do, however, compete for the same workers, meaning we see manufacturing jobs filled while leisure and hospitality jobs remain open.

Other industries facing employment pressures are those on a more fixed payment system. Healthcare and childcare, which often rely on reimbursement rates set by the government, are among those with hiring challenges.

So, where does the economy go from here?  Throw in the war in Ukraine and we have a significant amount of economic uncertainty. At this point, much depends on how policymakers react. At the state level, we have the budget surplus generated by the increased demand. At the national level, we continue to see federal government spending.

We also have the Federal Reserve attempting to tamper down on the inflation pressures by raising the interest rates. Interest rate increases, along with rising gas prices, may slow down consumer spending, relieving some pressure on the economy. It remains to be seen how much consumers pull back.

In Minnesota, our fundamental labor force issue will not change with these controls. We have low growth in the working-age population, so we will need to continue to be creative in our workforce solutions.