The Short and Mid-Range Economic Outlook

Thomas F. StinsonUniversity of MinnesotaNovember, 2009

Real GDP Is Growing Again

We Have Been in a Great Recession

The Recession is (Almost Certainly) Over

• The recession’s end usually is set at when real GDP begins to grow again

• The stimulus package, slower declines in inventories and modest growth in consumer spending will produce a positive Q3

• But, improvements in the labor market are unlikely before summer

The U.S. Economy Is Expected to Lose More than 7 Million Jobs

Job Losses in Minnesota Have Tracked the U.S. Average Since the

Recession Began

Real GDP Will Not Reach Pre-Recession Levels Until 2011

This Recession Was More Severe Than Those in 1990-91 and 2001

Minnesota Employment Is Projected to Recover Slowly

Why a Slower than Usual Recovery

• Interest rates will increase, not decrease

• Excess production capacity limits need for new business equipment

• Export demands unlikely to surge in short term

• Lost wealth and retirement concerns will slow pent-up demand

The Age Distribution Is Different Than in the 1980s

Spending on Food and Food Away from Home Will Increase in 2010

Oil Prices Now Expected to Trend Toward $85 Per Barrel in 2012

0

20

40

60

80

100

120

140

2005 2006 2007 2008 2009 2010 2011 2012

$ per Barrel (WTI)

Interest Rates Will Go Up, But Not Until 2011 and 2012

The Dollar Is Expected to Continue to Decline through 2012

The Housing Slump Has Been More Severe in Minnesota

0

20

40

60

80

100

120

04avg

2005 2006 2007 2008 2009 2010 2011 2012

Index 2004 = 100

US MN

What to Watch During the Next Six Months

• Consumer spending

• Savings rate

• Payroll employment (smaller declines)

• Credit markets / interest rates

• Capacity utilization

The Great Recession Has Raised the The Great Recession Has Raised the Level of Social AngstLevel of Social Angst

But

Four Mega-Forces Will Shape the Outlook for Longer Term Growth

Globalization

Technology

Energy prices

Demography

Minnesota Saw a 30 Percent Jump in Workers Turning Age 62 in 2008

0

10,000

20,000

30,000

40,000

50,000

60,000

7/05 to7/06

7/06 to7/07

7/07 to7/08

7/08 to7/09

7/09 to7/10

7/10 to7/11

7/11 to7/12

Year Turning Age 62

Wo

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d W

ith

in P

as

t 5

ye

ars

2005 ACS

From 2010 to 2020, Minnesota Will

See Large Increases Age 50s and 60s

20,15036,190

47,3305,050

-30,680-9,980

47,95061,920

-2,680-63,650

-42,31054,240

102,960112,540

91,37041,400

8,44016,500

0-45-9

10-1415-1920-2425-2930-3435-3940-4445-4950-5455-5960-6465-6970-7475-7980-84

85+

Source: Minnesota State Demographic Center, rev 2007Numbers are rounded

Competition For The Future Workforce Will Increase

6.8%

4.5%

-1.6%-2.2%

13.0%

-1.2%

-3.5% -3.0%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

2000-05 2005-10 2010-15 2015-20

Perc

en

t C

han

ge 1

8-2

4

US

Mn

Census Bureau US Proj, Mn State Demographer revised 2007

Labor Force Growth Is About To Slow Sharply

1.52%

1.12%

0.75%

0.43%

0.10% 0.13%

0.27%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1990-2000

2005-10 2010-15 2015-20 2020-25 2025-30 2030-35

Ave

An

nu

al C

han

ge

For Many Occupations, Replacements Will Outnumber New Job Growth

Projected Openings In Minnesota Occupations 2006-16

0%5%

10%15%20%25%30%35%40%45%50%

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Replacement

Growth

DEED projections. Percent of 2006 level

Migration Will Be Increasingly Important for Labor Force Growth

-100,000

0

100,000

200,000

300,000

400,000

500,000

2000-10 2010-20 2020-30

Total Natural Part Rate Migration

Net Labor Force Growth

State Demographer projection revised 2007

Workforce Development Will Be Crucial To Minnesota’s Economic

Future

• Number of workers

• Quality of workers

Economic Fact of Life #1

Standard of Living depends on output per resident

Output = Output per Hour * Hours Worked

Productivity Is Not Just Producing at a Lower Cost

Increasing the Value of Products Produced Also Increases

Productivity

Economic Fact of Life #2

• Productivity depends on – The private capital stock– The stock of human capital

• Education• Health status

– The stock of infrastructure– Advancements in technology

The New 3 R’s for Economic Success

• Retention

• Recruitment

• Retraining

Academic Research Is a Key Factor in State Economic Growth

• “the lags between R&D and economic outcomes are quite long (at least years, and more likely decades)

• “The state … may do well for a while by drawing upon its existing stock of knowledge capital

• “How the state of Minnesota will fare in the future … will crucially depend on its recent and future investment in R&D

*Long Gone Lake Wobegone, Pardey, Dehmer and Beddow, 2007

R&D Spending Slowed in the Early 90sWe Are No Longer Above Average

Rank 1972 Rank 2004

Total Academic R&D 19 26

Academic R&D per capita

20 40

Academic R&D per dollar of GSP

20 43

Health Care Spending Jumps After 55U.S. Health Care Spending By Age, 2004

$1,855$1,074 $1,445

$2,165$2,747

$3,496

$6,694

$9,017$9,914

$3,571

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

<55-

14

15-2

4

25-3

4

35-4

4

45-5

4

55-6

4

65-7

475

+

Avera

ge

Source: Agency for HealthCare Research and Quality, Medical Expenditure Panel Survey,data for per capita spending by age group in the Midwest. Excludes spending for long-term care institutions.

From 2010 to 2020, Minnesota Will

See Large Increases Age 50s and 60s

20,15036,190

47,3305,050

-30,680-9,980

47,95061,920

-2,680-63,650

-42,31054,240

102,960112,540

91,37041,400

8,44016,500

0-45-9

10-1415-1920-2425-2930-3435-3940-4445-4950-5455-5960-6465-6970-7475-7980-84

85+

Source: Minnesota State Demographic Center, rev 2007Numbers are rounded

Education Is The Key To Productivity

Minnesota High School Graduation Ratio

57%

85%

60% 62%

89%85%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

AmericanIndian

Asian Hispanic Black White Total

2 Y

r A

ve R

ate

2004-05 through 2005-06 graduates. Based on 10th grade enrollment three years earlier.