Employment Falls Dramatically in 2008

by Jerry Brown - jerry.brown@state.mn.us
April 2009

The economic situation late in 2008 was the kind of experience most people would prefer to avoid, but years later it will make a good story to tell the youngsters. The near collapse of our credit markets and the huge dampening effect this had on economic activity led to the worst performance in the job market since the severe double-dip recession of the early 1980s. When all is said and done, the declines in employment for this downturn will likely be the worst registered by the state from 1950 forward. That statement seems rather gloomy given that employment fell only 0.5 percent for the year, seemingly not severe enough for such a dour statement. However, while the loss on average was relatively small for 2008, employment growth late in the year weakened dramatically, and the decline continued to accelerate in early 2009. Figure 1 shows seasonally adjusted employment levels for Minnesota for 2007 and 2008 along with U.S. employment. The figure shows the dramatic employment decline experienced in Minnesota after September, which can only be described as a period of free fall. The U.S. showed radically increased declines at the end of the year as well.

The collapse is readily seen in measures of gross domestic product, which, on an annualized basis, grew by 0.9 percent and 2.8 percent the first two quarters of the year before losing 0.5 percent in the third quarter and declining by an eye-popping 6.2 percent during the fourth quarter. The chickens came home to roost for the financial industry as the bursting of the housing bubble and the subsequent declines in housing values created cascading losses among financial institutions that had invested heavily in mortgage-backed securities and/or provided insurance for the securities with the issuance of default risk swaps. The failure or near failure of several securities banks and the world’s largest insurance company caused a plummet in confidence and a wariness that froze up credit markets. The losses also constrained the lending ability of banks, many of whose capital reserves were now inadequate. Without normal credit flows, operating cash for business became difficult to obtain, and consumer borrowing became much more difficult. As confidence in the health of the economic system waned, consumers and businesses retrenched and serious reduction in economic activity spread across industries to encompass most of the economy both in terms of industry and geography.

In Minnesota the change in employment was very similar to that of the U.S. The annual change in employment from 2007 to 2008 by supersector for Minnesota and the U.S. is shown in Table 1. The U.S. showed a slightly smaller loss overall at -0.4 percent. Minnesota did substantially better in a few areas including Manufacturing, Information, and Educational and Health Services but fell well short of national results in Construction, Professional and Business Services, and Leisure and Hospitality. As previously noted, a trend of gradual decline in employment was the rule during the first half of the year for both the state and U.S. The declines sharpened substantially for the U.S. beginning in August, with Minnesota’s sharp decline beginning unmistakably in September. Table 2 presents annual growth rates for Minnesota by quarter for each industry supersector. The table shows moderate declines early in the year with second quarter weakening by 0.4 percent and third quarter by 0.3 percent. The loss then accelerated to 1.1 percent for the fourth quarter. This pattern generally held for all supersectors except for Educational and Health Services and for Information, both of which showed improvement at the end of the year.

Table 3 presents a ranking of the 50 states plus the District of Columbia. Twenty-one states showed job growth, two showed no change, and 28 showed employment decline. Minnesota was in the bottom half of the states when ranked by annual growth, with 28 states outperforming it. Minnesota’s decline, however, was close to the mean state growth of -0.1 percent and the median of -0.3 percent and seems rather modest when compared to Florida, Michigan, Rhode Island, Arizona, and Nevada where losses reached 2 percent or greater. As in 2007, states with major oil extraction dominated the top of the list, but with the price of oil falling to about one-third of its July 2008 peak by December, oil production in these states, and thus employment growth, is likely to slow in the coming year. The bottom of the list was dominated by states that were the most impacted by the collapse of the housing bubble or have been adversely impacted by the near bankruptcy of U.S. automakers.

Minnesota’s annual rate of unemployment was estimated to be 5.4 percent in 2008, somewhat lower than the national rate of 5.8 percent. Nevertheless it represented a significant increase of 0.8 percentage point from the previous year’s level. While large, over half of all states posted rate increases larger than Minnesota’s including Rhode Island, Florida, and Nevada, which saw their rates jump by more than 2 percent. Minnesota’s 5.4 percent rate was the highest since 1982 and 1983 when the rate was 8.1 and 8 percent respectively. Unemployment was rising sharply at the end of 2008, and the rate of unemployment during 2009 will likely eclipse the levels reached in 1982 and 1983.

Table 4 presents annual growth for 2008 and 2007 for a broad set of industries. So where did the losses come from in 2008? The two primary areas of weakness in 2007, Construction and Manufacturing, were again areas of significant weakness in 2008 and experienced increased job losses for the year. Construction employment was down 8.6 percent in 2008 after declining 5.8 percent in 2007 and showed no real signs of improvement during the year. Permits for new housing units in 2008 totaled 10,691 according to Census Bureau estimates, a decline of 39 percent compared to 2007. Permitting has fallen drastically since peaking at 40,877 units in 2004. Just how low is the 10,691 figure? It is by far the lowest the Census Bureau has on record from 1980 forward. The lowest previous figure was 17,256 in 1981. The data are not completely comparable as recent data are based on a larger set of reports, but the utter weakness in new home construction is unmistakable. Total sales of housing units in Minnesota declined 3.6 percent in 2008 according to the National Association of Realtors. By the end of 2008 about half of the sales made in the Twin Cities metro area were lender-mediated sales, which drove down the median sale price. A 10.9 percent reduction in new listings for the year compared to 2007 was positive, but with the economy weakening, foreclosures are likely to increase as employment and incomes continue to weaken.

Commercial real estate was off sharply in the second half of the year after being a source of strength in construction when housing initially began its collapse. Although vacancy rates are far from record highs, the demand for space almost completely dried up by the end of the year as the uncertainty about future business conditions grew. The Twin Cities had a positive absorption of about 158,000 square feet of office space in the first half of the year, but in the second half the net absorption was about -307,000 square feet. [1] The market for retail space was perhaps hardest hit in 2008 as the vacancy rate increased to 7.9 percent for all retail space combined in the Twin Cities, the highest in 10 years. The inventory of space is expected to grow as additional stores close in coming months, and construction of new space should slow further. After rapid growth in recent years, only 928,000 square feet of newly constructed retail space was completed in 2008, the lowest amount in 10 years. Industrial and medical space, while not as weak as the market for retail and office space, was sluggish to the point of appearing to be on hold at the end of the year. Currently we are still searching for the bottom in both housing and commercial construction. The continued weakness in construction can be seen in Table 5, which shows the predominance of construction and construction-related industries listed as the industries with the most rapid decline in employment.

Manufacturing also saw greater losses in 2008, down 1.9 percent after falling by 1.2 percent in 2007. The majority of the loss was in durable goods, particularly in areas affected by weak construction spending. Wood product manufacturing fell by 11.9 percent, and furniture and related was down 8.7 percent. These industries were weak throughout the year. Other industries showed weakness related to an expansion of the recession beyond construction and real estate as the year progressed. Transportation equipment was one such industry. Toward the end of the year, as credit dried up, consumer demand for not only cars, but also boats, snowmobiles, and motorcycles dried up. Many other manufacturing industries showed weakened performance in the last quarter including machinery manufacturing, medical equipment, paper manufacturing, and printing and related. Manufacturing losses began in 2006 so the decline is part of a longer trend, but clearly the pace of decline picked up in 2008, particularly nondurable-goods manufacturing, which went from a small gain in 2007 to a loss of over 2,000 jobs in 2008.

At the end of the year the conditions for manufacturing in Minnesota had weakened sharply. The Minnesota Business Conditions Index produced at Creighton University measures the conditions for growth in Minnesota, particularly manufacturing. This measure peaked in April at 55.1 but by December had declined to 32.2, almost 18 points below the break-even point of 50. Notably, the portion of the index measuring confidence had dropped to about 21, indicating that businesses were very unsure about their prospects. Manufacturing still performed somewhat better here in Minnesota compared to the U.S. as a whole, which lost manufacturing jobs at the rate of 3.2 percent. Fairly strong exports helped limit employment declines in the first part of the year, but by the fourth quarter exports declined removing an important support. The removal of this prop and the general weakening of the economy late in the year led to an increased rate of decline in Manufacturing at the end of the year as presented in Figure 2 and in Table 2.

Three major supersectors moved from adding jobs in 2007 to posting substantial losses in 2008 — Trade, Transportation, and Utilities, Professional and Business Services, and Leisure and Hospitality. Of these, Trade, Transportation, and Utilities is perhaps the most notable because of its broad underlying cause — a reduction in the ability and/or willingness of consumers to spend at previous levels. Trade, Transportation, and Utilities employment was in a state of decline for most of the year, driven mainly by weakness in retail trade. For the first three quarters of the year, the declines in retail trade were moderate with quarterly annual change between -1 and -1.8 percent. Like nearly every other industry grouping, retail trade weakened substantially fourth quarter 2008, with the quarterly annual decline nearly doubling to -3.7 compared to the same quarter in the prior year. Transportation, warehousing, and utilities employment conditions also turned dramatically worse in the fourth quarter.

Consumers faced several negative developments that slowed consumption. Falling house prices reduced net worth and thus purchasing, based on the extraction of wealth from the value of homes, was drying up. At its peak, estimates indicate that about 7 percent of disposable income came from extracting wealth from homes. [2] Add to this the sudden collapse of expected sources of credit, another gigantic decline in wealth in the form of the value of securities declining by more than 30 percent seemingly overnight, increased unemployment, and a constant stream of bad news. Even those who did not face foreclosure or a similar direct catastrophe had reason to be uncertain about the future. Consumer confidence plummeted and so did consumer spending, meaning that the important holiday season was a bust for retailers. Figure 3 shows retail sales by month for data on a seasonally adjusted basis. The data clearly show the large decline in retail spending in the second half of the year, particularly the fourth quarter, when monthly declines in retail spending averaged 3.2 percent per month. The figure shows the accompanying decline in retail trade employment in Minnesota as well. The importance of the decline in consumer spending cannot be overemphasized, as it represents about 70 percent of economic activity. Therefore, the reduced spending had a broad impact on employment.

The credit crunch had a huge impact on the auto industry. As normal credit flows ceased it was difficult for auto dealers to finance their inventory, and consumers, on top of a general wariness to make large purchases, faced tighter credit standards even if they did decide to buy. This came to a head at the very end of 2008. In total, 40 Minnesota new-vehicle dealerships closed in 2008, nearly 10 percent of the total number. Most notable was the closure of six dealerships owned by Denny Hecker. In January 2008 motor vehicle and parts dealerships showed a loss of 1 percent but sharp declines late in the year drove the loss to 6.4 in December. Building materials and supplies also saw substantial losses from reduced spending on construction projects. Transportation, warehouse, and utilities, while still positive in terms of annual average change, saw a strong decline in the second half of the year with annual growth dropping from 0.8 percent in June to -4.1 in December.

Another area to which large employment declines spread was Professional and Business Services. This supersector went from adding over 6,000 jobs in 2007 to a loss of about 3,600 in 2008. The major cause of this change was the loss incurred in administrative and support, down 6,846 jobs for the year. For most of the year administrative and support posted a 12-month change of between -4 to -4.7 percent, but at the end of the year two weak months drove this change to -12 percent. Nearly all of this change came in employment services, traditionally hard hit in a recession but the first to grow when employers are cautiously ready to start hiring again. Generally the industries in Professional and Business Services were among the most affected by the downturn in the second half as can be seen in Figure 4. Professional, scientific, and technical services went from a 12-month growth of 2.3 percent in January to a loss of 2.6 percent in December with the most dramatic weakening in computer systems design and related. With the weakness manifested in other industries, a severe decline in demand for temporary help and the use of employment services firms occurred. The number of jobs in employment services declined 9.3 in 2008, and the industry was among those with the highest rate of decline as seen in Table 5. By December, employment services showed a 12-month loss of 14.4 percent. While large, this was still well below the 21.5 percent decrease posted in January 2002 during the last recession. Services to buildings also shed a large number of jobs late in the year showing a 12-month loss of 8.8 percent by December.

Leisure and Hospitality and Financial Activities also showed substantially worse job growth. Leisure and Hospitality posted a loss of 2,775 compared to a gain of 2,601 in 2007. In percentage terms the loss was not dramatic at -1.1 percent. The largest portion of the loss came in food services and drinking places which lost 2,473 jobs. There was some, but not drastic, slackening of restaurant employment late in the year. Arts, entertainment, and recreation on the other hand saw dramatic weakening in the last three months of the year that led to the loss for the year. The final major loss was in Financial Services with a decline of 2,288.

On the negative side nondepository credit intermediation, real estate, and securities and commodities all contributed substantial losses. The decline in nondepository credit intermediation and real estate is directly linked to the continued decline of housing and commercial real estate. Most of the annual loss in securities and commodities came from cutbacks that occurred in the first quarter. There was some slight further weakening during the year, but the industry grouping did not show the sharp declines at the end of the year that many industries did. Insurance carriers posted a substantial gain for the year. Depository credit institutions posted a small but solid increase. This would tend to support the public statements made by a number of Minnesota banking entities that they had avoided the worst pitfalls of the financial crisis. In fact, Wells Fargo went forward with the purchase of Wachovia Bank late in the year. The purchase was enabled by Wachovia’s heavy participation in mortgage-backed securities and the like, which weakened its position to the point that the Federal Deposit Insurance Corp. sought suitors. Through the end of the year Minnesota’s traditional banking institutions were doing reasonably well although there was some indication that real estate development exposure was causing problems for some smaller banks. The decline in the stock market certainly challenges insurance companies, particularly life insurance companies, which make up about 25 percent of the insurance carriers employment. It is likely too early, however, for this to have significantly impacted employment at life insurance firms. About half of the employment in insurance carriers is related to health care, still an area of strong growth. The remaining employment is mainly in property and casualty insurance, where insurers avoided a catastrophic event in 2008, and rate increases have helped maintain revenues. A small annual decline occurred in Information with the loss centered in publishing. Newspapers, magazines, and the like continue to downsize in the face of revenue losses.

The one clear area of strength in the economy was Educational and Health Services. This supersector added 14,684 jobs for the year, down somewhat from a gain of 18,747 in 2007. Growth was widely spread with every single estimated industry group adding jobs. Most of the gains were in health care and social assistance. The largest gain among the components of this grouping was in social assistance with 3,979 new jobs, a gain of 6.2 percent. This subsector has consistently posted very strong growth. Since 1991 the slowest annual growth recorded was 4.9 percent. The gains in other components were also strong including nursing and residential care adding 3,452 jobs, hospitals up 3,051, and ambulatory health care up 2,600. To this point, citizens have been willing and able to expend increasing amounts of resources on health care, although in recent years the increase in cost has become an ever growing issue for purchasers of the services. An aging population, the failure by many to lead healthful lives, and the availability of new types of treatment would seem to insure demand for services in terms of need. Given the economic downturn, however, we may be reaching a point where costs are such that the growth of these industries will be threatened. In the near term health care will still likely grow but somewhat slower. In fact, late in 2008 there were reports of some small layoffs and limited hiring freezes at a handful of institutions. There is clearly demand for continued increases in health services; the question is whether costs are reaching a point such that people can not pay for the same amount of service let alone increased services. There clearly will be a debate on this issue and perhaps some concrete decisions as health care reforms are a central focus of President Obama’s first federal budget.

Three other supersectors posted gains for the year, although in each case the gains were much less significant. Government added 3,472 jobs for the year, with nearly all of the gains coming in state and local government education. The funding for schools was still based on the last biennium budget so for the most part pressure for schools to cut employment is likely to occur in the future, depending on the outcome of the next state budget. Attendance at state colleges is holding up, although the number of students graduating from high school peaked in 2008 as the crest of the echo-boom generation completed high school. This should gradually reduce the number of students needing to be served in coming years. There were also small gains in Other Services and in Mining and Logging. Other Services showed most of its gains in the middle of the year with rapid weakening late in the year.

What Does 2008 Portend For 2009?

Since it is usually the case that the best predictor of the future is the most recent past, 2009 looks to be a difficult year in terms of job growth. About the most positive sentiment one can find among economic forecasters is that the economy will reach a bottom in late 2009. Reaching this bottom will require an improvement in the key elements behind the economic downturn. Construction is foremost among these. Construction of new housing units outside of apartments continues to decline in Minnesota as can be seen in the continued drop in housing permits. Currently there are so many houses for sale relative to the rate of sales that there is a huge supply of homes that must be worked through before new construction again becomes viable. A large portion of the sales occurring is lender-mediated sales — about 50 percent in the Twin Cities market at the end of 2008 — causing the median sale price for homes to drop precipitously, making it very difficult for new homes to be competitive from a relative price standpoint. Investment in commercial real estate is only a handful of months into a downward cycle. Nationally, the Architectural Billings Index, a leading indicator for commercial construction, dropped precipitously during the last half of 2008. This indicates that investment in commercial construction projects will be weak in coming months. This is further supported by the most recent Northmarq report on conditions in the Minneapolis-St. Paul area commercial real estate market. [3] Vacancy rates for office and industrial space are still lower compared to recent downturns, but the economy appears still to be weakening and, hence, vacancies are likely to increase. Further, a new round of home foreclosures can be expected as unemployment increases and incomes decline with the recession. So construction at least for the next few months is likely to weaken further even with additional spending on public infrastructure.

Consumer spending is also likely to decline at least in the near future. One indication of this is the ratio of personal consumption to disposable income. Since consumption in recent years grew faster than income (fueled by wealth extraction from housing and by debt), the ratio of consumption to disposable income reached a peak of 97 percent in 2005. Subsequent decreases lowered the ratio to around 93 percent. Historically this ratio has been around 90 percent although it fell to around 85 during recessions in the 1970s and early 1980s. How far consumers will retrench in their consumption is uncertain. With relatively high levels of household debt and a strong recession, there may be serious retrenchment as consumers pay down debt and reduce expenses in the face of high levels of uncertainty. Recent months have seen a large drop in retail spending as noted above. The question is whether this drop has produced a level from which to build again or will continue to drop further. The most common belief is that retail spending will drop further.

Investment by businesses has also softened and is expected to fall further. For example, investment in equipment and software fell every quarter in 2008 with an annualized decline of 28.8 percent in the fourth quarter. This is expected to continue for some time. Business investment is likely to be very important to turning the economy around in this recession. With housing extremely weak, it is unlikely to provide the boost that would occur in a more usual recession.

Things look bad now, but the nature of cycles means that the causes of our downward path set the stage for recovery. In fact, businesses are actively reducing their inventories. As this process is completed, orders will have to be filled through production. Business investment is being put on hold, but equipment and software will increasingly be replaced out of necessity. Auto sales are among the worst ever experienced by the industry as purchases of new autos are put off to the future. Normally car sales occur at a rate so that the U.S. fleet of cars is turned over about every 14 to 15 years. The current rate of sales places the turnover at 25 years. The result is that a high level of pent-up demand for cars is being built up. A return of the financial system to some level of normalcy would allow these developments to evolve into increased economic activity at some point in the future.

Based on the indicators, it will be many months before we see the bottom of the recession. There is the potential for 2010 to be better based mainly on business investment and stimulus spending assuming a major improvement in the credit markets. Personal consumption is likely to take somewhat longer to rebound given current debt levels, reduction in wealth, lack of confidence, and the likelihood that income growth will be relatively stagnant for the foreseeable future. Solid economic growth depends on the return of spending to some form of normalcy, likely at a reduced rate compared to pre-recession years.

 [1]NorthMarq Real Estate Services produces a broad analysis of commercial real estate for the Twin Cities metro area. Data and comments about commercial real estate are based on this analysis. The Northmarq Compass reports can be accessed at www.northmarqcompass.com .
[2]Based on equity extraction data produced by Dr. James Kennedy at the Federal Reserve. For a discussion see: www.federalreserve.gov/pubs/feds/2007/200720/200720pap.pdf .
[3]See note 1.Employment Falls Dramatically in 2008