Employment Falls as Minnesota Experiences the Full Effect of the "Great Recession"

by Jerry Brown - jerry.brown@state.mn.us
April  2010

Minnesota employment fell precipitously in 2009 as the sharp downturn that began in late 2008 took full effect. Table 1 shows the annual rate of change for 2009 and 2008 using annual averages for selected industries. The rate of change in total nonfarm employment for 2009 showed a decline of 4.1 percent, equal to a loss of 112,907 jobs. This was the largest annual decline on record since 1950. The 3 percent decline in 1982 fell substantially short of this mark. By comparison, the loss in 2008, despite the collapse in the fourth quarter, was only 0.3 percent. The result for the U.S. as a whole was slightly worse with a loss of 4.3 percent in 2009. Table 2 presents a comparison, by supersector, of employment growth in Minnesota and the U.S. as a whole. The loss in each supersector was similar, with a couple of notable exceptions. First, mining and logging employment was much weaker in Minnesota because of the large losses in iron ore mining. Government employment was also weaker in Minnesota. Conversely, financial activities showed a much smaller loss in Minnesota, a reflection of the relative health of our larger financial companies. Minnesota also saw greater growth in educational and health services employment.

The pattern of loss is instructive in understanding where we stand moving forward. Figure 1 plots monthly seasonally adjusted total employment for Minnesota and the U.S. for 2008 and 2009. Using seasonally adjusted data clearly shows the timing of the decline. The patterns for Minnesota and the U.S. are very close. The figure makes evident the collapse in Minnesota employment in late 2008 that occurred when the financial industry experienced its initial crisis. Losses continued at a strong pace through third quarter 2009. The average monthly seasonally adjusted change was -11,600 per month in fourth quarter 2008, -15,100 per month in first quarter 2009, -12,600 in second  quarter 2009 and -8,500 in third quarter 2009. In fourth quarter 2009 a strong gain in October outweighed losses in November and December, for an average gain of 1,200 jobs. It cannot be stated with certainty that the bottom was reached in the fourth quarter, but by the end of 2009 indications were that employment was at or approaching a trough. This was as forecast by economists earlier in the year. Gross domestic product (GDP) was down sharply early in the year, with annualized growth of -6.4 and -0.7 percent in the first two quarters. In March the Dow Jones industrial average hit its lowest point of the downturn at 6,547. The other indices took similar plunges. From this low point, aided by stimulus spending, GDP annualized growth was 2.2 percent and 5.7 percent in the third and fourth quarters, respectively. This renewed growth in the U.S. economy stemmed the rate of job loss in the second half of the year.

Table 3 shows Minnesota’s rate of annual employment growth by quarter for each supersector. These data are a quick way to explore how the improvement at the end of the year was distributed among industries. Summary data like total nonfarm clearly show a weakening through the third quarter followed by improvement in the fourth quarter. There were, however, some notable exceptions to this pattern among the supersectors. Educational and health services employment growth gradually weakened during the year and by the fourth quarter annual growth was down to 1 percent. Other services, mining and logging, and transportation, warehousing, and utilities all continued to weaken substantially in the final quarter of 2009. The remaining industries either showed some improvement or were little changed from third to fourth quarter.

Minnesota was in the middle of the pack in terms of the rate of employment change, ranking 25th out of 51 states including the District of Columbia (see Table 4). No states showed employment growth for the year. The District of Columbia, Alaska, and North Dakota were the only states with a loss of less than 1 percent. Seven states posted losses of 6 percent or greater. Michigan was among this group as the state continued to suffer huge effects from the downsized auto industry. Four of these states were the locus of the largest real estate collapses — California, Florida, Arizona and Nevada. Nevada employment was down an alarming 9.1 percent, by far the fastest rate of employment decline among the states.

Minnesota’s annual rate of unemployment was estimated to be 8 percent. The unemployment rate began the year at 7.3 percent, peaked at 8.4 in June, and fell to 7.4 by December. Twenty seven states had unemployment rates higher than Minnesota. The highest unemployment was in Michigan at 13.6 percent; the lowest was in North Dakota at 4.3 percent. Given the high level of Minnesota job losses, a somewhat higher rate of unemployment might have been expected. One factor mitigating the rise in the unemployment rate was the 0.6 percent reduction in the labor force participation rate between January and December 2009. The national rate of unemployment increased steadily to 10.1 percent in October, ending the year at 10 percent in December and producing an average 9.3 percent rate for the year.

Table 1 also shows areas where substantial employment loss took place. Unfortunately in 2009 this included nearly every industry, and, more to the point, there really was no good news as every supersector was substantially weaker in 2009 than in 2008. A number of industries were hit harder than others. The supersector data show that for the most part those supersectors with the largest declines in 2008 were again the areas with the most rapid decline in 2009. Overall, goods-producing industries experienced a loss of 12 percent. Construction and manufacturing were again among areas showing the most rapid losses, down 16 percent and 10.6 percent respectively. Mining and logging along with construction and manufacturing were the three supersectors with losses greater than 10 percent for the year. Mining and logging is a somewhat special case. This small supersector, with an average employment of approximately 4,900, fell by 21 percent. The supersector is made up largely of two industries — iron ore mining and the mining of construction aggregates. The most important reason for the loss was a serious reduction in production of taconite that caused iron ore mines to reduce employment and/or shut down for substantial portions of the year. Estimates by the U.S. Geological Survey showed that 26 million metric tons of useable iron ore were produced in 2009 in the U.S. This was down 51.5 percent from 2008 levels. Iron ore in the U.S. is mined essentially in Minnesota and Michigan. Since Minnesota’s iron ore products are used in the production of U.S. pig iron, the 46.6 percent reduction in the production of pig iron in the U.S. in 2009 was the direct cause of mining layoffs. The dearth of new building construction projects also caused reduced production of crushed stone and sand and gravel, down more than 20 percent for the U.S. as a whole.[1]

Construction experienced the second-fastest rate of decline in 2009. All of the estimated construction industries showed large declines. Housing continued to weaken for most of the year as indicated by permit activity. Census Bureau estimates showed the number of housing unit permits for construction fell 14.1 percent in 2009. To put this in perspective, activity peaked at 40,877 permits in 2004, but in 2009 permits for the state totaled 9,189, equal to a decline of 77.5 percent from the peak. The last three months of 2009 showed permit activity somewhat higher than the previous year, but data for January once again showed a very large decline compared with the previous year, making discerning a trend problematic. Commercial construction fared no better for the year. In its annual report on the commercial real estate market, Northmarq Real Estate reported that 1.86 million feet of commercial property space was constructed in 2009, down from 2.40 million feet in 2008 and 4.38 million feet in 2007. Vacancy rates continued to rise in 2009 with 22.3 percent of office space vacant, including sublease space. Industrial space vacancy increased to 18.1 percent with subleases included. Although there was some slowing of vacancy in the second half of 2009, the year saw almost no new industrial space constructed and a negative absorption of 2.38 million square feet. There was a slight uptick in retail space constructed, but 2009 was 61.4 percent below the peak construction year of 2006. Retail vacancy was at a record 10.1 percent for the year. These factors ensured huge employment declines in construction. Construction of buildings was down 20 percent, including 19.2 percent in housing construction. Specialty trade contractors, a grouping that includes the majority of construction employment, fell 16.3 percent. Heavy and civil engineering was down 7 percent but showed a great deal of improvement in the second half of the year including over-the-year gains in the fourth quarter. A large part of this improvement was caused by two factors. First, federal stimulus money was distributed to states, thereby avoiding large declines in infrastructure spending. Second, an oil pipeline construction project got underway in the second half of the year, which at its peak will employ about 3,000.[2]

Manufacturing employment took a major hit in 2009, falling 10.6 percent, equal to 35,465 jobs. This was the fourth consecutive annual loss, and since 1998 the supersector has lost employment in nine of 11 years. These losses have reduced the role of manufacturing in the overall job mix. In 1990 manufacturing jobs equaled 16 percent of total employment. In 2009 this ratio was down to 11.3 percent. The majority of losses in 2009 came in durable-goods manufacturing, which fell by 27,283 jobs. Every durable-goods industry for which estimates were produced showed an employment decline. Some of these industries were closely related to the weak housing industry. Wood product manufacturing lost 13.9 percent of employment, slightly higher than last year, and furniture and related manufacturing employment fell 21.9 percent. Transportation equipment employment was also hit very hard by a reduction in demand. Transportation equipment manufacturing, except for the Ford truck plant in St. Paul, is for the most part ATV, snowmobile, boat, and private airplane manufacturing. It was a difficult year for these industries, which were marked by substantial layoffs. As an example, Minnesota-based Genmar, one of the largest boat builders in the U.S., filed for bankruptcy, citing difficulties obtaining needed credit during extremely difficult business conditions caused by the recession. Ultimately Genmar could not exit bankruptcy intact, and its business lines were sold off in early 2010.

A number of industries were impacted by reduced exports as well. Unfortunately, like the U.S., the rest of the world also faced a recession, making 2009 a poor year for manufactured exports. On an annual basis, exports were down 15.5 percent in 2009, although there was some improvement in the fourth quarter when annualized losses dropped to 6.3 percent. Reduced exports pushed losses to 13.4 percent in machinery manufacturing, 13 percent in fabricated metal manufacturing, and 9.9 percent in computer and electronic product manufacturing. Nondurable-goods manufacturing experienced less rapid decline than durable goods, down 6.8 percent. More than half of this loss was in paper manufacturing and printing and related support activities. This is no doubt related to the downward trend in publishing thereby reducing the need for paper and printing services and, more generally, the greater use of electronic media to replace printed copy. 

At year’s end there were some signs that the drastic job losses in manufacturing could be slowing. Figure 2 shows the Institute for Supply Management’s Production Managers Index (PMI) for manufacturing along with Minnesota’s seasonally adjusted manufacturing employment. The PMI is an index of conditions in U.S. manufacturing. Scores above 50 indicate conditions for growth in manufacturing, below 50 indicates decline. The PMI was at or below 50 for the first part of 2008 before beginning its plunge down to 32.5 in December 2008. During 2009 the PMI gradually strengthened, moving above 50 again in August and continuing a generally positive trend to the end of the year. Employment does not move in lockstep with the PMI and changes can lag by several months. The figure shows that, although no employment growth was occurring, by the end of 2009 manufacturing employment had ended its freefall and losses were much reduced. If the relationship between the PMI and employment change holds and the PMI remains above 50, there should be some job growth in early 2010. Perhaps the most instructive data on manufacturing is the Federal Reserve’s estimated level of manufacturing capacity utilization, which is a measure of how much of the sum productive capacity of manufacturing is being used in a given month. The data for 1972 through 2009 are presented in Figure 3. The series show the dramatic decline in utilization during recessions. The severity of the current recession is clear as capacity utilization reached its lowest point of the period in June 2009 at 65.2 percent. There has been gradual improvement since then, but utilization was still at very low levels. Note also that capacity utilization never reached previous levels following the 2001 recession. A major question is whether the recovery will fuel a return of capacity utilization to previous levels or fail to reach even the levels of the post 2001 recovery.

Overall, service-providing industries showed much less decline than goods-producing industries, down 2.5 percent. The most rapid decline was in professional and business services where employment fell 6.8 percent. The numeric decline was 22,237 making this the third highest employment loss behind manufacturing and trade, transportation, and utilities. The supersector experienced a great deal of decline early in the year with some measure of improvement during the fall and winter. This can be seen in Table 3 where quarterly over-the-year change fell to -8.3 percent by the third quarter but rebounded somewhat to -5.6 percent in the fourth quarter. Underlying this were industries that performed very differently over the course of the year. Figure 4 presents the seasonally adjusted employment series from January 2008 through December 2009 for each of the three major industry groupings of the business services supersector. This figure shows the contributing factors in the decline and improvement noted previously. The figure also shows that management of companies did not decline until late in 2008 and was the least affected by the downturn, losing about 3,200 jobs by the end of 2009. Professional, scientific, and technical services began its decline in mid-2008 with losses becoming more substantial from late 2008 to September 2009 and then flattening out in the last quarter of 2009. The most important source of change was administrative and support and waste management employment, which had begun to fall in the first quarter of 2008 and by the end of 2008 was falling rapidly. This rapid decline continued through mid-2009. Just as the losses in administrative and support services began a few months prior to other business services, its improvement began in the third quarter as losses flattened out before substantial improvement took place during the holiday season. This late-year improvement was the key to the improvement in the supersector as a whole. The main story was employment services stopping its plunge. In January 2009 employment services registered an annual average loss of 18.5 percent. Over-the-year loss peaked at -24.7 percent in March but by December had improved to -4 percent. The performance of employment services through 2009 was similar to the previous downturn except more drastic in nature. Given the sharp improvement late in the year, the question remains whether this industry is a harbinger of growth quickly spreading to other industries as it has tended to be in the past. Anecdotal reports indicate that firms are seeking to replace a greater portion of their employment with temporary positions.[3] If this is true, the gains made in employment services may not indicate that more widespread employment gains will soon follow.

Also showing a rapid rate of decline was trade, transportation, and utilities where employment was down 4.9 percent, equal to 25,827 jobs. The majority of the cuts came in retail trade where employment was down 14,580. This is not surprising given the reduction in spending in retail trade. Figure 5 shows retail sales adjusted to remove seasonality and inflation. There was a drop of 13.1 percent between April and December 2008, largely from declines after September. This meant that sales in 2009 began at a very low level. By December 2009, after gradual improvement during the year, retail sales was still 7.5 percent below the peak in April 2008. The effect of the reduction in sales on employment became fully manifest in 2009 as can be seen in the large, steady decline in retail trade employment shown in Figure 5. All of the more detailed retail industries for which estimates are produced showed losses in 2009. Reductions were particularly acute in motor vehicles and parts dealers, down 9.5 percent despite enhanced sales from the Cash for Clunkers program. A large decline was also present in building material and garden equipment and supplies dealers, down 6.6 percent because of reduced construction activities. Transportation, warehousing, and utilities fell sharply, down 5,136 jobs. Losses to truck transportation and couriers and messengers were substantial, down 7.5 percent and 9.6 percent, respectively. The American Transportation Association’s Truck Tonnage Index showed an 8.7 percent loss in the volume of freight shipped by truck in 2009. This drop shows the effect of reduced manufacturing output and the decline in wholesale and retail trade activity. Wholesale trade employment was down 4.6 percent. Figure 6 shows that wholesale trade employment bounced back somewhat in the last quarter of 2009 as wholesale trade sales picked up in the last half of 2009.

Information employment fell 4.6 percent in 2009. The majority of the loss came in publishing industries, which has posted an annual loss for eight consecutive years. Two-thirds of the loss came in publishing industries where there were 1,800 fewer jobs. Publishing industries includes non-Internet publishing described as newspapers, periodical, book, directory, and other similar publishing activities. Electronic media have long been weakening these industries, and 2009 was no exception to this trend. The Pew Charitable Foundation’s “The State of the News Media 2010” noted that while “newspapers are not dying in droves … far too many American papers are at risk of becoming insubstantial.” This is occurring because a loss of advertising, down 26 percent in 2009 after a cumulative 23 percent loss the previous two years, led to nearly universal downsizing of staff. Nationally, newspapers have shed about 27 percent of full-time reporting and editing jobs over the past three years. The same report estimated that the top six news magazines sold 19 percent fewer advertising pages in 2009, partly because of the economy but also because of the long running challenge of online sites. Other publishing businesses face similar challenges. These trends were manifested in Minnesota by continuing layoffs at newspapers and other media outlets during 2009. Telecommunication lost a modest 164 jobs.

Leisure and hospitality also posted what is a moderate loss under the circumstances of 2009. The supersector was down 3.4 percent and showed losses in every estimated component industry. Accommodation and food services accounted for 6,605 of the 8,429 jobs lost from the supersector. A reduction of more than 4,000 occurred in food services and drinking places with about half the loss in limited service eating places. The decline in 2009 and a loss in 2008 are the only annual employment losses posted for food services and drinking places in the available history. Prior to the current downturn, the shift to purchasing foods prepared away from the home was enough to offset the negative impact of the previous two downturns. Such was not the case in the current downturn. Accommodation was hit particularly hard, losing 9 percent of jobs in one year. Hotel occupancy rates have tumbled as business travel has been reduced and people cut back on personal travel during the recession. Arts, entertainment,and recreation saw a 4.7 percent decline. The decline would have been much smaller, but seasonal layoffs in the fourth quarter were much larger than usual.

Financial activities posted a decline of 2.7 percent, much better than the -4.8 percent rate for the U.S. as a whole. Generally speaking, Minnesota has been less exposed than some states to the problems in the financial sector, with its major institutions in relatively good condition. There were, however, five bank closures in 2009 with more expected in 2010. The job loss in financial activities was 4,701 with 2,882 of the losses from finance and insurance. The decline in finance and insurance was centered largely in securities, commodity contracts, and other financial investments and related activities, where employment fell 8.5 percent. Nondepository credit intermediation saw a loss of 8 percent. Real estate and rental and leasing fell by 1,820 jobs. About half of this loss came in real estate. The National Association of Realtors’ data showed sales of Minnesota homes rebounded somewhat, up 11.5 percent over last year as the first time homebuyer tax credit program helped to spur sales and reduce the housing inventory. This included a substantial reduction in the volume of lender mediated properties for sale.

Job losses in other services took place largely in repair and maintenance, down 1,177, and personal and laundry services, down 1,145.

Government employment fell by 2,245 jobs. The net decline took place entirely in local government where losses measured 0.8 percent. Given the reductions in state aid to local governments this decline is not particularly surprising. State government showed almost no change in either total state employment or employment at state colleges and universities. Federal government rose slightly despite an annual average loss of 764 from the U.S. Postal Service. Non-postal employment offset this loss with an increase in the first half of 2009 from workers hired to do address refinement and other tasks associated with the 2010 national census. Postal employment continues its long-term decline. The 5 percent loss in 2009 was the ninth consecutive loss and the largest reduction in annual average employment on record. This trend will no doubt continue as the U.S. Postal Service seeks additional cuts including the consideration of halting mail delivery on Saturdays.

The only supersector showing growth in 2009 was educational and health services, which added 10,210 jobs. The 2.3 percent rate of growth is the slowest rate of growth since 2004 and reflects a serious slowing of job growth as the year wore on. Figure 7 presents seasonally adjusted employment by month for private educational services and for health care and social assistance for 2008 and 2009. The figure shows private education produced a small level of growth until a slight downturn began in May, with a small increase once again in the fourth quarter. Health care and social assistance followed a similar pattern, but the growth from January 2008 to April 2009 was dramatically more robust. The decline in health care and social assistance that occurred from May through September was somewhat less sharp although the increase in the final quarter was similar to private education. The dramatic change in growth comes from a weakening of some areas as the year wore on. Most importantly employment at hospitals began to weaken early in the year and continued to trend downward. Ultimately hospitals posted a loss of 1,581 jobs comparing annual averages for 2009 and 2008, posting the first loss since 1994. Hospitals began the year with an over-the-year change of 0.8 percent in January, which fell to -3.1 percent by December. Over the course of the year, several hospitals announced layoffs, and anecdotal reports indicated a reduction in elective procedures. Ambulatory health care also weakened as the year progressed, starting the year with an annual change of 2.9 percent in January and closing with a gain of only 0.8 percent in December. Nursing and residential care facilities and social assistance continued to show steady growth over the course of the year, posting annual gains of 4.6 percent and 5.2 percent respectively. The slowdown in hospitals and ambulatory care definitely shows that an aging population is not sufficient to sustain growth in health care employment during a severe downturn in the general economy.

Looking to 2010:

The past year saw the greatest job loss on record. It is not going out on a limb to say that 2010 will be better. The question is how much better, It appears from the data that at the end of 2009 we were at or close to the bottom of the recession in terms of job losses. From this starting point, even fairly slight growth will be a vast improvement. Over-the-year growth should show slight growth by midyear unless we get a double-dip recession. Job growth is likely to be rather weak for some time. The construction industry usually is a major factor in pulling the economy out of its funk. Construction, however, is likely to remain very weak for the foreseeable future. The Architectural Billings Index is a measure of the activities of architectural firms in designing construction projects. The index has not substantially improved since July and stood at 44.8 in February 2010, well below 50, the point that indicates growth in billings. There is a nine- to 12-month lag between the billings and construction activity, so even with a rapid rise in the index, commercial construction is unlikely to show substantial improvement prior to the end of the year. The Northmarq report cited previously presents a pessimistic view of the commercial real estate market for the Twin Cities as well. Housing shows no sign of real recovery with housing permits for Minnesota still near record lows. Until foreclosures return to normal, there will be no substantial increase in new housing construction. Hence, construction is unlikely to create a boost of growth in 2010.

Another factor affecting recovery is a reduced willingness on the part of consumers to spend. There were some signs in early 2010 that consumers had gained some confidence and were more willing to spend. Retail sales data in Figure 5 show that at the end of 2009 retail sales were more than 7 percent lower than the highest level during 2008. To get a rapid turnaround in the economy, this spending will have to return to previous levels at a very rapid rate, which does not yet appear to be happening. There are a number of reasons to believe a sudden rapid rise in spending is unlikely. First, employment needs to grow much faster to increase consumption. This is a bit of the chicken-and-the-egg question, but until companies feel the need to begin hiring and/or increase wages and hours to a greater degree, the fuel for consumption will lag. There is also a greater tendency to save and pay down debt than has been usual in recent years. The Bureau of Economic Analysis reported that the savings rate for the U.S. increased from 1.7 percent in 2007 to 4.3 percent in 2009. Additionally, the Federal Reserve reports that consumer credit declined 4.3 percent and, more particularly, declined 9.6 percent in revolving credit during 2009. Consumers clearly have been paying down debt and been more reluctant to use credit to spend. Finally, home equity is no longer acting as a major source of funds for consumer spending. During the heyday of the housing bubble, equity withdrawal averaged more than 7 percent of personal disposable income.[4] Equity withdrawal disappeared in aggregate terms during mid-2008 as the recession began to form. Clearly, incomes would have to grow dramatically to replace this source of spending.

The point of the comments above is not that there will be no growth. Rather, they are simply reasons to believe that a rapid return to pre-recession employment levels is unlikely. A slow return of employment growth similar to that experienced after the 2001 recession is more likely.

[1]Production data concerning iron ore, pig iron, sand and gravel, and crushed stone are annual estimates produced by the U.S. Geological Survey. The data are available at:  http://minerals.usgs.gov/minerals/pubs/commodity/

[2]Tom Robertson. Minnesota Public Radio. “Oil pipeline pumping millions of dollars into area communities.”  Sept. 16, 2009.

[3]Peter Coy, Michelle Conlin, and Moira Herbst. “The Disposable Worker.” Business Week.  Jan. 14, 2010.

[4]the period 1991 through 2008. Similar estimates are being produced by Bill McBride and presented on the CalculatedRisk blog site: www.calculatedriskblog.com/2009/09/q2-2009-mortgage-equity-extraction.html

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