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Minnesota Employment Review

Employment Growth Returns in 2004

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

Revised estimates in the 2004 Current Employment Statistics (CES) tell the story of a Minnesota employment market that started off in the doldrums, rapidly improved in the second quarter, and continued to post an increased level of growth in the last half of the year. The revised data for 2003 and 2004 are presented graphically in Figure 1, along with U.S. total nonagricultural employment. Annual benchmarking showed weaker-than-estimated employment levels in the fourth quarter of 2003. Seasonally adjusted estimates in Figure 1 show a slight downward trend for 2003, with a second post-recession employment low point in November 2003 at 2,654,300 jobs followed by slight improvements through March 2004. Employment leaped forward in April, adding 21,000 jobs on a seasonally adjusted basis. The second quarter jump was followed by fairly consistent moderate monthly increases through the end of the year 2004. From March to December seasonally adjusted employment increased by 35,100—an average of 3,900 jobs per month. The United States showed a more consistent and moderately stronger seasonally adjusted employment growth pattern from September 2003 through December 2004, up 1.9 percent over the period compared to an increase of 1.5 percent for Minnesota.

By the second half of 2004 the long expected upward trend in job growth began to appear. This improvement is also evident in the 2004 rate of annual growth. Table 1 (pdf) presents the average employment for 2002 through 2004, along with numeric and percentage changes for 2003 and 2004, for approximately 80 industry groupings. Total nonagricultural employment for Minnesota fell by 0.2 percent in 2003, but rose by 0.6 percent in 2004. Figure 2 illustrates the effect of a fairly weak November 2003 to March 2004 on Minnesota over-the-year growth. Moreover, the seasonally adjusted data shows that the United States was beginning an upward trend during this period while Minnesota employment was stagnant. Overall, the pace of recovery from the most recent recession was slower in Minnesota than in the nation as a whole.

While the post-2001 recession recovery can no longer be termed a“jobless” recovery, job creation remained disappointing through the end of 2004. The data show clear job gains—but gains that continue to lag well behind expected employment levels based on the five previous recessions. After recent recessions it took an average of 25 months to regain jobs lost during the recession. As of December 2004, the 45th month after peak employment, Minnesota employment was still 11,100 jobs below the pre recession peak. Likewise, as of December 2004, U.S. employment was still 97,000 jobs below its 2001 peak. Hence, while the improvements that occurred from April to December are welcome, they are coming rather late compared to other recent recessions.

Table 2 presents the annual and quarterly rate of growth by supersector. From this table the drastic improvement in the second quarter, particularly April, is evident as year-over-year growth rates improved in all but one of the supersectors. The improved 12-month growth for second quarter was particularly evident in Construction; Trade, Transportation and Utilities (TTU); Professional and Business Services (PBS); Manufacturing; and Leisure and Hospitality. By December the rate of growth had receded for a number of these supersectors, but TTU; Leisure and Hospitality; Education and Health; Manufacturing; Natural Resources and Mining; and Government all registered higher growth in the fourth quarter compared to the second quarter.

Comparing Minnesota’s job picture to that of other states shows a general pattern of improved growth in 2004 compared to 2003. Table 3 shows 2004 job growth for Minnesota was in the lower middle of the pack compared to the other states listed. Job growth above 1.0 percent was common for 2004 among these states, and in that sense Minnesota’s growth of 0.6 percent is somewhat disappointing. However some of the states hardest hit during the 2001 recession still had not posted employment gains in 2004, including Michigan and Illinois.

Given the improved job growth, unemployment claims data also showed improvement. In 2004 there were 38,102 fewer initial claims made for unemployment insurance compared to 2003, an 11.8 percent decline. Although claims are impacted not only by job growth, this decline marks the first year since 1999 that the number of initial claims fell compared to the previous year, and much of the improvement can be attributed to gains in the job market. Minnesota initial claims are still a great deal higher than the 203,480 initial claims filed in 2000.

In 2004, nearly all major industry groupings showed a drop in initial claims. Manufacturing saw 11,699 fewer initial claims filed and large drops were also present in wholesale trade; transportation and warehousing; professional and technical services; and administrative and support services. The benefits paid out in 2004 from all unemployment insurance programs totaled $680,470,697. This represented a drop of 30.1 percent from 2003.

With the improvement in job growth and a substantial reduction in initial claims, it is not surprising that the unemployment rate fell during the year. The average unemployment rate for Minnesota fell to 4.7 percent in 2004 from 4.9 percent in 2003. By comparison the national unemployment rate was 5.5 percent in 2004. Figure 3 shows the seasonally adjusted rate of unemployment by month for Minnesota and the United States. The unemployment rate was higher than the 4.1 percent average rate during the 1990s but lower than the 5.9 percent average during the 1980s.

U.S. gross domestic product (GDP) increased 4.4 percent compared to an increase of 3.0 percent in 2003. Real annualized quarterly GDP growth measured 4.5 percent in the first quarter, 3.3 percent in the second, 4.0 percent in the third, and 3.8 percent in the fourth.¹ Inflation measured 2.7 percent in 2004, up from an increase of 2.3 percent in 2003. The year was marked by periodic spikes in energy prices. The rate of inflation for the Twin Cities metropolitan area was 2.8 percent for 2004, a bit higher than the 2.4 percent increase measured for all midwest urban areas combined. As the year wore on, the Federal Reserve Board expressed concerns about inflationary pressures as an impetus for increasing the Federal Funds Rate. During 2004 the rate was increased five times, from 1.0 percent up to 2.25 percent. Core inflation was only slightly higher, but the Fed proclaimed concern over the potential for energy to create upward pressure on prices and an increasing ability of companies to raise prices.

Goods-Producing Industries

Natural Resources and Mining:

Natural Resources and Mining employment underwent another loss as employment fell by 105. The supersector has not registered a measurable increase since 1997. Between 1997 and the end of 2004, employment declined by nearly 31 percent. Iron mining has taken the brunt of losses in this industry, with a loss of over 2,400 jobs during this period. The 2004 decline in employment comes despite strong demand for iron ore products. U.S. mines produced 54million tons of usable iron ore products last year. This is the highest level of production in the United States since 2000. The price of usable iron ore products also jumped significantly to $31.00 from $26.86 per metric ton during the year. The increased production and price reflect the impact of dramatically increased demand for iron ore in China. Nearly all iron ore is now used in the production of pig iron. The increase in pig iron production in China, from 76 million tons in 1992 to 200 million tons in 2003, points out the key role that China plays in the iron ore industry. Meanwhile U.S. pig iron production has increased only slightly after declining in 2001 and 2002. Until recently China’s increased demand for iron ore was met mainly by expanded production in Australian and Brazilian mines.²

Construction:

The construction industries posted job growth for the 13th consecutive year. While the increase of 1.3 percent is a far cry from the heady days of growth approaching 9.0 percent in the late 1990s, it nevertheless represents an improvement over the growth registered the previous two years—0.8 percent in 2002 and 0.7 percent in 2003. Over 80.0 percent of growth was in specialty trade contractors, which added 1,270 jobs. The addition of 926 jobs in residential building construction outweighed losses in nonresidential building construction resulting in the small gain.

Residential building construction has been the center of job gains in construction of buildings since 2002. During this time the construction of new housing has hit and maintained record levels aided by low interest rates, improved job growth, and rising incomes. The Census Bureau estimates of permits for new housing units rose once again, up 1.2 percent to 40,747. Valuation of these permits increased 5.3 percent not adjusted for inflation. A continuing trend is a strong market for multi-unit housing permits, a reflection of the demand for townhouses and condominiums. Units authorized as part of multi-unit permits increased 5.7 percent to 9,877. The annual data for permits masks an important weakening that occurred in the latter part of 2004. Figure 4 shows that through June permit activity was strong, but following August there was a weakening trend. Clearly, permits were still being approved at a very high rate but were not eclipsing the 2003 levels.

With residential construction seemingly reaching a peak, the relative health of commercial construction becomes more important to job growth in construction industries. Construction Bulletin data indicate the value of contracts awarded for commercial construction of private and public buildings, sewers, roads, and the like fell for the fourth consecutive year. Compared to 2000, there has been a 13.8 percent drop in the value of commercial construction contracts awarded, not accounting for inflation. Road and sewer construction has been sustained during this period but contracts for the construction of private and public commercial buildings have dropped off by 29.1 and 22.5 percent, respectively. Expectations are that the commercial real estate market will improve gradually in the Minneapolis-St. Paul area. The United Properties Outlook Report for the Twin Cities showed a small improvement in the commercial office market with the absorption of 522,000 square feet of space, and this helped reduce the vacancy rate from 21.6 in 2003 to 20.7 in 2004. The expectation is for absorption of 850,000 to one million square feet in 2005, further reducing vacancy.

There is little prospect for substantial private office construction in 2005 but the industrial space market is improving somewhat faster and is expected to continue this trend. About 1.2 million square feet of space was absorbed in 2004 improving vacancy to 15.5 percent. New construction of industrial space will likely remain well below historical averages for the region, but should improve from 2004 because manufacturers are once again adding jobs and filling up their existing space. The market for retail space was strong once again despite the closure of nine Mervyn’s stores that were included in the sale of Marshall Field’s to May Co. These properties are expected to fill rapidly and most national retailers are either seeking to expand or enter the market.

Manufacturing:

Though manufacturing as a whole saw a decline of 592 in 2004, this was a substantial improvement when compared to a loss of 12,532 in 2003. By comparison, the loss of 0.2 percent is substantially better than a decline of 1.2 percent in manufacturing for the nation as a whole. Durable-goods manufacturing performed fairly well adding about 3,100 jobs. These gains were experienced broadly among durable-goods industries. Of the detailed industries for which estimates are produced, only transportation equipment posted a loss for the year—an industry which underwent a number of temporary shutdowns during the year. Helped along by increased demand at home and abroad, wood product, fabricated metal product, machinery, electrical equipment, and miscellaneous manufacturing (including medical equipment) all showed good growth for the year. Nondurable-goods manufacturing posted a decline of 2.9 percent. None of the nondurable-goods industries for which estimates are produced showed any growth. This was about on par with the loss of 2.5 percent in the nation as a whole.

The improvement in manufacturing employment jibes with the results from key manufacturing indicators. First, the Institute for Supply Management Manufacturing Index was above 50 for the entire year indicating that the requisite conditions for growth in the manufacturing sector were present. From January to July the indicator remained above 60, but showed gradual decline in the last five months of 2004. The Creighton University Business Conditions Index showed that conditions in Minnesota followed a slightly different path. The index rose from 58.3 in January to 68.5 in June. It dropped below 60 in August and September but, unlike the U.S. figure, strengthened again to register 63 or above, the remainder of the year. The seasonally adjusted manufacturing employment data presented in Figure 5 show a substantial increase in October. Figure 5 shows the increasing levels of U.S. factory orders that underlies the improving picture in manufacturing employment. Export growth provided a boost for Minnesota manufacturing as exports of manufactured goods increased 12.5 percent according to data published by the Minnesota Department of Employment and Economic Development. A key to the strong results in durable goods manufacturing was not only the general increase in orders for manufactured goods, but more specifically the improvements in exports in 2003 and again in 2004. This increase has been very beneficial to durable goods manufacturing since the vast majority of manufacturing exports from Minnesota are durable goods. Computers, electronics, machinery, miscellaneous, transportation, electrical equipment, and fabricated metal represented over 77 percent of all exports for the fourth quarter of 2004.

Service-Providing Industries

Trade, Transportation, and Utilities (TTU):

Job growth in TTU was disappointing when compared to gains for the nation as a whole. Minnesota saw a gain of 0.4 percent in the supersector compared to an increase of 0.9 percent for the United States. With the exception of wholesale trade, which grew by 1.0 percent compared to a national increase of 0.8 percent, the other major industry groupings lagged behind the nation. Most importantly, retail trade added only a minuscule 151 jobs, a 0.1 percent rate of growth compared to national growth of 0.8 percent.

Wholesale trade sales increased substantially in the United States. Over-the-year gains began at 4.9 percent in January and peaked at 20.8 percent in November with the total sales for 2004 increasing by 13.8 percent. There was a consistent reduction of wholesale inventories from June 2001 until April 2004, as wholesalers pared inventories to a minimum. Since April there has been a small increase in the inventory-to-sales ratio indicating that some supplementing of inventories took place and that sales have improved enough to warrant more on-hand inventory. While not matching the sales increase, all three major components of wholesale employment increased for the year.

Retail trade saw a mix of results among its component industries. Motor vehicle and parts dealers overcame a loss among automobile dealers to post a small gain. Supported by strong home construction, building materials and garden equipment and supplies dealers posted growth of 2.4 percent, showing fairly even growth during the course of the year. General merchandise stores added 333 jobs all outside of department stores. This growth came despite the closure of nine Mervyn’s stores in late summer. Food and beverage stores saw a loss of 880 jobs marking a third consecutive annual loss. Grocery stores face increasing competition from the opening of superstores by Wal-Mart, Target, and Costco. The newly combined Sears and Kmart are also set to reconfigure stores to add more grocery items. Gasoline stations faced a tough year seeing employment drop by nearly 900 in 2004 following a loss of 817 in 2003. Over 60 Tom Thumb stores closed early in the year as the venerable company ceased operations in Minnesota.

Transportation and Warehousing saw gains of 0.9 percent with growth spread evenly over its component industries. As U.S. importing of goods and other economic activity grows, transportation should continue to improve. One indication of the increased activity is reflected in the double-digit increases in the number of containers handled at Twin Cities intermodal rail yards.³ Airport authorities report the number of passengers handled at the Twin Cities, Duluth, and Rochester airports also increased by 3.7 percent in 2004. Fuel costs, however, hindered the profitability of airlines.

Information:

For the third consecutive year, employment in Information fell in 2004. The loss of 1,693 was much smaller than the decline of 4,416 that occurred in 2003. One contributing factor in 2003 was a number of firms changing industry code, thereby shifting employment out of information and into other industries. This is by no means a complete explanation for the decline. Publishing industries and telecommunications, for example, posted losses for each of the past four years. Publishing employment fell by 265, with 100 lost in newspaper, periodical, book, and directory publishers. Employment in telecommunications fell by 4.3 percent, with the losses equally distributed between wired telecommunications and the remainder of telecommunications industries. This follows declines of 5.9 and 8.1 percent in 2003 and 2002, respectively.

Financial Activities:

A very small gain in Financial Activities reflected a pattern of early growth that gradually weakened during the year. This is shown in Table 4, which presents over-the-year growth by quarter for 2004. The performance of the supersector as a whole masks a number of industries that performed strongly the entire year or showed progressively better results as the year unwound. Depository credit institutions once again proved the strongest industry in the supersector increasing by 3.1 percent for the year. This industry has produced the most consistent growth for the supersector since 1998. Real estate employment added 782 jobs for the year driven by strong home sales and increased activity in the sale of commercial real estate. Home sales in the Twin Cities totaled a record 58,200 according to the Northstar Regional MLS, an increase of 3.0 percent over 2003. Since the onset of lower interest rates in 2000, there has been a 37 percent increase in the number of licensed real estate agents.⁴ Agencies, brokerages, and other insurance related activities was the only other industry group showing growth for the year.

All other industry sectors showed declines for the year and nearly outweighed the positive results discussed above. The poorest results were registered in insurance carriers with employment declining by nearly 1,500. A portion of this decline is associated with the closure of a State Farm Insurance regional office in Woodbury. Another major change occurred in non-depository institutions. Many of these jobs are related to mortgage financing and, while house sales remained strong, refinancing declined as mortgage rates rose after hitting a 30-year low of 5.4 percent in mid-March 2004.

Professional and Business Services:

Employment increased in Professional and Business Services mainly from strong growth in administrative and support services and management of companies. The main source of the increase was in employment services where 4,292 jobs were added. The industry saw a large increase in April and maintained the higher level for the remainder of the year. Services to buildings also added 608 jobs during the year and, combined with employment services, created an increase of 3,313 in administrative and support services. The increase in employment services for the year equaled 9.6 percent, the fastest rate of growth of any industry. This increase compares to a gain of 5.2 percent nationwide.

Although management of companies shows the addition of 2,201 jobs, the increase does not reflect an industry group that was experiencing strong gains throughout the year. Rather, there were several large business units that changed industry code, moving employment from other industries and into management of companies. The net effect was to move about 3,700 jobs to the industry group from a variety of other industries. Professional, scientific and technical services posted a gain of a little over 600 jobs. Most of the component industries showed gains for the year, but had to overcome a loss of 852 in accounting, tax preparation, bookkeeping and payroll services. Computer systems added over 448 jobs for the year, but most of the growth came in industries for which estimates are not prepared such as management consulting, scientific research, and advertising.

Education and Health Services:

The Education and Health Services supersector has registered job growth in every year for which we have estimates. Every month registered over-the-year job growth with a gain of 7,731 for all of 2004. Essentially all of this increase was caused by increases in healthcare and social assistance industries, as educational services experienced little change. The 7,680 jobs added in healthcare and social assistance equaled a 2.4 percent increase. While among the fastest growing industries, its rate of growth was well below an average 3.9 percent increase during the previous five years.

With the exception of nursing care facilities, all healthcare industry groups produced growth between 1.2 and 2.2 percent. Generally, these industry groups matched the pattern of somewhat slower growth in 2004 compared to the previous five years. This was the case for every industry except social assistance, which grew by 5.2 percent, nearly equal to average growth during the previous five years. This industry has a long history of strong annual growth driven by increases in individual and family services. From 1991 through 2004 the annual average increase was 5.6 percent.

The growth and aging of the state’s population makes the increases in healthcare employment unsurprising. National healthcare spending is increasing at a very high rate with annualized growth of 7.5 percent during the first half of 2004, virtually equal to 2003. This was down from growth of nearly 10 percent in 2001 and 2002. Minnesota’s experience is similar. A November 2004 report by the Minnesota Department of Health showed that healthcare spending growth in Minnesota measured 12.6, 6.7, and 10.1 percent for the years 2000, 2001 and 2002.

The employment loss in nursing care facilities is the second yearly decline in a row and the sixth in the last eight years. The 2004 loss is reflective of an industry that is struggling with profitability. A 2005 survey by Larson, Weishair and Co., an accounting firm for about half of Minnesota’s nursing homes, indicated that about one in four nursing homes had losses exceeding 5 percent of revenues the previous year. In northwest Minnesota 44 percent of nursing homes were in this category. The statewide median operating margin was 0.5 percent; the facilities in the Minneapolis-St. Paul Metropolitan Statistical Area have had a median operating margin in the red for five years.

Leisure and Hospitality:

Strong growth in food services and drinking establishments led to a gain of 3,743 in the Leisure and Hospitality supersector. The 1.6 percent increase is roughly equal to the 1.7 percent average gain during the previous five years. Industries outside of food services and drinking establishments experienced small employment losses. Arts, entertainment, and recreation lost 543 jobs as the slight downturn experienced late in 2003 continued through 2004. While this industry provided no gains for the year, it certainly was not a major drag on job growth. The same can be said for the accommodation industry where there was a negligible decline. Through the first half of 2004, occupancy rates at hotels showed some improvement from the 2003 levels, but are still well below prerecession levels.⁵

With losses in other areas, all of the gains in the supersector came from food services and drinking establishments. Most of this growth came in limited service eating places, which added nearly 3,300 jobs, an increase of 5.1 percent. This is much higher than an average 1.8 percent gain during the previous five years and is the highest rate of growth since 1995. Full-service restaurants added 1,665 jobs, but more than half of this gain came from employment shifting out of drinking places.

Other Services:

Other Services experienced a loss of 0.6 percent. Two of the three major components posted declines for the year. Repair and maintenance fell by 1.9 percent or about 400 jobs. This was the third consecutive annual loss with declines of 1.4 and 1.3 in 2003 and 2002, respectively. Religious, grantmaking, civic and professional also posted a loss in 2004, declining by about 300. While these were not large declines, the gain of 74 in personal and laundry services provided little counterbalance. The failure of religious, grantmaking, civic and professional; and personal and laundry services to produce stronger growth indicates that, to some degree, in spite of some improvement to the economy, people are not confident enough to direct more resources toward these largely discretionary industries.

Government:

Employment fell by 1,430 in Government. Federal government employment fell by 504 returning to a longer trend of small declines after adding employment in 2003 when airport security employees were federalized. The losses in 2004 occurred in both postal and non-postal agencies. The decline in employment at the U.S. Postal Service was the fourth consecutive loss.

State government added 712 jobs. All of this increase came from state government education where the addition of 1,603 jobs outweighed losses in other state government entities. This is the third consecutive year that this pattern has been in effect. The growth in employment at state colleges and universities was supported by a small gain in enrollment.⁶

Local government fell by 1,636 during the year. This result was not surprising given the general reporting of tight budgets among city and county officials. In recent years substantial declines in state contributions to local governments and the implementation of new property tax rules that shift property tax burden to homeowners and away from commercial properties have caused greater uncertainty over local government budgets. The Minnesota Higher Education Services Office projects that the number of high school graduates should hit a peak in 2004. As a result, employment at public schools is likely to be stagnant in coming years.

Endnotes:

¹ GDP data is from the Bureau of Economic Analysis’ March 30 release.

² U.S. Geological Survey, Mineral Commodity Summaries, January 2005.

³ Jennifer Bjorhus, “Freight Fracas”, St. Paul Pioneer Press. March 25, 2005.

⁴ Joe Mahon, “An Open House for Real Estate Agents,” Fedgazette. March 2005.

⁵ Smith Travel Research.

⁶ Minnesota Higher Education Services Office.

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