Employment Numbers Tell the Story: Twin Cities Economy Back on Track

Continued recovery in manufacturing jobs
Twin Cities businesses generally optimistic about 2006 economic prospects
Some retailers bracing for slower consumer spending in 2006—but Minnesota personal incomes expected to grow substantially

The Twin Cities economy continued to gather steam throughout the second half of 2006. Employment growth rebounded substantially in October, recording a 0.7% overall increase over September’s weak numbers. Service sector employment, comprising 84% of the total Twin Cities labor market, grew by 0.9% for the month. Overall manufacturing jobs grew by 0.1% in October, although employment in the durable goods producing sub-sector grew by 0.4%.

The Twin Cities job market grew at a 1.3% pace between October 2004 and October 2005, adding 22,000 jobs. That brought the region up to par with the national job growth rate for the first time since 2001. The area’s unemployment rate was 3.7% in October, versus 5.0% nationally. The year-to-date job growth number was substantially higher than what was projected by some economists earlier in the year.

Manufacturers continued to expand their payrolls, adding 3,000 jobs in the October 2004 to October 2005 period. This growth in manufacturing jobs parallels the continued strong demand throughout the year for Twin Cities industrial space.

Healthcare and education employers led the way in the service sector, adding 9,400 jobs—a large majority in the fast-growing healthcare area. Strong growth in demand for Twin Cities medical office space mirrors the industry job growth figures as well.

As commercial office space landlords can attest, the growth in traditional office-related jobs was steady. Professional services firms added more than 31,000 jobs between October 2004 and October 2005; financial services-related employers added more than 3,800 jobs.

Twin Cities home builders reported slowing growth in 2005. Twin Cities municipalities issued 8% fewer housing permits through October 2005 than in the comparable period in 2004. The median cost for a new home in the Twin Cities was $233,000 through September, an increase of 6% over September 2004.

Outlook
Most Twin Cities business leaders are optimistic about the region’s economy for 2006, according to a year-end survey by the Minneapolis Federal Reserve Bank. According to 60% of respondents, sales will be up, versus just 12% who foresee a downturn in sales. Jobs will increase as well, according to 35% of respondents, while 12% predicted fewer jobs in the region.

Forty-one percent of respondents believe service industry companies will be hiring in 2006, and only 5% see job reductions. Financial, insurance and real estate companies will also be adding jobs, according to 20% of respondents—while none predict fewer jobs in those industries. Manufacturing jobs will increase, in the opinion of 37% of respondents, while 17% believe there could be job cuts.

Less bullish is the outlook on consumer spending. Only 17% of respondents predicted that consumers will spend more next year in local retail establishments, while 39% thought consumers would spend less. A quarter of the respondents thought retailers would need fewer full-time employees in 2006, with just 5% predicting increased retail hiring.

Scott Anderson, Twin Cities-based Senior Economist for Wells Fargo Corporation, also predicts that U.S. GDP growth will be more balanced in the year ahead, with the emphasis shifting away from consumer spending and housing in favor of other activities such as increased business spending.

Twin Cities retailers may be bracing for a potentially more challenging year ahead, but there’s reason for optimism too. Personal incomes in Minnesota will be up a robust 5.4% in 2006, on the heels of a 3.5% rise in personal income in 2005, according to the Minneapolis Federal Reserve Bank’s statistical model.

Overall steady GDP growth of 3.5% is projected for 2006 by the forecasters at the State of Minnesota Department of Finance. The state’s revenue picture brightened considerably in November with the report that 2005 revenues exceeded forecasts by $298 million. The state finance department also projected a $701 million surplus for the 2006-2007 biennium. With the improved balance sheet, state legislators meeting in 2006 may feel less pressure to roll back recent business property tax reductions.