Minnesota's economy: Cause for concern ... or just a blip?

Minnesota's unemployment rate dipped slightly in June, but the latest state jobs report suggests that the slow fade of the state's economy from national front-runner to also-ran is continuing.

Since 2004, Minnesota's growth in jobs, per-capita personal income and output of goods and services have risen at a lower pace than the national average. That's a departure from the 1980s and 1990s, when Minnesota outshone most states on such important measures.

And while Minnesota added 4,200 jobs in June, much of the increase came on local and state government payrolls. The number of manufacturing jobs, in contrast, fell for the seventh time in 10 months.

"We're losing ground," said Minnesota State Economist Tom Stinson. "It's gone on long enough that it's disquieting."

The downward trend is especially puzzling in light of tax cuts and other measures taken this decade that were meant to make the state more competitive.

For a while, those measures seemed to be working. From 2002 through 2005, Minnesota's average annual unemployment rate was a full percentage point -- or more -- better than the national rate.

Between May 2006 and May 2007, however, it climbed from 3.9 percent to 4.6 percent, the first time in 30 years of record- keeping that it was higher than the national average.

Some say it's too early to declare that the North Star State's economy is dimming.

"It can pure and simply be timing. I don't know," said John Berglund, a job-market watcher at the Minnesota Department of Employment and Economic Development. The industries where Minnesota is strongest may simply be at the trough of their business cycles, Berglund said.

"But it does give me pause for thought," he added.

Maya Nestingen, 28, said she has found the job market slow since getting her degree in liberal arts at the University of Minnesota in 2004. It took her 10 months to find a job after graduation. She has worked at the Guthrie Theater and at a salon and spa but wants a position where she can draw on her arts background.

So far, all she can find are retail jobs. "Most just want a warm body to ring people up," she said.

Toby Madden, regional economist at the Federal Reserve Bank of Minneapolis, is among those who sees more good than bad in the statistics.

"We may hit bumps, we may hit some potholes, but we're still going to move along the highway at a pretty solid speed," Madden said.

Some people who've been out of work for months are less optimistic.

"There are so many people looking for jobs," said Malthea Little Smith, 57, who has been unemployed since March. "There's just way too many people."

Ellen Blake, 44, lost her public-relations job two months ago when her Twin Cities employer saw clients retreat or reduce spending. The accounts she worked on were in the troubled auto industry, including image-building for the Saturn division of General Motors.

"If this country continues to go down this path, we're in deep trouble," she said.

Even when Minnesota's economy was holding its own, it wasn't doing as well as it had in the past, Stinson, the state economist, said. Minnesota's economic output -- the dollar value of all goods and services produced here -- expanded after the 2001 recession, but not as vigorously as after previous downturns.

The financial troubles of Northwest Airlines may be partly to blame, he said. By laying off workers by the thousands -- and cutting the income of those who remained -- Northwest put downward pressure both on jobs and personal-income numbers. It has also reduced revenues for its suppliers.

Minnesota personal per-capita income fell more than 3 percent from 2004 to 2006, the years when Northwest edged toward bankruptcy and then sought court protection.

Beyond the state's borders, other industries have played a part in Minnesota's setback as a national pace-setter.

The Iraq war has buoyed military contractors with hundreds of billions of dollars of government spending -- money that largely has sidestepped Minnesota. At the same time, Minnesota exports a lot of lumber, furniture and building materials, so the slowdown in construction is being felt disproportionately here.

Meanwhile, imports have been surging this decade, and those foreign goods are chiefly shipped, distributed and financed by companies in coastal states rather than the Midwest, said Ann Markusen, a University of Minnesota economist.

The same could be said for a re-emergence of Internet and high-tech companies.

Minnesota has attracted about 1.5 percent of all venture-capital funding in the United States since 1995. However, the state's share has dipped to about 1.2 percent since 2004, according to the PricewaterhouseCoopers/ National Venture Capital Association MoneyTree Survey.

"You could say the industries that are driving the national economy, at the moment, are not the strongest here," Markusen said.

Nevertheless, economist John Adams thinks some of the blame for Minnesota's underperformance, compared with the nation, lies with recent political decisions.

Adams, a University of Minnesota regional and urban affairs specialist, contends that the state has failed to invest in assets ranging from highways and bridges to education.

"In the long run, it's a failure to compete effectively with what's going on someplace else," he said.

For business executives, who have to bet their future on Minnesota's prospects, the economic signals also lend themselves to far different interpretations.

Peter Sadowski, vice president of the devices group at Antares Pharma, a Princeton, N.J.-based medical company with offices in Minneapolis, is among those who sees worrying signs.

"When we advertise for people we don't get as many qualified applicants as we did five years ago," said Sadowski, who also is chairman of the Education and Workforce Development Policy Committee of the Minnesota Chamber of Commerce.

Mark Larson is far more optimistic about the state's economic performance.

Larson is president and chief operating officer of Thief River Falls-based electronics distributor Digi-Key Corp., which employs 1,850. Digi-Key has had no trouble recruiting qualified employees or getting its goods to market, he said.

Sales were up 32 percent in 2006 compared with 2005, thanks to strong demand nationwide and overseas. "By far, our fastest growth is outside of North America," he said

Mike Meyers • 612-673-1746 • meyers@startribune.com