Federal Reserve economists expect the state's unemployment rate to slip below 5 percent in 2013.
Minnesota's job market will grow faster in 2013 than it has in six years and unemployment will fall to 4.7 percent, economists at the Federal Reserve Bank of Minneapolis predicted Thursday.
Buoyed by retail hiring, an improved housing market and a resilient farm economy, employers in the state should add 59,000 jobs this year, Fed economists Toby Madden and Rob Grunewald said. That would be a faster rate of growth than any year in the new millennium except 2006, just before the nation's housing bubble burst.
The regional Fed outlook describes a 2013 hiring surge that would be a welcome change from the state's halting recovery thus far. Unemployment -- which already is two points lower in Minnesota than the national average -- would fall to its lowest level since early 2008.
"The statistical models are pointing to a stronger-than-average gain in employment growth and also a decrease in the unemployment rate," Grunewald said.
Rising home prices, stable manufacturing hiring, declining household debt and stable consumer prices all contributed to the upbeat forecast.
But the Fed's models have generated cheery forecasts on job growth before. Last year, Fed economists projected 2.8 percent growth in state employment, but the final figure was 1.7 percent.
"The last couple years, the forecasting model's been a little too optimistic," Grunewald said.
State and regional business leaders are less confident than they were a year ago. Uncertainty about the federal budget continues to plague the economy by discouraging hiring and investment, and Tuesday's fiscal cliff deal only partially alleviated the problem.
"A lot is riding on the debt ceiling and the postponed [spending cuts]," said Steve Hine, labor market economist at the Minnesota Department of Employment and Economic Development. "Any forecast has got to be read with that uncertainty in mind."
The Fed's surveys also showed that business leaders are worried about slowing economies in Europe and China.
Wages in Minnesota have been sluggish, and the labor force has been shrinking as people give up looking for work and are no longer included in the official tally of the unemployed. In November, the labor force participation rate fell to its lowest level since 1983.
Even manufacturing, which the Fed called "a key component of the recovery," slowed in the second half of 2012 as exports fell off. Manufactured exports from Minnesota to China fell 7 percent through October, and exports to Europe were flat.
The state's declining labor force participation rate likely means an uptick in the job market will lead to higher unemployment numbers as people start hunting for jobs, Hine said.
"For some length of time, while those people are searching for work again, they would be considered unemployed," he said.
In the broader Ninth District of the Federal Reserve Bank, North Dakota's oil boom continues to be the biggest story. Oil production rose 62 percent from September 2011 to September 2012, and the state now accounts for 11 percent of U.S. oil output.
North Dakota's housing market has not only improved but has surpassed its pre-recession peak. Unemployment, already the lowest in the nation at 3.1 percent, should fall to 2.8 percent in 2013, the Fed predicted.
"We're not growing as fast as them," Madden said. "However there is some effect on Minnesota's economy, in that it drives up demand for our products as well as demand for our labor."
Adam Belz • 612-673-4405 Twitter: @adambelz