As Wall Street panicked, Minnesota's biggest companies kept cool, made tough choices and planned for what they believe are better days ahead. They are still waiting.
To say 2008 was a bad year does not begin to cover it.
Falling home values, failing lenders and frozen credit markets conspired to ignite a global recession the likes of which we have not seen since the 1930s. Never has so much market value been lost by so many Minnesota companies in so few months -- and for reasons that, frustratingly, were mostly beyond their control.
By August, credit markets had seized. By October, Congress had passed a financial bailout as massive as it was controversial. Consumer spending, already soft compared with 2007 levels, all but evaporated in the third and fourth quarters as layoffs spread and unemployment surged over 8 percent. By November, the markets hit 12-year lows.
Through this storm, Minnesota's biggest public companies persevered. Sales at the Star Tribune 100 grew nearly 6 percent in 2008, although profits fell 14 percent as the recession's grip tightened. Employment grew by 1 percent, or about 14,000 jobs. But that figure generally does not include layoffs made so far in 2009.
Market values of the state's 100 largest companies plummeted 38.7 percent, in lockstep with other major market indexes. Star Tribune 100 companies collectively shed $190 billion in market value, the largest such loss since this survey began 18 years ago. (Market value, also called market capitalization, is a company's stock price multiplied by the number of its shares outstanding.)
Of the 94 companies that lost market value last year, 23 dropped $1 billion or more. The losers list reads like a Who's Who of Minnesota Fortune 500 companies: U.S. Bancorp, Mosaic, 3M, Medtronic, Target, Ameriprise and Travelers.
Just six ST100 companies saw their market values rise in the 12 months ended March 31, 2009. The biggest gainer was comfort-food chain Buffalo Wild Wings, suggesting that beer, wings and wide-screen TVs are one formula for success in a distressed economy.
Yet for all the depressing headlines, the fundamentals at Minnesota's biggest companies remain sound. Consider:
•Year-over-year sales increased at 68 companies in 2008; 32 saw declines.
•75 posted profits while 25 suffered losses.
Five companies held headcount flat, including Supervalu and Alliant Technology.
Forty-seven cut staffing, including four that cut 1,000 or more jobs. The biggest job cutters were Target, hair salon operator Regis Corp. and Donaldson Co., which makes industrial filtration products.
The jobs reported by ST100 companies reflect their payrolls worldwide, so they do not necessarily translate into Minnesota jobs. Unemployment statewide reached 8.2 percent in March, slightly below the national rate of 8.5 percent. Minnesota state economist Tom Stinson said there is "more bad news to come'' on the jobs front.
From the February peak to the December trough, Minnesota lost 54,000 jobs in 2008, Stinson said. Another 49,000 jobs disappeared in January, February and March. And he expects another 20,000 lost jobs by early 2010.
"The Minnesota job market is not expected to start a recovery until spring of 2010,'' he said, adding that statewide employment likely will not return to prerecession levels until 2012.
Signs of moderation
Our annual assessment of Minnesota's largest companies reveals a diverse corporate landscape that remains strong in financial services, retail, manufacturing and health care. Minnesota is home to 19 Fortune 500 companies, the highest concentration of headquarters firms per capita in the nation. Those big firms, and their high-paying headquarters jobs, have long been significant contributors to the local economy and the state's cultural climate.
But Minnesota's industrial diversity was no match for the panic of 2008.
"No one is getting out untouched," said Scott Anderson, vice president and senior economist at Wells Fargo & Co. in Minneapolis. Anderson said he sees signs of moderation in the U.S. recession but predicts "potholes on the road to recovery.''
First the good news: The big declines in consumer spending we saw in the third and fourth quarters are moderating, he said. And the housing market is "tentatively close to a bottom ... and that's what got us into this whole thing four years ago.'' Also, the credit crisis "appears to have eased substantially from last year. ... Right now we are in a refinancing boom. Hopefully, that will be sustained,'' Anderson said.
The not-so-good news: Further job losses are certain. Anderson estimates the U.S. economy will shed another 2 million jobs by year-end, bringing the national unemployment rate to 9.7 percent. Businesses are keeping a tight rein on capital spending, so no help there in the near term.
And although the U.S. economy seems to be stabilizing (i.e., not getting worse), Europe and Japan are still descending. (China is a bright spot, Anderson said, with an economy expected to grow 6 percent or more in 2009.)
Economists agree that recovery, when it comes, won't look like the boom years. But they don't agree on when the recovery will begin.
"We don't expect consumer spending to rebound to pre-bubble levels,'' Anderson said. "That means businesses are going to have to look elsewhere for margins.'' Probably in emerging markets such as China.
Dan Laufenberg, senior economist at Ameriprise Financial Inc., agrees there are signs the economy is poised to recover.
"We are not expanding yet, but the economy is setting itself up for recovery,'' he said.
Laufenberg argues that consumer spending in the last half of 2008 was hobbled by high inflation in energy and food, which robbed consumers of purchasing power just as the credit crisis limited their ability to borrow. That double whammy explains the steep spending drop.
What will help? Lower prices, he said. Pointing to Tuesday's wholesale price report, which showed a steep March decline in oil and food prices at the factory level, Laufenberg said. "We are seeing the adjustments necessary to get consumer purchasing power back.''
He expects consumer spending, which drives about 70 percent of the U.S. economy, to be positive in the second quarter, but just barely, and then to grow in the 3- to 4-percent range in the last half of 2009.
State economist Stinson disagrees. "I am afraid the economy won't recover that quick because consumers have lost so much in housing values and their 401(k)s.''
In a recession, consumers stop spending and start saving to build a cash cushion, Stinson said. Once the recovery arrives, they feel comfortable spending again. That's what happened in the early 1980s.
But this time, Stinson argues, there are proportionately more consumers closer to retirement age than there were then. He thinks those older consumers are more likely to hoard cash this time around. For that reason, Stinson predicts the recovery timeline ''will be longer and slower.''
Which sectors of the economy will lead the recovery? Stinson thinks consumer staples companies (think Wal-Mart) and consumer discretionary companies (think Target) ''will get better before everybody else.''
Stinson remains guarded about the economy's near-term prospects: "This year's comparables in revenue and sales will probably be better than next year's because the full extent of the recession has not been reflected'' yet.
Among Minnesota's 100 biggest public firms, manufacturing companies contributed the most profit in 2008, followed by health care and financial services. Retail and service firms accounted for the biggest portion of sales and the most jobs. The state's most valuable firms, as measured by market capitalization, are in manufacturing.
The global recession caught up with 3M in the fourth quarter. As its customers canceled orders and closed factories around the world, the diversified manufacturer responded with layoffs in the fourth quarter and promises that more are likely because of "overall weak business conditions.''
Although headcount at 3M rose by 2,800 last year, plans announced earlier this month to buy out 3,600 employees, or about 11 percent of its U.S. workforce, could mean a net loss of jobs in 2009.
General Mills and Hormel fared better as consumers ate more cereal, refrigerated dough products and Spam. General Mills added 1,500 jobs in 2008, up 5.4 percent, and Hormel added 500 jobs, up 2.7 percent.
Fertilizer giant Mosaic benefited from the boom in commodity prices in early 2008 as sales jumped 81 percent and profits soared. That boom turned to a bust by year-end, however, pulling down Mosaic's once sky-high market value by 57 percent, or $25 billion.
Health insurance giant UnitedHealth Group delivered solid sales growth, but profit dropped 21 percent and market value by 42 percent. The best news for UnitedHealth was the settlement of a series of high-profile lawsuits that had dogged the company for years.
Sales at medical device makers Medtronic and St. Jude grew in double digits. Medtronic's profit jumped nearly 46 percent, although its market value dropped 39 percent. Medtronic added 1,051 jobs (2.8 percent) while St. Jude's payroll grew by 2,000 (16.7 percent).
These companies will be watching the debate over President Obama's health care reforms closely in the months to come.
Patterson Companies, a dental and veterinary products firm, grew modestly, but investors sliced the company's market value in half anyway.
Retail and service
Big-box retailers Target and Best Buy were hit hard as the recession spread and consumers stopped spending. Profit at both companies dropped in double digits. Best Buy's market value, down 12 percent, held up better than Target's, which shed nearly 40 percent.
Both companies were forced to make significant layoffs at the corporate level. Yet growing Best Buy added a net 10,000 jobs for the year.
At Target, which has fared worse than archrival Wal-Mart during the recession, headcount was down 15,000 jobs -- the biggest reduction in force among the Star Tribune 100 companies. Still, at 351,000 full- and part-time workers, Target remains the biggest corporate employer on our list by far.
At grocery wholesaler and retailer Supervalu, sales, profit and employment were virtually flat while investors sliced the company's market value in half.
At C.H. Robinson, the global transportation logistics firm, sales, profit and jobs grew despite the slowdown, although market value dropped 18 percent.
Contagion in global credit markets infected all of our big financial services firms, although compared with some of their competitors around the world, the Minnesota firms continue to look pretty solid.
Sales and profit were down at big casualty insurer Travelers. And while market value fell 22.6 percent, Travelers nonetheless has become the biggest U.S. insurance company by that measure.
Last year's leader -- AIG -- is this year's government ward and favorite bailout whipping boy. Travelers avoided the market for risky credit-default swaps, which are used to insure mortgage-backed securities. AIG, on the other hand, largely invented that market. So much for first-mover advantage.
Financial planning firm Ameriprise posted a loss after getting snared in the credit crisis. Supposedly safe money market investments that the Minneapolis firm had made in Reserve Management's Primary Fund "broke the buck'' in September. After panicked investors had noticed a lot of shaky Lehman Brothers securities in the Primary Fund's portfolio, there was a run on the fund; redemptions outpaced deposits, causing the Primary Fund to price below $1 -- a very big no-no in the mutual fund industry. Ameriprise was among the first to sue Reserve on behalf of investors.
Profit was down at retail bankers TCF and U.S. Bancorp. Market values were hammered at all four companies, although U.S. Bancorp and Ameriprise really got clobbered.
U.S. Bancorp shares have doubled since the March bear-market lows as investors are starting to separate the "good'' banks from the "bad'' banks. (Wells Fargo shares have risen likewise.) Despite a tough year, U.S. Bancorp added jobs.
Compared with financial services, manufacturing and retail, the utilities sector was sheltered from the worst of the economic storm. Xcel Energy posted double-digit sales and profit increases, and its market value held up well, considering.
Profit at diversified Otter Tail Corp. fell 35 percent amid challenges in its manufacturing unit and an adverse decision in a rate case. Allete, which owns Minnesota Power in Duluth, saw sales and profit slide, as did telecom provider HickoryTech.
The smallest of the Star Tribune 100 sectors was also the worst hit last year.
Imation, ADC Telecommunications and Hutchinson Technology all lost money last year. The most red ink came from Hutchinson Technology, where the disk-drive assembly maker lost $184 million after PC sales slowed, forcing it to lay off hundreds as its customers canceled orders.
A similar story played out at network equipment maker ADC as its customers, such as AT&T and Verizon, delayed capital spending as the recession deepened.
Digital memory maker Imation continued its long search for a profitable niche.
But business software provider Lawson prospered in a tough environment, with profit up 4.4 percent on sales that also rose 4 percent.