Recession's sting in state may be deep, long-lasting

Nearly half of the people now working in Minnesota were carrying lunchboxes to school or playing in sandboxes the last time the state faced a recession like the one some economists are expecting.

"The forecasts are almost changing daily and getting more pessimistic each time," said Nariman Behravesh, chief economist of Global Insight, an economic forecasting firm based outside Boston.

In the U.S. economic downturns of 2001 and 1990-91, Minnesota could boast of escaping the worst of what the national downturn wrought on many other states. Not this time, said Minnesota state economist Tom Stinson: "In the recession of 2008-2009, it looks like we're going to get hit a little harder than the U.S. average."

"Don't expect a rapid snapback," Stinson said, considering the outlook for the Minnesota economy. "This isn't 1991. This isn't 2001. This is going to be more like the twin recessions of the 1980s."

That view is not universal.

A national recession that economist Dan Laufenberg believes started last month is more likely to be "typical" than "severe," in his view.

"This is going to be an average recession," said Laufenberg, chief economist at Minneapolis-based Ameriprise Financial Inc.

By contrast, the 1982 recession lasted 16 months, with the nation's economy contracting at an annual pace of 2.6 percent. The U.S. unemployment rate rose from a prerecession level of 7.2 percent to a high of 10.8 percent.

What separates Laufenberg from a more pessimistic pack of experts?

Unlike many other economists, he believes the housing market may be poised for recovery.

"Because the housing sector has been in a recession for over two years, it may be bottoming," Laufenberg said. "It will be one of the sectors that sort of lead us out."

Other economists think home sales will lag for years to come, depriving the Minnesota economy of a key element of past economic turnarounds.

Burned by billions in losses on mortgages, lenders will be more cautious than ever about home lending, Aleman said.

Don't look to manufacturing

Another problem for the Minnesota economy in the current slump: No one expects Minnesota manufacturing employment to rebound.

In the recessions of the 1970s and 1980s, manufacturing employment in Minnesota revived faster than across the nation. In the 1990s, Minnesota manufacturing employment enjoyed a revival even as factory jobs disappeared nationally.

"Manufacturing peaked in 2000," said David Senf, labor market analyst at the Minnesota Department of Employment and Economic Development (DEED). "It peaked forever."

Even Laufenberg's relative optimism about the economy's prospects has a downside. He believes the nation's economy may take years to bounce back to levels of employment seen before the downturn began. Widespread fears of a widening financial crisis will be hard to calm, he said.

"Jobs come back much slower because businesses, if they just get a whiff of the economy slowing down, are quick to downsize and get ready for it," he said.

How deep will the trough be?

In a mid-October report, Global Insight forecast a downturn of three back-to-back quarters of U.S. economic contraction. The nation hasn't seen that kind of downturn since the worst post-World War II recession, in 1973-74.

But Behravesh said the recession that he believes started last summer and predicts will end next March, April or May will be more like the recession of 1981-82. The forecast calls for the loss of 2.2 million jobs nationwide from peak employment before the recession and an unemployment rate of 7.5 percent in late 2009. The U.S. jobless rate was 6.1 percent in September.

"It's going to be very, very weak performance," Aleman said.

Forecasts changing on the fly

In a report released last week, DEED forecast that Minnesota will lose nearly 30,000 jobs by the end of the third quarter of 2009.

But that report was issued when Global Insight, the state government's forecasting beacon, was offering a brighter outlook. In the 1981-82 recession, Minnesota lost more than 100,000 jobs and took about three years to recover to the levels of 1980.

By the next time Global Insight's computers spin out an economic forecast, next month, Behravesh said, the risks of a worse recession will have increased sharply, as uncertainty about the nation's financial system is climbing.

Even that forecast is subject to amendment. In its October forecast, Global Insight offered 1-in-4 odds that the economy could deteriorate further than expected.

"In this scenario, the unemployment rises to a peak of 9 percent," Behravesh wrote. That's not a worst-case scenario, he said, but a plausible alternative to the most likely outcome.

Minnesota job growth had been lagging behind the nation's since early 2006. The outlook for Minnesota workers and job seekers could end up sagging faster than the nation as a whole, said Aleman at Wells Fargo.

"You will see further deterioration in the employment market and then kind of stagnation," he said. "No growth for a year and a half or so."