A recent conversation about the worsening economy ended on a sardonic note. ‘Well,’ my colleague said, ‘Don’t worry too much. Just remember the economy is highly resilient!’ His comment was a jab at Art Rolnick, the Minneapolis Federal Reserve economist who until just months ago downplayed the possibility of a recession because the U.S. economy is resilient.
Snickering is understandable but not entirely fair. Yes, the world is sliding into a worse recession than Rolnick predicted. But the U.S. economy is resilient and the state’s economy even more so.
The country will return to growth eventually. Meanwhile, all other things being equal, as economists say, the pain will be less in resilient regions like Minnesota than elsewhere.
Resilience, defined as “capability of returning to an original shape or position,” differs from strength. Steel is stronger and harder than rubber. But a rubber tire easily can roll for 60,000 miles on abrasive pavement that would quickly grind down a steel wheel. Rubber is the more resilient material.
I hope I am wrong, but I fear the worst recession in decades. We are a small state in a large nation and a big world for which the economic situation worsens daily. Minnesota is going to get hammered. Hard.
Different sectors will be affected differently. Here’s a sketch of how things are likely to play out:
Iron mining, after booming as China grew, is going in the tank. The building products side of the forest industry got there two seasons ago. Both sectors will lag the rest of the economy in recovery.
People always eat, but Asia and Europe may import less. Farmers may have to absorb abrupt price drops from the stratospheric levels of 2008.
A consumer-debt-fueled consumption binge encouraged unsustainable over-expansion of retailing. A shakeout was in the cards. We are going to see bankruptcies large and small, myriad empty storefronts, and deep layoffs.
Car dealership liquidations will be commonplace as cash-strapped consumers drive their cars longer. But auto mechanics, shoe repair shops and other service businesses that benefit from frugality will see strong business.
Other service businesses will see varied demand. Expect to see more people with duct tape holding their eyeglasses together or, like me, perennially late for haircuts. Cardiologists and oncologists won’t suffer, but cosmetic surgeons will. Providers of largely discretionary services all better prepare for the worst.
Discretionary flying will drop sharply, as will convention tourism. Cash-strapped corporations will spend less on sales or training meetings. People may take their vacations closer to home.
Legalized gambling barely existed in Minnesota in the last deep recession. Now it is as overbuilt as retailing.
Manufacturing generally will suffer, but ag processing and food sectors will do better than many. Medical-device makers may do the best of all, particularly in bread-and-butter lines like pacemakers and heart valves.
Increased subsidies from Obama-administration energy programs, combined with state renewable mandates may make wind energy a bright spot. So may expansion of transmission facilities to get new power out of windy areas to cities.
All in all, we are going to go through a very hard time and few families will be entirely unscathed. But the resilience of the Minnesota will make the recession less harmful than many other regions. Here is why:
- Diversity. Minnesota has a broad-based economy, and is not overly dependent on any one sector. Agriculture, forest products, mining and tourism all are important, especially outstate.
We have insurance, banking and other financial companies. There are major teaching and research hospitals that bring in patients from elsewhere.
We still have traditional industries like agricultural processing and food manufacturing as well as newer, higher-tech sectors like medical electronics, heart valves, stents and other medical devices.
Though we have lost several corporate headquarters, Cargill, Target, Best Buy, 3M, Medtronic and General Mills are still here, as well as cooperatives like Land O’ Lakes and CHS.
- Supportive institutions. Minnesota’s economy is supported by an important institutional base. We have a major research university, and other good public and private post-secondary schools. We have major-league sports teams along with nationally recognized theater, music and art institutions.
There are sizeable philanthropic foundations and a nonprofit sector with depth and breadth. At local as well as state levels, government is more efficient and honest than in many other regions.
- Human capital. More importantly, we have Minnesotans. Education levels here are high, there is a good work ethic and a culture that values creativity, cooperation, innovation and compassion. We have absorbed large immigrant communities from Asia, Africa and Latin America and they have made us stronger.
Now don’t call me Dr. Pangloss. We have problems that predate the recession. Manufacturing employment has shrunk. Computer hardware is largely gone. The Ford plant is in its last days. Minnesota’s educational system has significant problems it didn’t even a decade ago.
But the fact remains that many other areas would envy our position. The diversity of our economy historically has meant that we have not been as subject to from structural obsolescence of one dominant industry like steel in Pennsylvania, Ohio and Indiana in the 1980s or the problems Detroit is facing now.
Now, diversity means that recession-resistant areas like health care and food processing will buoy us as others shrink. Even affected sectors will not all hit bottom at the same time. Some will lag on the way down and some will lead in an eventual recovery. The overall effect is to average things out somewhat and reduce the depth of the overall decline at any point in time.
The supportive institutions add resilience in different ways. The University of Minnesota’s research has fostered economy-altering technological change including taconite processing, computers and medical devices. The philanthropic and nonprofit sector provides some level of funding and human services that are independent of government. These are particularly important as needs rise while public budgets are constrained. Functional government means that public resources are used more efficiently in meeting social and economic needs.
Minnesota’s human capital is the most important. Education increases human adaptability to new challenges. Well-trained or broadly educated workers can move more readily from particularly depressed sectors to higher-performing ones than can less-well-trained people. An ethos of creativity and cooperation similarly allows more rapid and effective adaptation to economic adversity. Compassion and a sense of social solidarity can help mitigate the human cost of lost jobs, income and housing.
© 2009 Edward Lotterman
Chanarambie Consulting, Inc.