Forecast: Minn. economy will continue growth, but slower

The nation's economic recovery has not been as robust as expected, and that's going to spell trouble for Minnesota.

So far, the state's job growth has been springing back at a faster rate than the nation's. The state is 3.6 percent below its employment level at the start of the recession in December 2007. U.S. employment, by contrast, dropped off by 5.4 percent over that period.

State economist Tom Stinson says if Minnesota kept adding jobs at the current robust rate, it would take another two years to return to pre-recession levels.

But at a press conference yesterday, Stinson made even that long, two-year haul sound overly optimistic.

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"In general, we're seeing just a slow gradual progression," he said. "We're not expecting continuation of the really rapid growth in employment we've seen over the last 13 months."

This year, the state has been adding an average of 5,500 private-sector jobs each month across a broad swath of industries. But in 2011, Stinson anticipates that pace will drop to just 2,000 jobs a month on average. In 2012, it will pick up to 4,000 a month -- still well below the current rate.

Economists point to a number of reasons for the sluggish growth. On the one hand, federal stimulus spending won't help out next year.

Snd without improvements to the national and international markets they serve, Minnesota employers will eventually have no need to add jobs, said Louis Johnston, an economist at the College of St. Benedict-St. John's University.

"Foreign demand isn't growing for U.S. goods as fast as a lot of people thought it would. For example, Europe has had a lot more troubles. No one was expecting to have problems in Greece and Ireland and perhaps Portugal and Spain and -- I hope not -- Italy," Johnston said. "And that's certainly reduced the demand for American exports. So that's slowing the U.S. economy down and consequently the Minnesota economy."

In addition, some demographic changes will exert a drag on the state's economy. State demographer Tom Gillaspy said the rate at which new households are formed has slowed considerably during the recession. Individuals have moved back in with their parents to save money or delayed getting married.

"What that does is slows down the demand for housing," he said. "It slows down the rate at which we can clear surplus housing and tends to keep vacancy rates up and slow down construction spending."

Consequently, construction jobs suffer, too.

One positive component to the state's outlook, however, is the fact that mortgage delinquencies appear to be on the wane. According to data from the Mortgage Bankers Association, the portion of mortgages in Minnesota that were at least 30 days past due have dropped a full percentage point from a peak of 7.3 percent late last year.

Chip Halbach, executive director of the nonprofit group Minnesota Housing Partnership, said he's convinced there's less trouble at the leading edge of the foreclosure process.

"Definitely we are seeing delinquency rates come down. Ironically it's at the same time foreclosure rates are at an all time high. But the delinquency rate are coming down and that does correspond with the slightly improving unemployment rate," Halbach said.

Even if the housing market improves, headwinds remain, including a mismatch between the skills workers have and the skills employers need, as well as a weakness in community banks, whose lending is critical to small business expansion and hiring.

The state's economic forecast says it's unclear how much those issues will crimp the state's growth in the next couple of years. "The Great Recession was so severe that many relationships among economic variables may be broken," the report says, "making once reasonable assumptions questionable."