For second Walz term, state's economy is fragile

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As Tim Walz is sworn in for his second term as governor he will find himself at the helm of an economy in relatively poor shape.

In our report "The Cost of Lockdowns and Shutdowns: Part I — Counting the economic costs of government policy responses to COVID-19," we found that state and local responses to the pandemic reduced Minnesota's gross domestic product (GDP) by 3.1% by the first quarter of 2021, which came to $1,866 for each individual, or $7,464 for a family of four. This was the 15th largest hit in the United States.

Minnesota's subsequent recovery has been below average. In three of the last five quarters our state's economy has shrunk, including the first two quarters of 2022. While Minnesota's economy grew again in the third quarter, our annualized rate — 2.3% — was below that of the United States as a whole — 3.2% — and ranked 29th among the states.

As a result of this sluggishness, Minnesota's economy was only 2.2% bigger in the third quarter of 2022 than it was in the fourth quarter of 2019, the pre-COVID-19 peak, a performance worse than that in 34 other states and the District of Columbia.

In the past, two quarters of economic contraction would have been called a recession. This time many have pointed to a booming labor market as proof of economic strength. When 6,800 net new jobs were added in November, Minnesota's media breathlessly reported 14 consecutive months of job growth.

But what about our low unemployment rate of 2.3%? That rate represents the number of people not currently employed but looking for work as a percentage of the total number of people in the "labor force" (which includes both those employed and those looking for a job). If you stop looking for work without finding a job, you simply disappear from both the labor force and the unemployment roll. In this way the unemployment rate can fall even as fewer people have jobs.

That is what has happened in Minnesota. Out of the 50 states and District of Columbia, no jurisdiction saw its population of unemployed people fall by more than Minnesota from February 2020 to November 2022: a decline of 71%. But these people did not move into work. Over the same period, the number of people employed in our state fell by 1.4%. These people have left the labor force entirely. The number of Minnesotans in the civilian non-institutional population who are neither employed nor unemployed has risen by 10%, the seventh largest rise out of the 51 jurisdictions.

The Star Tribune recently quoted "labor experts" citing "accelerated retirements among the state's aging population and continuing challenges with child or elder care as some of the reasons some workers haven't returned to the labor force." This may be true, but it raises the question of why these problems are so acute here in Minnesota.

Meanwhile, those working have seen their incomes hit especially hard in Minnesota. In real, per capita terms, non-transfer personal income in our state in the third quarter of 2022 was 1.4% lower than in the fourth quarter of 2019, a performance worse than in 30 states and the District of Columbia.

This grim economic record might explain why Minnesotans are fleeing the state in ever larger numbers. In 2021, our state lost 13,453 residents to other states, the biggest net loss of domestic migrants in at least 30 years. In 2022, we smashed that record, losing 19,400 residents to other states. The pace of exit is quickening.