'Strained' Minnesota economy facing many challenges, professor warns

The Russian invasion of Ukraine has further complicated the economy in the United States, including Minnesota. Likely, inflation will be higher and income growth lower than economists originally forecast for 2022, said Louis Johnston, a veteran professor of economics at the College of St. Benedict and St. John's University. Already, the pandemic had left many uncertainties for Minnesotans, he said in a wide-ranging interview, edited for clarity and length.

Q: How has your outlook for the Minnesota economy changed since Russia attacked Ukraine, with gas prices spiking on top of inflation that already had increased more than 7 percent?

A: The national and international economies were already dealing with the problems created by the pandemic and its aftereffects. Now, the same supply chains and trade relationships that were frayed over the past two years are strained by the economic sanctions and shocks triggered by Russia's invasion of Ukraine.

As far as Russia and inflation, people are using the 1970s as the case study of how to deal with it. Two better periods are from the end of World War II to the Korean War, or the end World War I to the Great Depression. They are more relevant.

With both, you had a big wave of globalization. At least across the North Atlantic. Then WWI destroyed it. Then we spent 30 years putting it back together and couldn't. And then there was WWII. We tried again, and it took 35 or 40 years to do globalization. I think the second great wave of globalization ended in March 2020. It benefited us from the farm to the factory to the laboratory. Trade, investment, research and development and medical-device companies that worked in Ireland, Germany and China. This allowed Minnesota to prosper.

Q: What should concern working- to middle-class Minnesota families?

A: Two factors concern me. I think wages will rise due to strong labor demand, but I'm not sure wages will rise as fast as inflation. This means that households will find their budgets strained as they pay more for certain items and must compensate by cutting back on other purchases.

Then there is child care, pre-kindergarten and after-school options for families. The pandemic illustrated how these factors are critical to our labor markets, in particular, and our communities. The labor shortages are particularly acute in this area, and I'm not sure that the level of services that was available before the pandemic will return — not to mention that level was already too low to begin with.

For those searching for jobs, it might be harder to find work as the Federal Reserve raises interest rates and slows down economic growth.

Q: How important are gas prices to the average Minnesota family?

A: Transportation costs are 15 percent to 20 percent of a typical family's spending. Given that rent or mortgage payments are fixed, they have to look to other areas of household budgets where they can reduce their spending. Food budgets, especially food not prepared at home, is a prime target, as is entertainment outside the house. General Mills and Hormel would love that — so it cuts both ways. Clothing purchases are also a typical choice for reduced spending.

Q: Where would you like to see this economy in six months?

A: Optimistically, inflation no higher than 2021, about 4.5 percent on an annual basis. Unemployment, 3.5 to 4 percent nationally; 3 to 3.5 percent in Minnesota. Income growth, inflation adjusted, at 3 percent, meaning that wages rise faster than inflation. My hunch is that inflation will be higher, unemployment will be higher and income growth will be lower.

Given the Ukraine war and how that has raised energy and commodity prices, I think inflation could be 5 or 6 percent this year. I think unemployment, if not rising, will stop going down. I may be cynical about income growth. Businesses are maintaining their profit margins and trying to keep wages from growing faster than inflation.

Q: How will remote work affect the economy?

A: For the long term, how will the increase in remote work affect metropolitan and urban economies in Minnesota? Many service jobs in Minneapolis-St. Paul, Duluth, Rochester, St. Cloud depend on people coming in to work. If people don't spend as much time in the office as they used to, what will happen in food service, dry cleaning, and other typically small businesses in downtown areas? I don't know.