Economics Group. Special Commentary. May 24, Minnesota s knowledgebased. industries have helped keep the state s economy growing.

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1 May 24, 17 Economics Group Special Commentary Mark Vitner, Senior Economist (74) Jamie Feik, Economist (74) Minnesota Economic Outlook: May 17 Minnesota: Mind over Matter Consistent gains in knowledge-based industries have helped keep the state s economy growing, even as the state s manufacturing, mining and agriculture sectors came under increased pressure from slower global economic growth, lower commodity prices and the stronger dollar. Overall job growth held up relatively well, as health and medical sector continued to boost hiring. Growth in information technologies was another bright spot. But output slowed in the state s factory sector. Manufacturing accounts for 14.7 percent of economy, which is outsized compared to the nation but on par with other Midwest states. Fortunately, employment base has become more diverse. Health care, financial activities, trade and business services all play a larger and growing role, which helps explain the sturdy trend in nonfarm employment. With manufacturing and agriculture on the sidelines, economic growth in Minnesota has increasingly been driven by healthcare, financial activities and business services. Construction also saw an impressive pickup, driven largely by activity in the Twin Cities. Demographics continue to challenge labor supply, as more people move out of the Gopher State than move into it and more of the state s workforce reaches retirement age. Moreover, skill imbalances exist between available workers and available jobs, as evidenced by the recent upward drift in the unemployment rate. Employers appear to be struggling to replace retiring workers. Large corporations headquartered in the state span a bevy of industries, providing exposure to the best and worst of current business conditions. Potential policy changes present both increased opportunities and increased risk to many of largest private employers, including health insurance providers, energy companies, manufacturers, retailers and banks. Exporters are seeing some near-term relief, as growth has strengthened overseas and the dollar has weakened. But retailers face mounting pressure from online competition, necessitating more belt-tightening. Figure 1 Gross State Product & U.S. GDP Year-over-Year Percent Change Figure 2 1 5% Minnesota Nonfarm Employment Year-over-Year Percent Change, 3-MMA Nonfarm: Yr/Yr Pct. Change: 1.5% Manufacturing Employment: Education & Health Services Employment: 3.5% 1 5% knowledgebased industries have helped keep the state s economy growing. -5% -5% Minnesota: 1.5% United States: % -15% Source: U.S. Department of Commerce, U.S. Department of Labor and Wells Fargo Securities This report is available on wellsfargo.com/economics and on Bloomberg WFRE.

2 Minnesota Economic Outlook: May 17 May 24, 17 diverse employment base withstood another year of soft manufacturing conditions. Minnesota Posts Modest Job Gains without Help from Manufacturing diverse employment base withstood another year of soft manufacturing conditions. Growth picked up or held steady in other key areas, most notably in healthcare. Construction topped year-to-year industry growth in April. This was largely the result of strong hiring in the first quarter of 17, as mild weather encouraged an early start for new projects. Construction payroll growth was essentially flat in 16. Education & healthcare has been a consistent source of job growth and hiring has gained momentum in recent months. The sector added 19,1 net new jobs over the past 12 months its largest year-to-year gain since 8. Moreover, education & healthcare sector hiring picked up across the state, accounting for 7 percent of jobs added outside of Minneapolis and Rochester. highly-educated population sets it apart from other Midwest states. The share of state s population with a bachelor s degree is the tenth highest in the nation, and the highest in the Midwest. This talent pool largely feeds into knowledge-driven industries including professional & tech, financial activities, information and education & healthcare. Hiring in these industries helped nonfarm employment growth remain positive, even as payrolls declined in leisure & hospitality and manufacturing over the past year. While hiring in professional & tech services appears to have decelerated, the financial sector has added jobs at close to a 2 percent year-to-year pace for the past two years. The information sector also gained traction recently, expanding 1.6 percent over the past year after posting near-consecutive declines since 7. Manufacturers have endured a nearly two-year stretch of soft global growth, stronger dollar and the downturn in commodity prices. The factory sector is on the mend, however, both nationally and in Minnesota. Global growth has perked up, the dollar has given back some of its gains, commodity prices have firmed and capital spending plans have increased since the latter half of 16. Factory employment growth diminished throughout most of 16 but has shown signs of firming more recently. manufacturing exports increased on a year-to-date basis in the first three months of 17, a welcome contrast from declines during the previous two years. Manufacturers are upbeat about prospects for 17, according to an annual survey conducted by MN DEED 1 and the Minneapolis Fed. Manufacturers contacted in November 16 responded with either unchanged or improved conditions expected in 17. A more timely monthly survey of Minnesota businesses conducted by Creighton University, which is comparable with the ISM manufacturing index, indicates Minnesota businesses expanded in the first four months of 17. overall index surged from below 5 in November to 61.2 in April, similar to the strong survey data noted nationwide since the election. We are encouraged by the improvement in the employment index, as a turnaround in the factory sector may shift job growth into higher gear. Most other major employment sectors are also expanding. Figure 3 Figure 4 Minnesota Employment Growth By Industry Year-over-Year Percent Change, 3-MMA Total Nonfarm Trade, Trans. & Utilities Educ. & Health Services April Minnesota Economic Conditions Creighton University Survey, Index > 5 indicates Expansion 8 7 Government Prof. & Bus. Svcs. Manufacturing More Number of Employees Leisure and Hospitality Financial Activities Less Other Services Construction Information - 3 ISM Manufacturing: U.S.: 54.8 Minnesota Overall Index: 61.2 Minnesota Employment Index: Source: U.S. Department of Labor, ISM, Moody s Analytics and Wells Fargo Securities 1 Minnesota Manufacturing Business Conditions Survey, 2

3 Minnesota Economic Outlook: May 17 May 24, 17 Figure 5 Figure 6 1 Minnesota vs. U.S. Unemployment Rate Seasonally Adjusted Components of Population Change: Minnesota In Thousands Natural Increase: 27.3K International Migration: 13.6K Domestic Migration: -1.8K United States: 4. Minnesota: Source: U.S. Department of Labor, U.S. Department of Commerce and Wells Fargo Securities Demographics Challenge Workforce Supply unemployment rate has drifted up slightly over the past year, although it remains quite low relative to the nation. The most recent MN DEED job openings survey for the fourth quarter of 16 reported that job vacancies rose 1.3 percent from 15, to 97,. The Twin Cities have.9 unemployed persons per opening; the ratio was 1.4 outside of the Twin Cities. Some skills mismatch may be at play. jobless rates by educational attainment, which the BLS provides in an annual profile of employment and unemployment, shows that unemployment for workers with some college or a bachelor s degree and higher was essentially unchanged in 16, while the unemployment increased for those without a college education. This contrasts with the nation where the unemployment rate for those without a college education declined last year. Job opportunities have skewed toward the higher-skilled sectors, limiting the degree to which the jobless rate can decline without retraining of the remaining available worker pool. Demographics place a relatively low ceiling on potential growth rate. relatively older population limits population growth from natural increase as the number of deaths is rising faster than the number of births. Slower population growth limits labor force growth and makes it harder for employers to find the workers they need. Attracting new residents from other states is also an area where Minnesota comes up short, as more Minnesotans move away than move to it from other states. Domestic out-migration did lessen in 16, although it remained negative. Domestic out-migration has been offset by international in-migration for the past 15 years, highlighting the vital role immigration plays in increasing potential growth Demographics place a relatively low ceiling on potential growth rate. Figure 7 Figure 8 Unemployment Rates by Cohort: Minnesota Percent of Civlian Labor Force, Annual Total Ages 16 Yrs & over Ages Ages 65 & older 1,6 1, 1, Minnesota Renewable Energy Net Generation Renewable Sources excl. Hydroelectric, Thousand Megawatthours Net generation from renewables 12-month moving average 1,6 1, 1, Black Hispanic origin White Less than a high school diploma High school graduates; no college 15 Some college or associate degree 16 Bachelor's degree & higher Nation 5% 1 15% 2 1, , 8 6 Source: U.S. Department of Labor, U.S. Energy Information Administration and Wells Fargo Securities 3

4 Minnesota Economic Outlook: May 17 May 24, 17 Clean energy powers significant private sector investment in cleantech innovation. Renewables Power More Growth in Minnesota Minnesota is among the top states for renewable energy capacity, ranking sixth nationally and third regionally in 17, when hydroelectric is excluded. Most of renewable energy comes from wind, but the state has seen notable growth in solar capacity in the past year. Minnesota has made a concerted effort to push renewables to 25 percent of energy use by 25, a goal it is already quite close to hitting. Minnesota relied on renewable sources for 22 percent of its electricity generation in 15, up from 14 percent just five years earlier. Coal s share of power generation fell from 52 percent to 43 percent over the same period. Natural gas has taken on a larger role. Minnesota retired 396 MW hours of coal-fired plant capacity and added four times that amount in renewable energy over the past five years. Xcel energy is the largest utility in Minnesota and has been a significant driver of clean energy initiatives for the state, recently receiving approval for its plan to reach percent renewables by 3 and to closing 1, MW of coal capacity in coming years. Minnesota also leads in energy efficiency standards, and boasts some of the nation s most active corporate players in their respective industries for corporate procurement of clean energy and energy efficiency. Clean energy also powers significant private sector investment in cleantech innovation. A recent Brookings analysis of clean energy innovation found Minneapolis ranks among the top ten metro areas in terms of absolute cleantech patents developed from Minneapolis specialized in advanced green materials and energy storage, according to the analysis. The top cleantech patent holders were 3M, Seagate Technology and Honeywell. The recently released 17 U.S. Cleantech Leadership Index ranked Minnesota 9 th among states, a notable jump from number 15 the prior year. success on this front is largely a function of state policy, corporate investment and successful leveraging of higher institutions and research capability. Figure 9 Figure CoreLogic HPI: MN vs. U.S. Year-over-Year Percent Change Minnesota Housing Permits Thousands of Permits, Seasonally Adjusted Annual Rate Single-Family: 15,1 Single-Family, 12-MMA: 14,19 Multifamily, 12-MMA: 11,728 Single-Family Average (1998-3): 26, United States: 6.3% Minnesota: Competition is fierce for a reasonably priced home in the Minneapolis region. Source: CoreLogic, U.S. Department of Commerce and Wells Fargo Securities Housing Market Ramps Up Home sales and home construction are beginning to build momentum in Minnesota, even though house price growth continues to lag the nation. Total housing permits rose 1.9 percent in 16, driven by a notable increase in apartment construction. Multifamily building ramped up further in the first few months of 17 as well. Single-family building continues to lag, however, even though lean inventories of homes available for sale have increasingly plagued would-be homebuyers in metro areas. Persistently low unemployment and job growth at the higher-end of the pay scale have strengthened demand for housing, particularly in the thriving Twin Cities region. Years of slow single-family homebuilding have limited available inventory, however, making the area, like many others in the nation, a sellers market. Competition is fierce for a reasonably priced home in the Minneapolis region where the average home sold in April was on the market less than two months. A recent analysis by Zillow Research noted that Minneapolis posted the largest drop in for-sale housing inventory over the past year. Inventory is most limited in the bottom and middle price tier, according to Zillow data

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