Minnesota s Economics & Demographics Looking To 2030 & Beyond Tom Stinson, State Economist Tom Gillaspy, State Demographer July 2008
Minnesota Has Been Very Successful (Especially For A Cold Weather State at the End of the Road) Our economic growth rate has exceeded the national average Our population growth rate leads the frost belt We rank with the leaders on many social and economic indicators Education has been a key contributor to the state s success
Minnesota s Economy Has Changed Since the 1960s % of GSP Res Based Mfg Adj Const 2001 1963 TCU Trade Services Financial Govt 0% 5% 10% 15% 20% 25%
Minnesota s Per Capita Personal Income Exceeds the U.S. Average by 6 Percent Minnesota ranked 14 th in personal income per capita in 2006- - - In 1960 Minnesota ranked 25 th Personal income per capita grew at an average annual rate of 6.8 percent between 1960 and 2005 Since 1960 per capita personal income has grown faster in Minnesota than in most states outside the Southeast
Minnesota s GDP Growth Rate Exceeded the US Average, 1967-2007 Annual % Change 8.00 6.84 6.98 US MN 6.00 5.72 6.04 4.00 2.00 0.00 Total Per Capita
1997=100 Minnesota Private Industry Has Generally Matched National Growth Index Of Private Industry GDP 180 160 140 120 100 80 60 40 20 0 BEA. Before 1997 based on SIC. Since 1997 NAICS 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 US Mn
BEA 2007 Minnesota Per Capita GDP Is 8.8% Above The National Average
Payroll Employment Growth 1972-2007 120% 100% 80% 60% 40% 20% 0% MN US
Payroll Employment in Minnesota Has Grown Faster than the US Average Index 1972 = 100 250 200 150 100 50 US MN 0 1972 1976 1980 1984 1988 1992 1996 2000 2004
Manufacturing Employment 1972-2000 1972=100 175 150 125 100 75 50 25 0 Minnesota United States
Minnesota s Unemployment Rate Has Been Well Below the US Average Unemployment Rate 12.5 10.0 7.5 5.0 2.5 US MN 0.0 1976 1980 1984 1988 1992 1996 2000 2004
Minnesota Per Capita Income Has Grown Faster Than The Nation s 110% 105% Per Capita Income Per Capita Disposable Income 100% 95% 90% 85% 1930 1940 1950 1960 1970 1980 1990 2000 2007p
Minnesota A Leader Among Northeast and North Central States In Population Growth Since 1990, Slightly Slower Than The National Average BEA from Census. US=1.1%, Mn 1.0% per year
Minnesota Ranks Highly in Many Social/Economic Indicators 2 nd percent of 16-64 employed (76.9%) 2 nd cost of living adjusted per capita income (OK DOC) 8th lowest poverty rate 1 st percent with health insurance 2004-06 ave 9 th median family income in 2006 2 nd Kids Count 2007 4 th most livable state (Morgan Quinto Press) 4 th lowest rate of disability among people age 16-64 1 st with at least high school degree (90.7%) 12 th with at least a bachelor s degree 1 st home ownership 2 nd United Health Foundation ranking of state healthiness 2007 Updated July 2008
Past Performance Does Not Ensure Future Results
From 2004 to 2007 Minnesota Underperformed the US Averages Personal income growth US 6.2% MN 4.4% Per capita personal income growth US 16.6% MN 13.5% GDP growth US 8.4% MN 4.8% GDP per capita growth US 5.4% MN 2.6%
Minnesota Payroll Employment Has Struggled Since Early 2006 Percent Change From February 2001 5 4 3 2 1 0-1 -2-3 Jan 01 July Jan 02 July Jan 03 July Jan 04 July Jan 05 July Jan 06 US July Jan 07 MN July Jan 08
Minnesota s Unemployment Rate Now Is Similar to the US Average Unemployment Rate 8 6 4 2 MN US 0 2004 2005 2006 2007 2008
US Manufacturing Employment Fell Faster Than MN, 2000-2007 Index: 2000=100 125 100 75 50 25 US MN 0 2000 2001 2002 2003 2004 2005 2006 2007
Nevada Wyoming Arizona Idaho Utah Florida Montana New Mexico Hawaii Alaska Texas North Dakota Washington South Dakota Oregon Virginia D.C. Maryland North Carolina Oklahoma Nebraska Colorado Georgia South Carolina California United States New Hampshire Delaware Arkansas Alabama Rhode Island Minnesota Vermont West Virginia Iowa Tennessee Kansas Maine Kentucky New Jersey Pennsylvania Missouri Wisconsin New York Connecticut Louisiana Mississippi Indiana Illinois Massachusetts Ohio Minnesota Ranked 30 th in Employment Growth, 2000-2007 30% 25% 20% 15% 10% 5% 0% -5% -10%
North Dakota D.C. New York Louisiana Montana Vermont Hawaii Oregon Maryland South Dakota Iowa Alabama Wyoming Nebraska Rhode Island Florida Oklahoma Virginia Kansas California Arkansas New Mexico Idaho Pennsylvania Connecticut Minnesota New Jersey Nevada Tennessee United States Kentucky Arizona Massachusetts North Carolina Texas Utah Maine West Virginia Mississippi Washington Delaware Wisconsin New Hampshire Illinois Alaska Ohio Missouri South Carolina Colorado Indiana Georgia Michigan 30% Minnesota Ranked 24 th in Real Per Capita GDP Growth, 2000-2007 25% 20% 15% 10% 5% 0% -5%
Real Per Capita GDP Growth Compared to Neighboring States 2000-2007 30% 25% 20% 15% 10% 5% 0% North Dakota South Dakota Iowa Minnesota United States Wisconsin
20% Real Per Capita GDP Growth Compared to Midwestern States 2000-2007 15% 10% 5% 0% -5%
Real Per Capita GDP Compared to High Tech States 2000-2007 20% 15% 10% 5% 0%
Difference in growth rate 12 8 Difference in Per Capita GDP Growth (MN - US), 2000-07 9.0 8.4 8.3 4 0 0.19 0.5-4 -8-12 -4.2-4.7-4.7-6.0-6.1-6.3-6.5-8.4-11.2-16
Diference in Growth Rate 125 100 75 Difference in Per Capita Mfg GDP 104.4 Growth (MN - US), 2000-07 50 25 0-25 34.1 32.6 23.6 14.4 10.1 9.1 2.7 2.4-3.1-15.8-50 -75-100 -90.0
But What About Tomorrow?
Economic Fact of Life #1 First Principle of Economic Growth Standard of Living depends on output per resident Output = Output per Hour * Hours Worked
Four Mega-Forces Will Shape Minnesota s Economy Globalization Technology Energy prices Demography
The Three Big Demographic Trends Growth and suburbanization Increased diversity Aging
By 2020 Minnesota will add about ¾ Million People & 1/3 Million Households 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0 1970 1980 1990 2000 2007 2010 2020 2030 State Demographer projection revised 2007
Suburban & Exurban Growth Coupled With Rural Declines Central Cities Have Stabilized Projected population change 2005 to 2015 State: 518,000-8,779 to -1 0 to 999 1,000 to 4,999 5,000 to 65,348
Upper Midwest Becoming More Diverse But Still Less Than The Nation United States Wisconsin South Dakota North Dakota Minnesota Hennepin Cnty Iowa 14.3% 8.7% 13.4% 8.8% 9.6% 5.8% 14.1% 6.3% 11.4% 9.0% 4.1% 24.4% 23.9% 33.6% 2006 1990 0% 10% 20% 30% 40% Percent Population of Color Note: Population except white alone, not Hispanic, 2006 Census Bureau estimate. Hennepin in 2005
In 2006, Minnesota s Foreign Born Workforce Was 240,000 or 8% Of The Total Workforce Advanced Degree Bachelor's Degree Some College High School Less Than High School 2006 ACS 0 10000 20000 30000 40000 50000 60000
From 2010 to 2020, Minnesota Will See Large Increases Age 50s and 60s 85+ 80-84 75-79 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4 -42,310-63,650-2,680-30,680-9,980 Source: Minnesota State Demographic Center Numbers are rounded 16,500 8,440 41,400 54,240 61,920 47,950 5,050 47,330 36,190 20,150 91,370 112,540 102,960
Worked Within Past 5 years The Number of Workers Turning Age 62 Will Jump 30 Percent in 2008 60,000 50,000 40,000 30,000 20,000 10,000 0 7/05 to 7/06 7/06 to 7/07 7/07 to 7/08 7/08 to 7/09 7/09 to 7/10 7/10 to 7/11 7/11 to 7/12 2005 ACS Year Turning Age 62
Childless Couples And 1-person Households Projected To Grow Other Households 24,000 Living Alone, 55+ 77,800 Living Alone Under 55 6,400 Married No Kids, 55+ 127,700 Married No Kids, under 55-7,200 Single Parents 29,000 Married with Kids -24,500 Projected change, 2005 to 2015 Minnesota State Demographic Center projections
Percent Change 18-24 Competition For The Future Workforce Will Increase 14% 13.0% 12% 10% 8% 6% 4% 2% 0% 6.8% 4.5% US Mn -2% -4% -6% -1.2% -1.6% -2.2% -3.5% -3.0% 2000-05 2005-10 2010-15 2015-20 Census Bureau US Proj, Mn State Demographer revised 2007
Ave Annual Change Labor Force Growth Is About To Slow Sharply 1.6% 1.52% 1.4% 1.2% 1.12% 1.0% 0.8% 0.75% 0.6% 0.4% 0.2% 0.43% 0.10% 0.13% 0.27% 0.0% 1990-2000 2005-10 2010-15 2015-20 2020-25 2025-30 2030-35
Migration Increases in Importance as Labor Force Growth Slows Net Labor Force Growth 500,000 400,000 Total Natural Part Rate Migration 300,000 200,000 100,000 0-100,000 2000-10 2010-20 2020-30 State Demographer projection revised 2007
The Three Most Important Factors For Future Economic Success 1. Productivity 2. Productivity 3.Productivity
Economic Fact of Life #2 Productivity depends on The stock of physical capital The stock of human capital Education Health status The stock of infrastructure Advancements in technology
Academic Research Is a Key Factor in State Economic Growth the lags between R&D and economic outcomes are quite long (at least years, and more likely decades) The state may do well for a while by drawing upon its existing stock of knowledge capital How the state of Minnesota will fare in the future will crucially depend on its recent and future investment in R&D *Long Gone Lake Wobegone, Pardey, Dehmer and Beddow, 2007
R&D Spending Slowed in the Early 90s We Are No Longer Above Average Rank 1972 Rank 2004 Total Academic R&D 19 26 Academic R&D per capita Academic R&D per dollar of GSP 20 40 20 43
2 Yr Ave Rate Education Is The Key To Productivity Minnesota High School Graduation Ratio 100% 90% 85% 89% 85% 80% 70% 60% 57% 60% 62% 50% 40% 30% 20% 10% 0% American Indian Asian Hispanic Black White Total 2004-05 through 2005-06 graduates. Based on 10 th grade enrollment three years earlier.
Managing State Finances Will Be Challenging
Minnesota s Population Will Change The Three Largest Cost Drivers In The State Budget 1,400,000 1,200,000 1,000,000 800,000 600,000 18-24 65+ 5-17 400,000 200,000 0 1950 1960 1970 1980 1990 2000 2010 2020 2030 Census counts & State Demographer projection, revised 2007
Health Care Spending Jumps After 55 U.S. Health Care Spending By Age, 2004 $12,000 $10,000 $9,017 $9,914 $8,000 $6,000 $6,694 $4,000 $2,000 $1,855 $1,074 $1,445 $2,165 $2,747 $3,496 $3,571 $0 <5 5-14 15-24 25-34 35-44 45-54 55-64 65-74 75+ Average Source: Agency for HealthCare Research and Quality, Medical Expenditure Panel Survey, data for per capita spending by age group in the Midwest. Excludes spending for long-term care institutions.
State Taxes Paid by a Married Couple Before and After Retirement Income Income Tax Sales Tax Total Change Pct Working $35,000 $1,236 $782 $2,018 $65,000 $3,387 $1,295 $4,682 Retired @ 70 % $25,000 $0 $559 $559 -$1,459-72% $45,000 $1,091 $896 $1,987 -$2,695-58%
State/Local Government s Share of Personal Income Has Declined Price of Government 20% 17.9% 17.4% 15% 15.9% 15.4% 16.3% 10% 1990 1992 1994 1996 1998 2000 2002 2004 2006 Calendar Year Mn Dept of Finance
Estimating the Volatility of a System of Taxes Markowitz s modern portfolio theory used as a guide: The expected growth rate in revenues is the weighted sum of the individual growth rates Portfolio volatility is the square root of the weighted sum of the variances and covariances of the individual components
Portfolio Theory Suggests Using a Tax System that Minimizes Volatility for a Given Growth Rate Given the trend growth rate, variance and covariance of each major tax, an Efficiency Frontier Line (EFL) can be estimated The EFL shows combinations of taxes that provide the lowest volatility for each growth rate Points below the frontier are suboptimal. The EFL is determined using quadratic programming to minimize state tax revenue volatility, σ 2 T, given growth rates g T
10% Estimated EFL for Minnesota's General Fund Tax Revenue Portfolio, FY 2005-2007 Portfolio Trend Growth Rate One-Year Post MVST Phase-Out 9% Efficiency Frontier Line 8% 7% 6% MN's Actual One-Year GF Tax Mix (Post MVST Phase-Out) 7.7% Trend Growth Rate & 3.26% Standard Deviation 5% 1.75% 2.25% 2.75% 3.25% 3.75% 4.25% 4.75% Portfolio Volatility
Actual vs. Efficient MN One-Year Tax-Mix Given the Current Trend Growth Rate Actual FY 2005-2007 Portfolio Efficient Tax Mix Portfolio Difference: (Efficient Less Actual) Trend Growth Rate 7.70% 7.70% 0.00% Volatility (Standard Deviation) Share of Total Tax Revenue 3.26% 3.09% -0.17% General Sales 31.2% 60.3% +29.2% Corporate Income 7.4% 13.1% +5.6% Individual Income 48.1% 9.2% -39.0% Other Revenues 13.3% 17.4% +4.2% Total 100.0% 100.0%
Summary Minnesota has been very successful We are in a period of rapid and critical change What we do today will shape our future for the next quarter century Productivity increases will be the key to further growth throughout Minnesota