State economist: Federal action buoyed state finances

Minnesota's economic outlook has improved since the state's last budget forecast in November, but state officials continue to caution that the recovery will be slow-going, and various events could throw it off course.

The extension of federal unemployment benefits and a number of federal tax policies that will encourage consumer and business spending helped brighten the forecast, said state economist Tom Stinson.

"That stealth stimulus package provided us with some welcome fiscal insurance looking off into 2011. Most of it is one year in nature, but it produces a large change in the expected growth rate for the economy in 2011," Stinson said.

The state of Minnesota uses the economic projections of forecasting firm IHS Global Insights, which anticipates the US economy will grow 3.2 percent this year. That forecast could be overly pessimistic, though, Stinson noted, especially if there's a ramp-up in jobs.

He says the conditions are ripe for job growth. Corporate profits are robust, such that companies can stop worrying about whether they can afford workers.

And, Stinson said, companies can squeeze more out of their existing workforces only for so long without hiring. Eventually they have to bring on workers to keep productivity up.

"So everything's there for it to occur, the question is: Who rings the bell? What rings the bell to start the hiring process?" Stinson said.

Still, state officials estimate that Minnesota's job market will improve at a sluggish pace. The state won't regain all the jobs lost in the recession until mid 2013.

And in the shorter term, they project that the state unemployment rate will hover around 7 percent most of this year, where it is currently.

Stinson noted that the state's economic picture could change after the Department of Employment and Economic Development releases some key job data later this week.

Over at DEED, state labor market analyst Steve Hine is striking a slightly more optimistic tone about the unemployment rate.

"Some of these unemployment figures could show a brighter picture than many people are predicting," Hine said.

Hine says the unemployment rate has experienced some large declines recently. That's due in part to workers giving up on finding a job. When that happens, they're no longer considered unemployed.

"Demographic trends are if anything going to exacerbate that downward trend in participation," said Hine.

While that may help bring down the jobless rate, it's not good for overall prosperity in the state to have fewer people willing and wanting to work.

Hine says the employment picture could worsen if the state enacts major cuts to deal with the budget deficit. He says demand for goods and services leads to job growth. The government and government workers count among the buyers of those goods and services.

State economist Stinson agrees, to an extent. When asked to compare the economic impact of $3 billion to $5 billion in tax increases versus $5 billion worth of spending reductions, Stinson said both would have a harmful effect, but the spending cuts would hurt slightly more.

"The difference is if you increase taxes, part of that increase comes out of increased savings, so you don't see a full drop in consumption," he said. "Whereas if you cut government spending by an equal amount, it's assumed that most of that cuts into consumption."

Skyrocketing oil prices due to unrest in the Middle East and Northern Africa could also crimp recovery, Stinson said. If gas prices remain under $4.50 a gallon, the damage won't be too severe, he said.

Those higher costs will just eat up some of the cushion provided by the tax cuts passed last year.

If, however, prices shoot markedly higher, Stinson said the risk of another recession emerges.