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By Andrew Haeg
December 15, 2000
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The Minneapolis Federal Reserve office says the state's economy should continue to grow, but not as fast as it did in the last year. The Fed's Forecast for 2001 predicts the economy will create more jobs and higher income levels, but says overall growth will fall well short of previous years. But others say the Fed's predictions are too optimistic, and consumers and investors should be prepared for a downturn and maybe a recession.
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THE PAST SEVERAL WEEKS have produced a stream of bad economic news. Corporations warned of lower profits, technology companies laid off workers, energy prices jumped, and commodity prices remained near record lows.
Yet, the Fed doesn't see this as the beginning of a slide into recession.
"We don't see the economy going in the tank, we see slowing of the growth - although there are concerns," says Fed regional economist Toby Madden, who co-authored the report. It combines statistical forecasts with a survey of some 150 business leaders throughout the region to produce an outlook for the future of the state and the region.
The Fed's statistical forecast is moderately optimistic, predicting non-farm employment will grow by 2.4 percent, tightening labor markets even further. Highly-sought-after workers will continue to demand higher wages, but the those workers will be more productive as they learn how to use new technologies.
Madden says statistical forecasts aren't so good at predicting turning points, or downturns, as are business leaders. Those the fed surveyed were slightly less sanguine. They expect business spending to continue expanding, but expect consumers will cut back on spending.
"Over the last 20 years, we've had continued growth in a strong and resilient economy that's faced a lot of shocks: stock market crash in 1987, the Asian crisis in 1998, uncertainty of who the president will be," says Madden. "Even with all these negative effects, consumers continue to spend, businesses continue to invest and make money, and the economy continues to grow."
Wells Fargo Chief Economist Dr. Sung Won Sohn says the government's projections may be too optimistic.
"Government officials aren't able to say that things are going to get worse or we're looking at an economic recession because that would become a self-fulfilling prophecy," Sohn said.
According to Dr. Sohn's estimates, there's a 40 percent probability of a recession in 2001. He doesn't disagree with the Fed's overall predictions, but thinks a shock - a dramatic spike in energy prices, or a financial crisis - could send the economy spiralling downward.
"Economic cycles are alive and well. We will experience one of those I'm sure in the next year or so. The questions is whether we'll have a soft landing or a hard landing," says Sohn.
Real estate investors are keenly watching economic forecasts to see whether or not to keep building. The Fed predicts housing starts will fall in Minnesota.
As for commercial and industrial real estate, Colliers Towle Real Estate predicts a modest expansion of roughly two percent, or about 6 million square feet.
Colliers Towle Vice President Ray Reese says real estate investors should be prepared for a market downturn.
"What'll happen at the end of the day is that the best-located and the most-functional real estate is always going to perform well. So people need to be cautious, they need to keep an eye toward quality and location," says Reese.
As for agriculture, the Fed predicts prices for livestock will rise, but that commodities prices will continue to fall. Despite that, the fed currently sees farmers bidding up land prices and paying off their loans. That's mostly due to increased government payments. The Fed is less than sure that the government next year will continue to support the state's beleaguered agricultural sector.
Andrew Haeg covers business news for Minnesota Public Radio. Reach him via e-mail at ahaeg@mpr.org.
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