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The Economics of 'Public Panic'
By Mark Zdechlik
January 16, 2001
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Throughout the country people are losing their jobs as companies struggle with decreased sales. Rising energy costs, a sagging stock market, and declining consumer confidence threaten to derail the nation's longest economic expansion. The incoming Bush administration is using the threat of recession to bolster the argument for massive tax cuts. The Federal Reserve Bank has begun cutting interest rates.

Local economists say as the nation goes, so too does Minnesota. Layoffs are hitting this region, people who assist dislocated workers say they're busier now than they've been in nearly a decade.

One sign of economic trouble can be found in the auto industry and, locally, at the Ford Plant in St. Paul. The plant's shutting down for a week as part of a North America-wide production cut directly resulting from a decline in sales, according to Ford.
BUSINESS PEOPLE DON'T EVEN LIKE TO MENTION the term slowdown in reference to the economy. The fear is that negative talk worries people and worried people are less likely to spend money and less spending leads to more weakness.

At a machine-tool showroom in the Twin Cities, the owner doesn't want his name or the name of his business on the radio. But he says he's cut nearly a quarter of his work force and put off buying expensive software that would make his business more efficient. He's also asked the law and accounting firms that do contract work for him to reduce their billing, and unlike past holidays, this year there were no gifts for his best customers. The equation for this business and many others like it is simple: Sales are down, so costs must be scaled back.

"With respect to what's going to happen in 2001, the economy is going to be slower," says State Economist Tom Stinson. "I think what we will see is less overtime. I think we'll see fewer jobs going unfilled because some of those jobs that are unfilled won't be necessary and we'll see a little slower increase in wages."

Throughout Minnesota, news of layoffs has been increasingly frequent. The state's largest employers - Northwest Airlines, 3M, Medtronic - have not trimmed their ranks. Others have. From Fingerhut to ADC Telecommunications, thousands of jobs have been eliminated.

According to the Minnesota Department of Economic Security, initial unemployment insurance claims - a good measure of layoff activity - were higher in the just-ended fourth quarter of last year than they've been since the early 1990s, the last time the economy was in recession.

Initial unemployment claims are a key indicator of layoffs. In the 4th quarter of 2000, the number was higher in Minnesota than it's been in 1991, when the economy was in recession.
Source: Minnesota Department of Economic Security See a chart showing the extent of layoffs in Minnesota.
"Our workload has consistently gone up in terms of numbers of events as well as the numbers of workers being affected," says Minnesota AFL-CIO Dislocated Worker Liason Mike Goldman, who works with Department of Trade and Economic Development's rapid response team, traveling the state, assisting workers who've lost their jobs.

Goldman has been spending a lot of time lately in northeastern Minnesota where 1,400 LTV steelworkers on the Iron Range are losing their jobs.

"I've been associated with the dislocated worker program for more than 10 years and I have never seen the level of activity that we're experiencing now before in Minnesota," Goldman says.

Goldman says the good news about this slowdown in growth, is that although rising, the state unemployment rate remains relatively low, making it easier than in the past to find new work.

It did jump to more than three percent in November, marking only the second time in three years that it's rising above three percent in Minnesota.

Another sign of economic trouble can be found in the auto industry and locally at the Ford Plant in St. Paul.

The plant's shutting down for a week as part of a North America-wide production cut directly resulting from a decline in sales, according to Ford.

United Auto Workers Local 879 President Rob McKensie, a more than 20-year auto industry veteran, says memories of sales-related shutdowns had been fading.

"The last sales-related layoff I can remember is 1991; probably the majority of our members have never seen a volume downturn that's resulted in layoffs," McKensie says.

McKensie says the change in what had been the status quo of gang-buster growth has a lot of his colleagues worried about what's next.

"There's a lot of concern about the future; a lot of rumors about which plants are going to be closing," he says.

During the week-long shutdown, Ford employees will receive roughly 70 percent of normal wages, depending on seniority. Ford says if sales continue to fall there will be more shutdowns.

In the past, Minnesota has generally fared well compared to other parts of the country in times of softening economies largely because of the state's diverse business base.

"We could talk ourselves into a recession."

- Economist Tom Stinson
Although news of the weakening economy has taken a center stage, often absent from the reporting is the fact that economists generally agree we're not going into a recession. Instead what's happening is growth is slowing after years of robust expansion. The latest authoritative national survey has economists predicting just over over 2.5 percent growth in 2001 over 2000.

"The last few years have been the best economy that anyone can remember. Not only the best in a decade but the best of our generation and you just can't expect that will continue," says Minnesota State Economist Tom Stinson. He says the biggest threat to continued growth is public panic.

"We could talk ourselves into a recession," Stinson says. "If everybody believes that there's going to be a recession and they cut back on spending and they decide that they want to be a little more cautious, what will happen is that inventories will build up, there will be less need for additional work, and additional production going on, and so then there will be further reduction in hours, and we start on a vicious spiral."

At the machine-tool sales business, there's optimism despite the layoffs and other cutbacks. They're even working to hire another salesperson; banking on better business later this year, assuming continued interest-rate reductions and a major federal tax cut.

Mark Zdechlik covers business issues for Minnesota Public Radio. Reach him via e-mail at