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What drives Minnesota’s business cycle?

Minnesota’s economy shrank by 0.3% from the last quarter of 2016 to the first quarter of 2017, according to data released today by the Bureau of Economic Analysis. Minnesota was one of only seven states where output fell in that period. Nationally, the economy grew by 1.2%.

What drives Minnesota’s business cycle?

Isn’t that because of the harsh winter? Quite likely. Adverse weather can depress economic growth, even in advanced economies. Going back to 2005/2006, the average change in Minnesota’s GDP from Q4 to Q1 is a fall of 1.2%. In just four of the twelve periods has our state’s economy seen growth.

What about other periods?

The table below covers the period since Q1 2005. It shows i) the average change in Minnesota’s GDP for each period, ii) the average change in US GDP for each period, and iii) the average difference with the US figure.

Q4-Q1 is also the period of lowest growth for the US generally. Again, this is probably due largely to weather.

On average, our economy grows slowly from Q3-Q4 (it shrank in only four of twelve periods). Again, this is probably in large part down to the weather. Between 1981 and 2010, snowfall in the Twin Cities averaged 30.1 inches in Q1 and 21.4 inches in Q4. By contrast, it was just 2.5 inches in Q2 and practically zero in Q3. This also, no doubt, goes some way towards explaining the state’s better performance in Q1-Q2 (the economy shrank on only three of twelve periods) and Q2-Q3 (it shrank in only two of twelve periods).

Exogenous causes drive peaks and troughs

But weather isn’t everything. Minnesota’s biggest economic slump in this period was in Q3-Q4 2008 and Q4-Q1 2009. True, these were both in the weaker quarters, but the magnitude of the falls – 11.2% and 10.9% – was surely driven the the economic meltdown following the bursting of the sub-prime bubble. The best period since 2005 also came with winter approaching, Q3-Q4 2010, with growth of 13%. I would guess that this was, in large part, the result of a general recovery from the depths of the previous slump, shown in the graph below, but would love to hear from anyone with any better ideas.

Minnesota’s quarter on quarter GDP growth rate

Source: Bureau of Economic Analysis

The weather is going nowhere anytime soon. But those things, such as the sub-prime bubble, which drive the really big swings, we should look out for.

John Phelan is an economist at Center of the American Experiment.

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