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Is Minnesota less vulnerable to a recession?

This weekend, the Star Tribune carried an article titled ‘Minnesota less vulnerable to recession than some states‘. It said

Generally speaking, Minnesota is poised to weather recessions better than some states, experts say, because its economy isn’t overly reliant on any one industry. In fact, Minnesota’s economy closely mirrors the U.S. economy as a whole, with output spread throughout sectors, though there’s some concentration in industries like finance, insurance, real estate rental and leasing, and business and professional services.

“When you have a diverse economic base like we have, it gives you some resilience during downturns,” said Laura Kalambokidis, Minnesota state economist. “If any single industry is contracting, another industry might be able to pick up those workers.

This has long been noted. In 1982, economists Robert B. Litterman and Richard M. Todd wrote that “for nearly the last 25 years, most of Minnesota’s economy has closely resembled the nation’s in composition and in sensitivity to recessions and expansions.” This weekend’s article went on to say

That means Minnesota’s less susceptible to busts, but generally also less apt to see economic booms: the state’s economy often grows at a relatively slow clip.

The recession of 2007-2009

This suggests that we should see a sort of ‘smoothing’ effect in state GDP numbers: our booms might not be as boomy, but neither will our busts be as busty. How does this claim stack up against the data?

The National Bureau of Economic Research dates recessions in the United States. It dates the last down turn as running from December 2007 to June 2009. As Figure 1 shows, according to data from the Bureau of Economic Analysis, from the fourth quarter of 2007 to the second quarter of 2009, real GDP fell further in Minnesota than it did for the United States as whole. Nationally, GDP fell by 13% in real terms while, in Minnesota, it fell by 17%. Contrary to the smoothing argument, our bust here was bustier than the national average.

Figure 1: GDP change in Minnesota and the United States, Q4:2007=100

Source: Bureau of Economic Analysis

Have our booms been boomier?

Figure 2 suggests not. Since the second quarter of 2009, the US economy has grown by 143.6% in real terms. In Minnesota, that growth rate has been 128.0%. Our state did comparatively well until the middle of 2014, but since then our quarterly growth rate of GDP has been lower than that of the US generally in 61.1% of quarters. In the period from the second quarter of 2009 to the second quarter of 2014, our quarterly growth rate of GDP was been lower than that of the US generally in 47.6% of quarters. Here, the ‘smoothing’ hypothesis does hold: our boom was less boomier.

Figure 2: GDP change in Minnesota and the United States, Q4:2007=100

Source: Bureau of Economic Analysis

In short, the ‘smoothing’ hypothesis doesn’t seem to hold, not over the last cycle at any rate. Minnesota’s diverse economy is a great source of strength for the state. But, as the last boom and boost shows, we cannot afford to be complacent.

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

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