The longstanding St. Benedict/St. Johns Economics Professor: Minnesota’s economy is facing many challenges right now

The Russian invasion of Ukraine has further complicated the economy in the United States, including Minnesota. Inflation is likely to be higher and income growth lower than economists originally forecast for 2022, said Louis Johnston, a senior professor of economics at the College of St. Benedict and St. John’s University. The pandemic has already left many uncertainties among Minnesotans, he said in a wide-ranging interview edited for clarity and length.

Q: How has your outlook for Minnesota’s economy changed since Russia attacked Ukraine and gas prices have skyrocketed on top of inflation, which was already up more than 7 percent?

A: The national and international economy was already dealing with the problems caused by the pandemic and its consequences. Now the same supply chains and trade links that have been ailing for the last two years are being strained by the economic sanctions and shocks triggered by Russia’s invasion of Ukraine.

As for Russia and inflation, people use the 1970s as a case study on how to deal with it. Two better periods are from the end of World War II to the Korean War, or from the end of World War I to the Great Depression. You are more relevant.

With both of them you had a big globalization wave. At least over the North Atlantic. Then World War I destroyed it. Then we spent 30 years putting it back together and couldn’t. And then there was the Second World War. We tried again and it took 35 or 40 years to go global. I believe the second great wave of globalization ended in March 2020. It has helped us from the farm to the factory to the lab. Trading, investment, research and development and medical device companies that operated in Ireland, Germany and China. This allowed Minnesota to thrive.

Q: What should concern working to middle-class families in Minnesota?

A: Two factors concern me. I think wages will rise due to strong labor demand, but I’m not sure wages will rise as fast as inflation. This means that households are finding their budgets stretched as they pay more for certain items and have to offset this with savings on other purchases.

There is also childcare, pre-kindergarten and after-school care for families. The pandemic has shown how crucial these factors are, especially for our labor markets and our communities. Labor shortages are particularly acute in this area and I’m not sure the levels of services available before the pandemic will return – let alone the levels that were already too low to begin with.

Those looking for work could find it harder to find work as the Federal Reserve hikes interest rates and slows economic growth.

Q: How important are gas prices to the average Minnesota family?

A: Transportation costs are 15 to 20 percent of what a typical family spends. Because rent or mortgage payments are locked in, they need to look at other areas of the household budget where they can reduce spending. Dining budgets, particularly food not prepared at home, are a primary goal, as is entertainment outside the home. General Mills and Hormel would love that – so it goes both ways. Clothing purchases are also a typical choice for discounted spending.

Q: Where would you like to see this economy in six months?

A: Optimistic inflation is no higher than 2021, around 4.5 percent on an annualized basis. unemployment, 3.5 to 4 percent nationally; 3 to 3.5 percent in Minnesota. Income growth, adjusted for inflation, at 3 percent, meaning wages are growing faster than inflation. My guess is that inflation will be higher, unemployment will be higher and income growth will be lower.

Given the war in Ukraine and how it has boosted energy and commodity prices, I think inflation could be 5 or 6 percent this year. I think that if unemployment doesn’t go up, it will stop going down. I may be cynical about income growth. Businesses are maintaining their profit margins and trying to keep wages from rising faster than inflation.

Q: How will remote work affect the economy?

A: How will the increase in remote work affect the Minnesota metropolitan and city economy over the long term? Many service jobs in Minneapolis-St. Paul, Duluth, Rochester, St. Cloud depend on people coming to work. If people don’t spend as much time in the office as they used to, what will happen to the food service, dry cleaning, and other typical inner-city small businesses? I do not know.