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Mining, ag economic bright spots

ST. PAUL - Rural Minnesota provides the state with its only good news in an otherwise dismal economy.

High grain prices, especially, provide farmers more money to spend than they have seen in years. And Iron Range mines are working as fast as they can to meet demand for steel.

"They are the bright spots that we have," State Economist Tom Stinson said Thursday after an otherwise-bleak economic forecast.

On the other hand, Stinson and Toby Madden, a regional economist with the Federal Reserve Bank of Minneapolis, said another rural segment is among the worst - the lumber and forest products industry.

"On the ag front, things are going pretty strong," Madden said.

A recent survey of agricultural lenders indicated farm customers in the Upper Midwest are doing well.

"They saw tremendous increases in profits, capital expenditures and household spending," Madden said.

Stinson credited grain markets for much of the good news.

"When grain prices are high, they spend money in town," he said of farmers.

Big-dollar farm equipment, some of which costs well over $100,000, is selling well, Stinson said.

Good crop harvests last year and high prices have helped the agricultural sector, Madden said. While production costs have gone up for farmers and ranchers, their profits also have increased.

Predictions show production from rural sectors such as agriculture should increase in 2008. That is good for farmers, Madden said, but consumers probably will continue to pay higher prices for goods.

He warned that the state's rural economy could be hurt by major crop failures or commodity production elsewhere.

"Things could change rapidly, he said.

Worldwide construction and production continues to increase, boosting demand for iron ore and steel from northeast Minnesota's Iron Range.

"They've been digging it out as fast as they can," Madden said of taconite, used to make steel.

The future could be even brighter, Stinson said, if plans to open northeastern Minnesota copper and nickel mines materialize.

However, while the Iron Range is looking good, nearby foresters are not.

"That's not just a slump," Stinson said. "That's a disaster."

Lumber and wood products businesses are hurting in a large part because the nation's housing market has all but collapsed.

"It is going to be 12 months or more" before there is any change in that, Stinson said. The housing situation is driven by extremely tight loan markets, which are affecting all types of loans.

"No one will loan anyone money at this point," Stinson said.

As an example of the housing market, Stinson said, in the last quarter of 2005 2,400 permits for single-family homes were issued across Minnesota. In the same period of 2006, that had been cut in half. In the last three months of last year, just 800 permits were issued.

The state economist added that the situation is the same or worse in other states, and Minnesota's lumber industry serves a national market.

Combined, the state's forestry, agriculture, fisheries and mining industries only make up 2 percent of Minnesota's $250 billion annual gross domestic product, Madden said, although they also contribute to other sectors such as manufacturing.

Between half and two-thirds of the state's overall economic output is in the Twin Cities. There, problems with the housing industry and higher oil prices continue to affect the economy, Madden said.

Overall, Minnesota continues to post above-average income and production numbers.

However, nearby states including North Dakota and Montana are experiencing rates of economic growth higher than Minnesota.

Much of the reason for the western states doing better, Stinson said, is because they are producing increasing amounts of oil and coal, and energy fuels are in high demand.

Stinson said the state is in a recession that should last through the first half of the year. The federal economic stimulus package will help improve the economy in the last half of the year, he said, but early 2009 probably will experience an economic slowdown once the federal rebate checks have been spent.

The economist said government and Americans need to be cautious about the economy.

"The outlook is quite uncertain," Stinson said.

Don Davis
Don Davis has been the Forum Communications Minnesota Capitol Bureau chief since 2001, covering state government and politics for two dozen newspapers in the state. Don also blogs at Capital Chatter on Areavoices.