Economic forecast in Minnesota's northwoods: Sunny with a few clouds

“Spotlight” is an occasional feature about Ninth District communities in which the Minneapolis Fed has held private meetings with businesses to gauge regional economic conditions. To maintain confidentiality, individuals and their businesses are not named.

Many people think of unemployment as a go-to gauge on economic health. Using that yardstick, unemployment rates in north-central Minnesota that are several percentage points higher than the state average would seem to suggest that this region’s economy is faltering in the midst of widespread growth across the state and country.

But ask the locals about economic conditions, and you’ll get a much different perspective. A banker in Grand Rapids said, “I’ve never seen it better. Loan demand is as full as I’ve seen in a decade.”

Broad economic measures do not always paint very detailed pictures of regional economies. So the Minneapolis Fed traveled to the northern Minnesota cities of Park Rapids, Bemidji, and Grand Rapids in June to get a clearer picture of the growth, opportunities, and challenges facing these regional economies.

The general economic outlook among contacts across the region was optimistic. It wasn’t universal; in part, because there are notable areas for improvement, including comparatively high unemployment rates. One also quickly learns that these regional centers have some similar economic traits, but also some unique, defining characteristics. All of the regional centers depend on tourism, thanks to the many lakes that dot the landscape. The general area is also home to Itasca State Park and the headwaters of the Mississippi River.

But each local economy depends on tourism to a differing degree. Park Rapids (pop. 3,934) is the junior municipality in terms of size and depends the most on tourism. The city is home to one of the state’s most iconic downtown districts, thanks to its throwback median parking, originally designed so that wagon teams of most any size could turn around. The draw of pristine lakes has also remade the local airport into the sixth busiest jet airport in the state. Tourism over the past few years has been exceptional, according to local sources. So good, in fact, that resort ownership is seeing some turnover, both because a younger set is interested in ownership and because aging owners see a good opportunity to move to the leisure side of the equation.

Grand Rapids (pop. 11,099) grew up as a company town on the shoulders of the Blandin Paper Company. But the past couple of decades have been spent dealing with the decline of the papermaking industry. At one point, the company was estimated to be responsible for roughly two-thirds of the local economy. Today it’s closer to 15 percent, the result of numerous production cutbacks and related layoffs, but also a local economy that has slowly diversified.

The town’s economic maturation might best be seen through Blandin’s most recent cutback in October of 2017, when it shut down a paper machine and laid off 150 workers. Prior shutdowns had “massive impact,” according to local sources, and the community was preparing for more of the same. “This time around, there was not so much as a speed bump” in the local economy, said one business contact, as workers were absorbed by other businesses. A local government contact added, “We were set to engage, and the siren never went off.”

With nearly 15,000 residents, Bemidji wouldn’t seem to be notably different from its regional peers. But the city punches above its population weight because it is the regional hub for retail and other services, along with health care. As the county seat, Bemidji offers considerable public sector jobs, especially after adding the local school district. It is also home to Bemidji State University, the region’s only four-year university. Along with a two-year college, higher education there represents an economic anchor that some believe makes Bemidji virtually recession proof; students are in town for nine months, “and when they leave, the tourists come in,” said one business contact.

Recent growth trends

Every regional center has a unique economy, built over time and, in some cases, at different trajectories. While contacts across this region were generally upbeat, each location has marked a different course on some fundamental economic measures.

Similar to the national trend, unemployment has declined significantly across the three northern counties since the Great Recession. But it remains notably higher than the state average, particularly in Hubbard and Itasca counties (Chart 1).

That’s not for lack of jobs. In fact, job vacancies have skyrocketed in the north-central and northeastern regions of the state over the past decade (Chart 2). Exact vacancy figures are not available for Beltrami, Hubbard, and Itasca counties, but local employers widely reported that they were hiring and having difficulty filling open positions.

Employment data show that Beltrami is having by far the most luck finding workers, with total employment rising at about twice the rate as the state average. But the chicken in this egg equation is the fact that total population and labor force growth in Beltrami have also risen significantly faster compared with Hubbard and Itasca counties or the statewide average. In other words, Beltrami has seen significantly higher job growth during the recovery—at least in part—because the region saw significantly more workers come into its labor market compared with elsewhere (Charts 3 and 4).

Bemidji is seeing growth rates that are more common in larger urban centers or smaller regional centers that are not so far north. That’s not lost on locals. “We’re a community that is seeing things happen,” said a contact.

Retail offerings have expanded considerably in recent years, servicing a broader regional population that is several times larger than the city itself, and extend to two tribal reservations—Red Lake and Leech Lake—partially located within Beltrami County. Both are about 40 minutes away by car, a drive tribal members (and others located in more isolated areas) make frequently for goods and services, helping to boost the Bemidji economy.

But employment growth in Bemidji is not all retail; since 2010, annual countywide employment in so-called goods jobs (construction, manufacturing, and natural resources) has grown by almost 11 percent. There are also numerous public and private initiatives—trade academies in K-12 schools and workforce development programs like the Idea Circle—to continue and even accelerate that growth.

In Grand Rapids, the mood of business and other contacts was robust. Trade tariffs on steel have been a big boost to the taconite mining industry and its ancillary businesses in northern Minnesota, with Itasca County representing the western edge of activity. Two major K-12 school projects are under way—the first in years—which, along with other projects, will help push up construction activity to levels it hasn’t seen in decades, locals said. A banker commented that businesses were doing so well they weren’t even borrowing, but expanding and running operations on retained earnings. Another mentioned that the forestry industry has been comparatively healthy. “When loggers are paying ahead, you know things are good.”

None of this would be unusual except that Itasca County’s economic metrics have not been particularly flattering. The region has an unemployment rate that is almost double the state’s average, and growth in population, labor force, and jobs has been largely stagnant. One possible reason for the slower growth trend might hinge on the fact that Itasca County has seen very little growth among immigrant populations, something that has driven stronger growth in other Minnesota communities. The region does not have much agriculture or food processing, two industries that often provide a foothold to new immigrants and whose economic success might pull others.

Look over here

Each of these communities has opportunities and challenges ahead, with both similarities and differences among them.

In Grand Rapids, the opportunity and challenge will be to find ways to continue diversifying. Many there believe that the city’s papermaking days are numbered—exactly how many is hard to say, but most are hopeful for five more years, give or take. Minnesota Power also operates a large coal-fired plant in the region, representing a major slice of the county’s tax base. But it’s slated for decommissioning due to environmental regulations (though final reckoning depends on a multitude of factors) and would result in the loss of 140 good-paying jobs. And while the region manages to absorb those workers, many are taking jobs that pay less. As one contact put it, “We’re seeing job growth but a loss of income.”

In Park Rapids, said one community official, “if you’re comparing to where we’ve been, it’s pretty strong,” but that was also a comparatively low bar. Aside from schools and the hospital, there are not a lot of middle-income jobs, locals said. The tourism industry is healthy, but businesses are searching for ways to extend the “shoulder-season,” the time before and after the traditional summer tourism season, so local businesses stay busier longer.

Sources across the region also noted a bifurcated economy. Tourism economies tend to cater to those with wealth. The good news is that the region has been successful in attracting people of means. The bad news is that many locals live more vicariously. One person described the situation as an inverse bell curve. “There is no middle, and the differences between the two are staggering.” Growth and prosperity are “fairly new” in Bemidji, said a business contact there. “It’s a place where you can see a $60,000 car and a $600 car going to the same grocery store. There’s [still] a lot of people with needs out there.”

The poverty rate of 19 percent in Beltrami County is almost twice the state level and is even higher in Bemidji, according to Census figures. A county contact said child placements outside the home were “literally breaking us,” almost tripling from 2009 to 2017 to almost 1,300—wiping out an $11 million fund balance in the process—before finally seeing a small decrease in 2018. Many placements are the result of parental drug and alcohol abuse, but tight housing and myriad other factors are also involved, according to local contacts.

Related to this, there are considerable misalignments of labor demand and the skills of available workers. Despite higher-than-average unemployment, workforce shortages were widely cited as a tourniquet to faster economic growth. A large potato plant near Park Rapids is typically 25 people short despite hourly pay that runs between $14 and $29 “with some of the best benefits you’ll find.” A manufacturing plant in Grand Rapids recently had to turn down a contract because it lacked the necessary labor. A banker there said positions at all levels of the organization were available. “We’ve never seen a labor market like this in my career.”

Wages were also rising in response. Tellers at a Park Rapids bank went from $12 an hour last summer to $14 this year. A major discount store in Bemidji took out a full-page ad in the newspaper this spring offering a $2 per hour bonus over the summer. A restaurant owner there said it was offering cooks $15 an hour “because I can’t afford the turnover of $12 [an hour] cooks.”

A Park Rapids hotel operator said the business tries to have eight housekeepers on staff, but over the past six months, “we went through 35 people.” Pay was raised from about $9 an hour to $11, but that has had little effect on retention; in part, because higher pay can have adverse effects on government-provided assistance for housing, day care, or other services that are worth more—either in financial or household security terms—than the higher wages, a point made by multiple contacts in each community.

Outlook: Comparatively sunny

While the region has challenges, so too does it have advantages other rural areas might lack in the competition for families and workers. For example, the region is ahead of many rural areas in transitioning to a digital economy, having excellent broadband connectivity across much of the region despite its relative sparseness. Each of the three cities also seemed to have a thicket of people and organizations working, planning, and problem-solving for the long-term benefit of the community.

Most notably, though, the region is an outdoors mecca, with natural amenities that often pull former residents back when the opportunity arises. Boomerangs are an untapped source of skilled labor, and many want to come back after sampling life in larger urban areas. Said one Grand Rapids resident, “When [they] have the opportunity, people come back here.” Unfortunately, the right opportunities are not always available, especially when a working spouse also needs to find suitable employment in a new location.

Some make financial sacrifices to move back. One health care professional in Grand Rapids said he took a 60 percent pay cut to move back to his hometown, and the good news is that he’s apparently not a unicorn. “Every one of my friends is waiting in the wings to come back.”