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Minnesota economy buffeted by crosscurrents

High energy prices have become the No. 1 issue for Minnesotans in this year’s presidential race. High food prices are important, too, but they cut both ways in the agricultural state.
Image: Alan Eskuri
Alan Eskuri, an engineer for a medical device company in Maple Grove, Minn., bought a jewelry store at the Mall of America to supplement his salary. But the shop has struggled as the high price of gas has kept tourists away and made local customers reluctant to buy luxury items such as jewelry.  Andy King for

When Alan Eskuri and his wife, Sheree, decided to buy a jewelry store in 2006 in the Mall of America in Bloomington, Minn., the business looked like a good investment that would add a second income stream to his salary as an engineer for a medical device company.

Two years later, battered by falling real estate values, a sharp slowdown in consumer spending and higher costs for everything from rent to silver, Eskuri, 34, said his business is on the verge of failing. He's already laid off most of the store's staff as sales have fallen. Even worse, his family's net worth of about $150,000 has been wiped out and they face bankruptcy.

High energy prices are crimping spending for retailers across the country, but Minnesotans are getting hit harder than many others. When we asked’s Gut Check America readers in Minnesota to tell us how the state’s economy was affecting them, they mentioned issues as diverse as the slump in housing prices, the turmoil the stock market and runaway government spending. But energy prices were foremost on their minds.

Minnesota is a largely rural state with long driving distances between urban areas and limited public transportation alternatives. The state’s farm economy also is feeling the surge in oil prices on two fronts: the higher cost of running farm equipment and the increased cost of fertilizers made from petroleum.

It's no surprise, then, that energy has become the No. 1 issue for Minnesotans as the Republican Party prepares to hold its convention in the twin cities of St. Paul and Minneapolis. A July 24 poll by Quinnipiac University found that energy supplanted the Iraq war as the hottest issue in the state as pump prices shot up this summer.

A pall at the mall
The high gas prices have hit businesses like the Eskuris' jewelry store hard: Tourist traffic to the Mall of America is down sharply, and local customers have less to spend on extras like jewelry, he said. And though recent federal income tax rebates were designed to keep consumers shopping, Eskuri said he hasn’t seen any benefit in his store.

“We're just very dependent on whether or not people feel they have disposable income to spend," he said. "And right now I just don’t think they do.”

Eskuri, who has two young children, figures he can keep the business going for another six to 12 months in hopes that sales will pick up. That means this year's holiday season — always the busiest time for shops like his — is critical to the store's survival.

Other Minnesotans who responded to's Gut Check America appeal confirmed that they're feeling the squeeze form high pump prices.

“I can no longer travel for a weekend getaway," wrote Joe Abbott from Wabasha, Minn., a small town 70 miles southeast of Minneapolis on the Mississippi River. "Gas prices have cut deeply into any entertainment money ... for things I used to enjoy once in a while."

Higher energy prices likely will sting retailers and others even more intensely when winter settles over the Land of 10,000 Lakes, because Minnesotans burn about twice as much fuel as the national average to heat their homes.

“One never knows what’s going to happen with respect to natural gas prices,” said University of Minnesota economist Tom Stinson. “But if they hold at today’s levels, people are going to be getting some pretty sizable natural gas bills around the first of December. And that’s going to be a damper on holiday shopping.”

Polls indicate state in play
Both Democrat Barack Obama and Republican John McCain have high hopes for the state. Although the state has not voted for a Republican presidential candidate since Richard Nixon in 1972, McCain and his reputation as a GOP maverick could play well in the state. Minnesota voters traditionally have shown an independent streak that in recent years led them to elect former professional wrestler Jesse Ventura their governor.

In 2004, Democrat John Kerry beat President Bush in the state by less than three percentage points, and the Republican choice of Minnesota to host the convention suggests GOP insiders believe the state could swing their way.

Polls also indicate the state is in play. Obama still held a narrow lead — 46 percent to 44 percent — among likely voters in the July 24 Quinnipiac poll, a significant narrowing of the 54 percent to 37 percent gap the pollster found a month earlier. And McCain was leading Obama in the latter survey among independent voters in the state.

Beyond the cost of topping off their gas tanks, many Minnesotans report they’re having a harder time making ends meet for other reasons. While a majority said they think their family finances are “holding steady,” about a quarter told Quinnipiac pollsters they felt they were “falling behind.”

The differences were pronounced along party lines. Some 21 percent of Republicans said they’re “getting ahead” and just 13 percent felt they were “falling behind." By a 4-to-1 ratio, Democrats who noted a change said their family finances are deteriorating.

Minnesota voters aren’t the only ones tightening their belts. The state government is projecting a budget shortfall of $835 million, or about 5.5 percent, for the current fiscal year, according to the Center on Budget and Policy Priorities. The state has instituted a hiring freeze to help close the gap, but has avoided layoffs.

After gas prices, financial issues on Minnesotans’ minds include health care costs, declining home prices (especially for Republicans) and rising food costs (especially for Democrats), all of which are taking their toll on family budgets.

"We are farther in credit card debt because we have to use it to pay for some of the things we need because of the inflation of other things," Diane Holcomb of Grand Rapids, Minn., about 85 miles northwest of Duluth, told

High food prices benefit farmers
High food prices are a double-edged sword for the state’s $6 billion agriculture industry. While consumers have been stretched, farmers are getting good prices for their crops. And some farmers turned to the futures market to hedge against the rising cost of fuel before oil prices surged in the spring.

The conflicting interests on food prices have blurred the issue of farm policy and left many Minnesotans unsure of whom to vote for, according to Clay Richards, assistant director of the Quinnipiac University Polling Institute.

“That’s one of the mysteries of this campaign I think for them so far,” he said. “They’re not really sure who has the better policies that would affect them on crop prices and farm policy."

Corn prices are also getting a boost from increased ethanol production in a state that has taken an early lead in developing renewable sources of energy. Minnesota has set an aggressive target of generating 25 percent of its electrical power from renewable sources by 2025, giving a major boost to development of wind energy. Minnesota is the third-largest generator of wind energy in country, according to Kirsten Morell, a spokeswoman for the state’s Department of Employment and Economic Development.

There are other bright spots for the state’s economy. The banking and financial services industries, concentrated largely in the Twin Cities, have dodged much of the credit crunch that has swamped many big U.S. banks with losses. And while other states in the industrial Midwest have struggled with a loss of manufacturing, a weak dollar has boosted U.S. exports and given Minnesota’s economy a lift, according to Rob Grunewald, a regional economic analyst at the Federal Reserve Bank of Minneapolis.

Farmers in a tough spot
“It’s not a traditional large industrial manufacturing state,” he said. “But to the extent there’s a lot of custom manufacturing and a strong medical device manufacturing sector that areas has helped the state economy.”

Minnesota's economy has been less fortunate when it comes to the nationwide downturn in housing. The state is home to several large building products companies, including window and door makers Andersen and Marvin.

Locally, the housing market hasn’t been hit as hard as once-hot spots like California and Florida. Statewide, roughly one home in every 400 was at some stage in the foreclosure process in the second quarter, about the national average, according to RealtyTrac.

But while home prices are slumping, prices of farmland are soaring, driven by rising crop prices and continued expansion of the suburbs into rural areas. The value of farmland rose by more than 13 percent in 2007 and is expected to grow by nearly 15 percent in 2008, according the the Department of Agriculture.

That has put some farmers — and would-be farmers — in a difficult position.

Just a few years out of college, Matt Schruers wrote to to say that he feels less secure financially than when he was in college, even though his income is much higher. Schruers works for an agricultural lender in Marshall, Minn., about three hours southwest of Minneapolis. With a wife and 18-month-old son, he’s hoping to get his start as a farmer, but for now those plans are on hold. In addition to the steep rise in prices for farmland, lenders are looking for sizable down payments — as much as half the property value — before approving a loan.

“Someone in my position coming out of college trying to get into farming, there’s no way that you can afford to buy a piece of land right now — unless you happen to buy from a family member who’s going to give you a steal,” he said.