How will the Rochester area economy fare in 2023?
Area leaders paint a cautiously optimistic picture of the Rochester economy for the upcoming year.
ROCHESTER — All of the unexpected turns in the past few years have made one question difficult for Rochester business leaders to answer: What’s next?
As 2023 starts to pick up steam, what can people living in Rochester and Southeast Minnesota expect?
Inflation is still high, though it seems to be slowing. Prices for gas and some construction materials like wood are declining, though they remain high. Unemployment is at historically low levels as wages are climbing.
On a national level, many are predicting a recession is on the way. However, others are saying the Federal Reserves’ lowering of interest rates has slowed the economy enough to avoid that.
People like the head economist for credit ratings giant Moody’s Analytics are predicting something between a recession and the typical economic weather.
"The U.S. economy will struggle in 2023 with halting growth and higher unemployment. Recession is a serious threat. But the Moody's Analytics baseline forecast — the most-likely outlook — holds that the economy will avoid a downturn. Call it a slowcession," analysts at the firm led by chief economist Mark Zandi state in a recent report. "It is important not to be Pollyannish, but it is also important not to convince ourselves that a recession is inevitable. It is not."
While national trends are of interest, the popular local belief has always been that Rochester and Southeast Minnesota are not as susceptible to economic headwinds due to the shelter of Mayo Clinic.
While wages and staffing are higher than ever, Mayo Clinic still reported year-over-year revenue increases in 2022. The wages pressure might slow revenue growth, but it appears Mayo Clinic will continue to flourish and grow in the coming year.
Simply put, when things are bad elsewhere, they aren’t as bad here. And difficult times don’t last as long here. That theory seemed to hold up generally during the 2008 Great Recession, though the COVID-19 pandemic did challenge it a bit.
“I think in spite of what we read and the pressures on the national economy, the Rochester area, which is based not only on health care, but agriculture, and manufacturing, remains robust," says Rochester Area Economic Development Inc. President John Wade. "That doesn't mean we are immune from those pressures. Many people are feeling the effects of inflation in their own lives. When we look at the base economy, and the base employment outlook, I think we have reason to continue to be optimistic about weathering the storm during 2023 and that is because of the fundamental strength of our economy."
For almost all of 2022, Olmsted County’s unemployment rate remained below 2%, and it crept to 1.6% in November. The low was in April at 1.2% and the high was 2.7% in January. Other counties in the region remained comparable. The state’s unemployment rate was 2.3% in November, while the U.S. rate was 3.5%.
The Rochester Area Chamber of Commerce frequently surveys its members on a variety of topics. Chamber President Ryan Parsons shares that the outlook on jobs remains mostly positive.
“Feedback from members has shown that most plan to sustain their employment levels or grow in the next 12 months. However, challenges in talent attraction and retention can impact an employer’s ability to grow and expand,” says Parsons. “We’ll have more data on this and other items as we release the results of the Chamber’s Business Outlook Survey in the weeks ahead.”
A drive around Rochester shows that most businesses have “Help Wanted” signs out as the older generation retires and a new generation of workers with fewer bodies try to fill their shoes.
The challenge is that most economists believe that higher employment makes inflation harder to control.
“Unemployment is a trailing indicator of a recession rather than a leading indicator. So we may see some loosening in that area or higher unemployment. Our employment picture is obviously so tight, that it continues to strangle growth,” says Wade. “Employers large and small alike have great pressure to hire the workforce that they need to grow their businesses.”
Parsons sees workforce as both the Rochester area’s top asset as well its greatest problem in 2023.
“Looking at this in terms of challenges and opportunities, I believe workforce is both a challenge and opportunity. Challenges in access to workforce and talent attraction and retention are ongoing for area employers,” he says. “However, the existing talent in our region is outstanding and the teams that make Rochester area businesses and organizations excel is an excellent strength and opportunity for the community. The talent we have in the region is strong and will be essential in ensuring businesses grow and can identify and implement solutions for other challenges moving forward.”
Beyond jobs, construction activity is another signpost that signals the health of a local economy.
Rochester has long been proud of the many large cranes that are often seen in the city working on large construction projects. Many such projects started in 2022 will continue into the new year.
Mayo Clinic, which often has multiple Rochester projects under construction, will continue to work on the $120 million Anna-Maria and Stephen Kellen Building with the hope of opening the 11-story downtown research facility in late 2023. Another major Mayo Clinic downtown project, the $200-million addition to its proton beam treatment facility, is expected to continue throughout 2023 and 2024 with the completion anticipated in 2025.
More apartment complexes are in the works for Rochester in 2023 as are more residential developments. Local developers and many from outside of Minnesota see housing as a big need that has created a major business opportunity.
The city continues to try to meet the need for more housing as the home inventory is far below what the market is demanding, after years of being a sellers market.
“We've all been amazed at the number of apartments that have gone up and continue to go up in Rochester, which is I think a good sign,” says Scott Hoss, Think Bank’s vice president of business banking.
Benike Construction, a fourth-generation Rochester firm dating back to 1937, has been the team swinging the hammer for buildings of all kinds throughout the city. Like all businesses, Benike is gearing up for another year.
Reflecting on Southeast Minnesota as a whole, Benike Construction President Aaron Benike says this area is different from other places in this region.
“I think that the peaks aren’t as high and the valleys aren’t as low. We're part of a peer group that has contracts all across the country. And when they are really doing well, the margins in Rochester aren’t near what they're making,” he says. “When it was the Great Recession in 2008, we thought we had it, but it was not nearly as bad here as elsewhere. I'll tell you I would take not having as tall of a perch as having not nearly as deep of a valley.”
Going into 2023, he is feeling pretty good about how his team is fully staffed after replacing several retiring employees. There are several scheduled projects, though there is room for more.
“I'm not an economist, I'm a contractor, but the ingredients of what I see on the table look like the makings for a pretty good year.
It could be a great year or it could be a not-so-great year. I won't know until my customers tell me,” says Benike. “If you're talking about day-to-day construction project construction work, then I am optimistic for 2023.”
Will we see new businesses opening their doors in 2023 with less access to capital due to the higher interest rates?
“I'm optimistic. Starting a new business doesn't necessarily always require borrowing a lot of money. Plus there are a lot of grant programs out there,” says Hoss. “Usually if you've got something on the side or in a garage, banks will want to look at two or three years of tax returns before they're going to give you a significant asset. I think that the community has been strong and growing, which in a few years will filter up to more efficiently.”
Parsons is also positive about start-up business growth in 2023.
“I believe we will see an increase in the next year (and hope that is the case). Rochester continues to grow and we have a diverse range of industries, including healthcare, education, hospitality, and others, that invest in the community and help to support a strong entrepreneurial space in the area,” he says.
It is impossible to predict exactly how 2023 will play out for area laborers, teachers, nurses, artists or business owners. However, many signs are positive, as long the core industry remains strong.
“We are competing with a number of cities across America. There are other fine health care institutions. There are other great innovative communities. We need to step up our game, because it doesn't just happen. It happens because we work at it,” says RAEDI’s Wade. “We have to stay vigilant and continue to improve the environment and create an environment where all businesses can develop, grow and prosper. Because if we do that, we can all be more optimistic about our future.”