The economic outlook for Minnesota manufacturers in 2025 is a mixed bag, reflecting cautious optimism tempered by significant challenges. While key economic indicators suggest steady growth through 2024, underlying concerns such as workforce shortages, cost pressures, and potential disruptions are clouding the horizon for many, according to industry experts and economists.
Data available through the third quarter of 2024 shows that both the state and national economies continued to grow, buoyed by cooling inflation. Joe Mahon, Regional Outreach Director for the Federal Reserve Bank of Minneapolis, explained that inflation trends have offered a sense of relief after the peaks of recent years.
"The United States’ Gross Domestic Product increased by 3.1% at an inflation-adjusted annual rate in the third quarter of 2024," Mahon noted. "Minnesota mirrored this growth, with its GDP increasing by 2% over the same period."
While growth continues, the labor market has begun to show signs of strain. Both Minnesota and the nation saw unemployment tick up slightly throughout 2024. In Minnesota, unemployment rose from 2.7% in January to an estimated 3.5% by November. Nationally, unemployment climbed from 3.7% to 4.2%.
The manufacturing sector reflects these mixed signals. While some manufacturers report steady business, others are experiencing a marked slowdown. This divergence in performance has left the industry grappling with uncertainty as it heads into 2025.
Creighton University in Omaha, Nebraska, frequently publishes the Mid-America Manufacturing Index, which compiles data from a nine-state region, including Minnesota. This index has become a trusted barometer for the sector's health.
The most recent report shows a dip in Minnesota’s Business Conditions Index for December 2024, which declined to 51.4 from 53.4 in November.
The components of the overall December index were as follows:
Note: These numbers represent index values, not percentage points or specific units. They are part of the Business Conditions Index, which is typically measured on a scale where 50.0 is the growth-neutral threshold.
Here's how to interpret them:
Above 50.0: Indicates growth or expansion in that category.
Below 50.0: Indicates contraction in that category.
While the index remains above the growth-neutral threshold of 50, the decline suggests that growth has slowed as the year closed. This aligns with broader concerns about demand, workforce availability, and rising costs that continue to weigh on manufacturers’ outlooks.
"Manufacturers in the nation and region continue to shed jobs," said Ernie Goss, Forecasting Group Director, in a recent press release. "In terms of impending economic threats, such as an East/Gulf Coast longshoreman strike looming on January 15, approximately 45% of supply managers expect a recession in the first half of 2025."
Yet, not all data points are discouraging. According to the U.S. International Trade Administration, Minnesota expanded 2024 year-to-date manufacturing exports by $2.2 billion compared to the same period in 2023, representing an impressive 11.5% gain. This highlights that while domestic challenges persist, global opportunities remain a bright spot for many manufacturers.
Enterprise Minnesota's annual State of Manufacturing (SOM) survey, a comprehensive look at industry trends and sentiments, paints another picture of the challenges and opportunities facing manufacturers.
At the end of 2023, manufacturers expressed apprehension about several recent legislative changes, including the implementation of mandated paid sick and leave time policies for employees of all company sizes and the legalization of cannabis products. These legislative shifts have created financial and operational concerns, particularly for smaller manufacturers with fewer resources to navigate regulatory changes.
While the financial burdens of implementing paid leave policies are still a concern for large and small manufacturers alike, this year’s survey revealed that inflation, increasing material costs and the challenges of attracting a qualified workforce are also top concerns for 2025. Additionally, respondents expressed growing fears about the economy as a whole — five years ago, only 15% of respondents believed that the Minnesota business climate was worse than before — in 2024, 56% believed it to be true, while only 12% believed it to be better than before
To learn more, visit the full survey report at enterpriseminnesota.org.
Despite the challenges, some manufacturers maintain a cautiously optimistic outlook. Mahon noted that while many industry leaders report declining demand and lower sales volumes, the underlying reasons vary widely.
“In general, demand appears to be down, as contacts have been telling us that sales or orders have been decreasing for months now,” Mahon said. “In some cases, this is a matter of activity returning to normal after a few very strong years, while other contacts have told me that business is the slowest they have seen in a very long time.”
The impact of these slowdowns often depends on the specific markets manufacturers serve. Those selling to interest-sensitive sectors, such as construction equipment or industrial machinery, are feeling the effects of higher interest rates more acutely.
Still, there are bright spots. According to the SOM, manufacturers investing in automation, process improvements, and diversification of customer bases are positioning themselves for growth in 2025 and beyond.
“I have heard from numerous contacts that they are anxious about the impacts of a potential intensification of trade conflicts affecting both access to international markets for products and the ability to source inputs,” Mahon added.
As 2025 approaches, Minnesota manufacturers are keeping a wary eye on both opportunities and challenges. While the broader economy shows signs of resilience, the sector remains in a delicate balancing act between adapting to external pressures and capitalizing on growth opportunities.
For now, manufacturers across the state are focused on mitigating risks, exploring new markets, and preparing for a year that is likely to test their resilience and ingenuity.