Minnesota’s economic momentum appears to be slowing a bit, according to nearly 300 business leaders across the state who were asked about their views and their plans for the rest of this year. Things aren’t getting worse; they’re just not getting better as strongly as they had been, especially in the four to six quarters as monitored through a quarterly survey Twin Cities Business began in mid-2011 (see “About the Survey,” at the bottom of this article).

Survey results are used to compile TCB’s Minnesota Economic Outlook Index, which for the fourth quarter slipped to 49.0. This is below the trailing 13-quarter average of 50.7, and down nearly 2 percentage points from the third quarter. An index above 50 indicates healthy business growth; below signals slowing business growth.

Reasons for this decline start with an issue that also surfaced in nearly every live event panel discussion and CEO meeting Twin Cities Business editors have been involved with during 2014: a worsening, if not already acute, labor shortage.

The survey includes an open-ended question asking participants to explain what their greatest challenge is expected to be in the months ahead. In 2011 and 2012, “economic uncertainty” was the most common response. That concern has ebbed, mirroring Gallup’s U.S. Economic Confidence Index showing overall stability through 2014. But beginning last year, a significant number of “challenge” answers shifted to finding qualified labor. The issue is now mentioned by more than half of those who respond to the write-in question.

Here’s why: Minnesota’s unemployment rate of 4.3 percent runs up against a declining labor participation rate of 68.9 percent as of August—the lowest percentage of Minnesotans in the workforce since 1979. While unemployment remains higher in several other states (and is still 6.1 percent nationally), it’s becoming more difficult for Minnesota employers to recruit from outside the state’s borders because labor supply is tightening everywhere. As of August, there were 4.8 million job openings nationwide, a 13-year high according to the U.S. Labor Department. And there are now only two unemployed workers per every job opening—higher than in Minnesota, but well below the seven unemployed workers per open job in 2009.

It’s also tough to recruit from other companies in Minnesota unless you can pay well. Thirty percent of employees answering a recent poll from Dale Carnegie’s Minneapolis office said it would take a pay raise of 20 percent or more for them to shift jobs; 16 percent said they’d need at least 15 percent more, 14 percent would want a raise of 10 percent. Only 12 percent would take a job for a raise of 5 percent. And 28 percent said they wouldn’t leave for any pay increase.

All of the above helps explain why 46 percent of respondents expect it to become even more difficult to find qualified labor in the final months of 2014, according to Twin Cities Business’ quarterly survey; a paltry 1 percent says they expect hiring to become easier. These are the highest and lowest percentages in their respective categories since the survey began in 2011. Fourteen quarters ago, only 24 percent of respondents said finding qualified labor would be harder in the months ahead.

This could be one reason there was a 15 percent decrease in the number of leaders expecting business conditions to improve this quarter, compared with last quarter’s survey results. At 33.1 percent, it’s the lowest level of optimism in this category since first quarter of 2013. Meanwhile, concern that global economic conditions will worsen by Dec. 31 increased 10 percent from third-quarter survey results.

On the bright side, there is less pessimism today about the state’s overall business conditions. Compared with a year ago at this time, 32 percent less expect conditions to worsen; only 12.5 percent expect this now. Optimism and pessimism have waned leading to 54 percent of respondents to say they expect conditions to remain the same—well ahead of the trailing 13-quarter average of 46 percent.

The corporate revenue outlook remains about the same as in previous quarters, with 52 percent of businesses anticipating revenue increases this quarter, 40 percent expecting to hold steady and only 10 percent planning for revenue declines.

Also good: Only 5.2 percent of Minnesota employers are planning reductions in their workforces. This is the lowest level since the survey began. Meanwhile, 37 percent of employers are looking to add to their workforces by Dec. 31—slightly above the 13-month trailing average of 35.2 percent in this area.

Of concern, however, beyond finding good help, is the highest level of “stay the same” and “maintain” survey responses reported during the last 14 quarters. They replaced what had been more frequent and positive “improve” and “increase” answers in areas important for longer-term economic growth. For example:

• Employee productivity is expected to stay the same this quarter, at 56 percent of the businesses responding to the survey – the highest percent in the 14 quarters monitored thus far. The percentage of those who expect productivity to increase (42 percent) is down by 8 percent compared with third-quarter expectations and by 13 percent compared with one year ago at this time, and is now the lowest in 14 quarters.
• The number of companies planning to increase research and development spending dropped 10 percent this quarter compared with last. Only 18 percent of businesses responding to this survey plan to increase such spending. Meanwhile, 75 percent of respondents plan to stay the course with their R&D spending—the largest percentage seen during this survey’s 14-quarter span.

Both of these areas have the potential to impact corporate profitability in the short and long term. However this may only be a one-quarter dip: Upcoming surveys will tell.

Percentage of respondents anticipating increases (Business Planning) or improvements (Business Conditions) in these areas during the fourth quarter of 2014; charts represent a diffusion index view: all responses for “increase” or “improve,” plus one-half of responses for “maintain” or “stay the same.” Above 50 is positive; below is negative.