3 posts from April 2011

Young establishments take recession on the sidelines

Though data on young firms and establishments are not particularly timely, available information suggests that the recession might be convincing entrepreneurs and others to wait a bit before taking the plunge into opening a new storefront or other establishment, and it’s having a residual effect on new jobs.

Data from Business Dynamics Statistics (of the U.S. Census Bureau) show that 2006 was the height of new establishment formation (those under one year of age) in five Ninth District states. Employment was similarly at its height among those establishments at that time—maybe not surprising, given that many such businesses employ only the owner. But some young firms grow very quickly, or are larger to begin with, which is why there is some variation in the two trends.

Since 2006, both measures have steadily slid (see chart). These data partly reflect the decision-making of boot-strapping entrepreneurs who finally decide to hang out a shingle (or not, in this case). But the measures also involve (to an unknown degree) corporate decisions about expansion, as new establishment numbers reflect a business at a unique location, even if it happens to be the second Starbucks in town.

Young establishments -- 4-26-11 

The downward trend is more pronounced in Minnesota, Wisconsin and Montana, where both the number of establishments and related employment dropped in the range of 30 to 40 percent from 2006 to 2009, while the Dakotas saw declines of between 12 and 22 percent. In every state, 2009 levels were lower than, or very close to, those last seen in the early 1980s recession. Other, more-recent data from the Bureau of Labor Statistics suggest that 2010 might be a stabilizing year for new establishments.

Much more on establishment trends and entrepreneurship will follow in the July issue of the fedgazette.

Philly Fed index sees variable growth in district states

A slow-growing national economy hides the fact that individual states often see very different growth rates, a fact illustrated by an index of leading indicators measured at the individual state level by the Federal Reserve Bank of Philadelphia.

The State Leading Index attempts to predict the increase (or decrease) in general economic activity at the state level over the next six months. The index is constructed from a wide variety of state and regional data series (including things like nonfarm payroll employment, average hours worked in manufacturing, housing permits, initial unemployment insurance claims and a few other wonkish measures). These individual measures are then summarized into a single statistic, and its growth (or decline) is tracked over time.

The index suggests that both national and district state economies will continue their slow growth in the near term; however, the district states have displayed different growth patterns over the past couple of years. Among the district states, Montana has been by far the biggest laggard coming out of the recession, but might also be said to have the strongest upward trajectory. Conversely, since hitting a high-water mark of 2.2 in May 2010 (which implied that economic activity would increase by 2.2 percent by the end of 2010), Minnesota has watched its index performance steadily deteriorate. North Dakota, which has been outperforming other district states and the nation since the recession, also does so in this index.

Philly Fed index charts - 4-15-11 

Individual state values also need some context. For example, Michigan’s two most recent index values, both over 4.3, are far higher than those of other district states or the national average. But this is due largely to the fact that the variables used to tabulate the index—mostly having to do with employment and economic activity—have taken a severe beating and are rising from a steeply depressed base.

The index was also designed to gauge the economic outlook in major population centers and as such is not fined-tuned to western district states, which have small populations, are less dependent on manufacturing and more heavily dependent on commodity prices, and are subject to the vagaries of weather for crop growing.

World events ripple to Ninth District businesses

With the Ninth District square in the middle of the continent, you might think troubles in faraway places—the Japanese disaster, a sovereign debt crisis in Europe, political upheaval in the Middle East and North Africa—would not be a big concern for businesses here. But you would be wrong, at least according to some of those businesses.

The Minneapolis Fed conducted an ad hoc survey in late March asking a variety of business contacts about recent price changes and the impact of world events. Not surprisingly, most of the 158 survey respondents said foreign turmoil hasn’t had a direct effect on them. But a fair share of those surveyed did feel the ripples of these distant events. The responses to the survey are summarized in the following table.

 World issues table -- 4-5-11

 When the results are broken down by what sector the respondents come from, interesting details emerge. For example, while two-thirds of overall respondents said the Japanese disaster had no effect on their business, 41 percent of manufacturers said it had an unfavorable impact, while nearly 14 percent saw favorable effects for their operations. Forty-four percent of wholesalers said the impact was somewhat or very unfavorable. As you might expect, the services and construction sectors were less affected.

Overall, European debt woes had the least impact on regional businesses. However, they were more of a concern for the finance industry, where a quarter of respondents said the effect was unfavorable.

The political turmoil in the Arab and Muslim world was the biggest international concern for district businesses, especially for manufacturing and construction, in which almost half of survey takers said the impact was negative. Going by the comments, the primary threat was increased oil prices.

The survey also asked about recent price changes. Nonlabor input prices increased for 53 percent of respondents, compared with 47 percent of respondents to the same question asked in early February. But that increase hasn’t passed through as much to customers. Only 25 percent of respondents said they have increased the prices they charge, down from 29 percent in the previous survey.