4 posts from May 2011

District banks see relatively weak first quarter

During the first quarter of this year, banks in the Ninth District took something of a breather on their uphill climb to better health, according to a quarterly review of banking conditions from the Federal Reserve Bank of Minneapolis released this week.

The review looks at a variety of bank performance metrics—e.g., asset quality, earnings, supervisory ratings—for the 684 banks located in the district in the first quarter of 2011. Bank health had improved through much of 2010, but performance in many areas was flat in the first quarter of 2011, leaving overall bank health in a comparatively weak position.

The biggest reason for this assessment, according to Ron Feldman, senior vice president, was asset quality. Simply put, there was not much improvement in the rate at which borrowers paid back loans. There had been consistent improvement over previous quarters, but “overall asset quality has flattened out” this past quarter at relatively weak levels, Feldman said. “Whether this is a trend or a one-quarter blip is something we’ll have to wait and see.”

Banks saw improvements in funding and resources available to absorb losses, but those were not enough to offset poor performance in other metrics. Loans in commercial real estate saw no improvement and commercial/industrial loan performance worsened a bit. Average and median earnings rose, but Feldman suggested it was likely the result of putting less money aside to cover loan losses, and “is not likely to be sustained” because net interest margins (a big source of income for banks), dropped notably in the last quarter.

Across the district, banks in the Twin Cities had the weakest asset quality, while those in the Dakotas had the best.

Go here for data and other information on bank performance across Ninth District states. A video summary of first quarter results featuring Feldman is available below.  

  

A state of entrepreneurship: Careful what you wish for

The entrepreneur is widely lauded for the innovation and energy he or she brings to the economy. States desperately hope to be the seedbed of the next Google, Apple or even Applebee’s these days. States often take great effort to be (or at least appear) entrepreneur-friendly and worry when they perform poorly in any nationwide ranking.

The Kauffman Foundation, the largest foundation in the world dedicated to entrepreneurial research, comes out with an annual index of entrepreneurial activity. The index captures new business owners in their first month of significant business activity and then tabulates a score based on a state’s adult population.

The bad news for several district states is that annual scores have fallen considerably since 2006. Minnesota, South Dakota and Wisconsin all slipped below an index value of 0.2, while the national average crept up slightly and finished at 0.34 during this period (see Chart 1). North Dakota held its ground; Montana’s rate fell significantly, but from very high levels.

Entrepreneur chart 1 -- 5-13-11 
 
Woe is the Ninth District entrepreneur? Not necessarily. Entrepreneurship encompasses many things, running the gamut from those working out of a basement or back of a truck to a sophisticated high-tech startup. For its index, Kauffman uses consecutive-month reports from the Current Population Survey from the U.S. Census Bureau. It flags people who report working for themselves for at least 15 hours per week during the past month (and, importantly, not doing so in the month before that).

It’s difficult to know the direct relationship between the recession and self-employment. But those looking for work often make ends meet by doing informal side jobs, and recessions create conditions that likely increase the amount of entrepreneurship done out of necessity rather than opportunity or desire.

Coincidence or not, high-unemployment states tend to rank high in Kauffman’s index. The states with the three highest average scores from 2008 to 2010—Arizona, Georgia and California—all have unemployment rates considerably above the national average of 9 percent in April (see Chart 2). California is world-renowned for its entrepreneurial culture, à la Silicon Valley; less known might be the fact that its 11.9 percent unemployment rate is the second highest in the country.

Entrepreneur chart 2 -- 5-13-11 
In the most recent single-year ranking (2010), Louisiana and Nevada joined Georgia as the top-ranked entrepreneurial states in the country. Nevada currently has the nation’s highest unemployment rate at 12.5 percent. Louisiana’s is better, at 8.1 percent, but the state would not be mistaken for an economic hotbed.

In the Ninth District, Montana has consistently scored high in Kauffman’s index—its average from 2008 to 2010 was second nationwide—and has long had a reputation for bootstrapping small businesses. But it also happens to have the highest unemployment rate in the district (tied with Wisconsin) and does not rank particularly well on income, poverty and other economic measures that might suggest a high ranking comes with big economic benefits.

Even acknowledging the methodological shortcomings, low-ranking district states don’t have much to brag about, either. The lowest ranking states—Alabama, Pennsylvania and West Virginia—don’t offer much explanatory bravado for Minnesota or Wisconsin, two states that have seen their scores drop to similar levels.

In the end, it appears there might be something of a Goldilocks effect here—not too high, not too low, but just right … in the middle. North Dakota, for example, has had one of the best economies over the past few years, and its index score has remained steady, generally hovering in the middle of the index range.

Additional research on establishment trends and entrepreneurship will be featured in the July issue of the fedgazette.

A deadly recession for many Wisconsin businesses

Wisconsin business, we barely knew ye.

That might be the funeral theme for many businesses that were incorporated—and subsequently unincorporated—in the land of cheese during the past four years. Those interested in starting a business must register with their home state under a variety of legal classifications (corporation, limited liability, partnership, etc.).

Few states track the active status of registered businesses over time. Wisconsin is one exception. Statutes allow the state to administratively dissolve entities that fail to file their required annual report, and it has an ongoing program to do just that, according to a state source.

Figures from the Department of Financial Institutions (provided at paid request), show a huge spike since 2007 in the number of mergers, dissolutions and otherwise defunct business registrations taken off state books (see Chart 1). This is particularly the case with corporations and LLCs, which make up the large majority of business registrations.

WI small biz -- 5-12--11 

The recession had the opposite effect on new business registrations. The annual number of new LLCs, for example, skyrocketed from the late 1990s until about 2006 (see Chart 2), due largely to changes in Wisconsin law (and laws in many other states) giving greater legal protection and tax advantages to sole proprietors and others organized as LLCs. But by 2007, LLC registrations leveled off and subsequently fell. The number of corporation filings also fell, but that merely continued a trend started well before the recession (see Chart 2).

WI small biz CH 2 -- 5-12--11 

On net, the state witnessed an 8 percent decline in the annual number of registered businesses from 2008 to 2010—the first such decline in at least a decade, and likely much longer given the general strength of the economy in the 1990s.

Much more research on birth and death trends among businesses across the Ninth District will be published in the July issue of the fedgazette. 

It’s a small (business) world, after all

It’s widely perceived that today’s economy is ruled by large corporations, and the small business owner doesn’t stand a chance. Drive down any major highway near a big city—it’s hard not to think so given the visual evidence of big-box stores and major office towers.

Though small businesses have lost a small amount of footing in the business world, data from the U.S. Census Bureau suggest that, in fact, state economies are still dominated by small businesses.

From 1977 to 2009, the total number of Minnesota establishments grew by 70 percent, to almost 131,000. Over this period, the share of establishments in Minnesota with fewer than 10 employees dropped slowly, but steadily (see chart). But even today, they account for almost three of five establishments in the state and number more than 75,000.

Small biz chart -- 5-5-11 

The chart above is also something of a methodological illusion, making it appear that big businesses are gaining share faster than they actually are—at least on the ground. That’s because establishments are grouped based on the size of the parent company, not necessarily the establishment you see sitting in a new commercial development.

For example, the number and overall percentage of establishments with 500 or more workers have risen steadily in Minnesota for more than 30 years (see the purple line on the chart). But figures for these large firms represent the number of establishments owned by a larger parent company, often headquartered elsewhere.

In 2009 there were about 19,000 establishments in Minnesota owned by parent companies with over 500 employees. Some (unknown number) of these firms also happen to be headquartered in Minnesota and actually employ 500-plus workers in the state. But they can’t all be located in the state, or they would be employing twice as many people as there are in the entire state.

That also explains why there are more establishments with 500-plus employees than there are ones with between 50 and 500 workers—which juxtaposes the rule of thumb that smaller businesses outnumber larger businesses (see the bottom of the chart). This occurs because large firms are more likely than smaller firms to open new locations in different states, and those new establishments—regardless of their actual employment size on the ground—are counted as large ones.