4 posts from October 2011

District businesses say they are growing

The Ninth District economy continues to expand, according to a Minneapolis Fed ad hoc electronic survey of 202 business contacts around the district in late September and early October.

The results indicate that business activity over the past three months was stronger than last year and a bit stronger than results shown in the ad hoc survey conducted in August. Sales, profits and employment grew over the past three months (see table). However, input costs also rose and space occupied was little changed.

Respondents expect a little slower growth for the next three months. Sales, profits and employment are expected to increase, but at a slightly slower pace than the previous three months. This may be caused by some of the market turmoil over the past two months. “There is much economic fear in people,” commented a Minnesota manufacturer. Space usage is expected to increase somewhat, and input prices look like they will increase at a slower pace.

Meanwhile, access to bank credit has stabilized, with two-thirds of the respondents seeing no change in access to bank credit over the past three months.

The survey is over-weighted to Minnesota, as 88 percent of the respondents were from Minnesota, while the state represents about 60 percent of the district’s population. However, the results from the other states were somewhat similar to the overall results.

Business ad hoc survey -- 10-24-11

The price of flame

The Pagami Creek fire in northeastern Minnesota is one of the biggest forest fires in state history. Spawned by a lightning strike in the Boundary Waters Canoe Area Wilderness (BWCA) near Ely, the fire has burned for almost two months, scorching about 150 square miles. The U.S. Forest Service mobilized a small army of nearly 900 firefighters to battle the blaze, which was still not fully contained as of mid-October.

The cost of fighting the fire, borne by U.S. taxpayers, was considerable, according to Forest Service figures. As of early October, federal and state agencies had racked up about $21 million in firefighting expenses.

Based on a Forest Service breakdown of costs as of late September (see chart, below), labor accounted for the biggest chunk of total spending so far: roughly $12 million to pay fire crews (including elite “hotshot” units brought in from western states) and other personnel, such as fire commanders and contractors. Aviation was the next biggest expense—over $4 million to dispatch airplanes and helicopters on water bombing and reconnaissance missions. Other expenses included equipment and camp support—buses, mobile showers, portable toilets and other items needed to maintain crews in the field.

Pagami Creek redo -- 10-13-11

But these firefighting expenses are only a small portion of the full costs of the Pagami Creek fire, which will keep rising long after the last ember is extinguished. Estimates by wildfire experts of the total cost of large, out-of-control forest fires range from five to 50 times the cost of suppressing them. Short- and long-term costs not tallied by the Forest Service include burned timber, damage to roads and private property, lost business revenues, degraded recreational value, destruction of wildlife habitat, and ongoing repair and rehabilitation expenses. The “all-in” cost of a big wildfire can run into hundreds of millions of dollars.

However, the Pagami Creek fire probably won’t exact as high a toll as the Ham Lake fire, a 2007 blaze in northern Minnesota that destroyed nearly 150 buildings. The Pagami fire mostly burned within the BWCA, only briefly threatening structures near the southern edge of the wilderness. Homes and businesses in the path of a wildfire are expensive to protect and even more costly to replace if firefighting efforts fail.

For more discussion on the costs of wildfire in the Ninth District, see “Money to burn,” in the July 2010 fedgazette.

Spotlight (again) on state-owned banks

As reported in a fedgazette interview last year with the president of the Bank of North Dakota, a number of states and even a few countries are curious about the idea of a state-owned financial institution. The Bank of North Dakota is the only one of its kind in this country, and the state has had a one-of-a-kind economy through the recent recession and slow-growth period. And some are drawing a correlation.

Massachusetts was so intrigued by the question of whether North Dakota’s state-owned bank proved a financial bulwark during the recent crisis that it enacted legislation in August 2010 to, among other things, “study the feasibility of establishing a bank owned by the commonwealth or by a public authority constituted by the commonwealth.”

The Federal Reserve Bank of Boston has obliged with its own study on this question, suggesting that the evidence for state benefits is mixed, the startup costs are substantial and there may be better alternatives to address state financial needs. The report provides useful background and analysis on the broader issues of state-owned banks, and the Boston Fed also has posted a webinar presentation for a quick overview.

The Boston Fed suggests a two-step plan for Massachusetts: First, clearly identify economic goals; second, carefully consider all options to address those goals before assuming that a state-owned bank is the answer. For example, the report reminds state lawmakers that the financial landscape has changed since the crisis and that there are new federal programs in place to address credit problems; in other words, a full reassessment is in order.

And it is always useful to recall the words of Eric Hardmeyer, president of the Bank of North Dakota, from his fedgazette interview, which the Boston Fed report also cites: “I think that we’ve played a significant role in the state’s recent success, but to quantify a role and tell you what that is would be difficult. But certainly to lay the success of the state’s economy at our feet wouldn’t be appropriate either.”

Garage (plus home) sale: Home foreclosures in the Ninth District

One legacy of the housing boom and bust has been an increase in the number of homes in foreclosure for late payment, or already foreclosed and subsequently owned by banks. According to two data sources, foreclosure trends in district states are generally more positive than in the nation as a whole, though banks own a large number of homes in Michigan and Minnesota.

When a bank completes the foreclosure process and takes back the home, it then becomes known as a “real estate owned” (or REO) property on the bank’s balance sheet. The bank will then attempt to sell the home. In early August, the Federal Housing Finance Agency released data on the number and locations of REO properties for sale in July. They showed that REOs (on a per capita basis) fluctuated fairly widely in district states.

Michigan and Minnesota, for example, both had REO rates significantly higher than the national average (see table). In Michigan’s case, the high rate is likely the fallout from a particularly poor state economy, and for Minnesota, a robust housing market in the Twin Cities leading up to the recession. Other district states came in considerably lower than the national REO average.

However, the foreclosure pipeline leading to REOs has better news for district states. For government-sponsored mortgages in the United States, there are 35 homes per 10,000 residents that are at least 90 days late in payments or are in the foreclosure process, according to Lender Processing Services Inc., a provider of mortgage information. Every district state beat that rate with a little room to spare—even Michigan, where 31 homes per 10,000 were in trouble (see table). On both housing measures, the Dakotas had rates that were a small fraction of the national rate.

Foreclosures -- 9-26-11