4 posts from March 2012

Bankruptcies: A step down from the financial ledge

As more evidence of a recovering economy, and of improving household and business balance sheets, bankruptcy trends appear to have finally pivoted to safer territory.

Consumers and businesses in district states saw a fairly significant decline in the number of bankruptcy filings last year (see Chart 1). Every state saw a drop; bankruptcies in North Dakota dropped by 23 percent, and in Montana 17 percent, over the previous year.

 Bankruptcy -- Ch 1 -- 3-26-12

Disaggregating bankruptcy totals by chapter—named after the laws that govern types of bankruptcy filings—shows some interesting differences. Bankruptcies are filed under chapters 7, 11, 12 and 13, each of which has different requirements regarding exempt and nonexempt debts and assets. The vast majority, however, are filed under chapters 7 and 13. (Last year, for example, there were a total of 217 and 62 bankruptcies in district states under chapters 11 and 12, respectively—a rounding error compared to chapters 7 and 13 filings.)

Chapter 7 bankruptcies are complete liquidations, after which debtors are unbound from debts and essentially allowed to start over. Roughly 95 percent of Chapter 7 filings are by individuals, according to the Administrative Office of the U.S. Courts. Chapter 7 bankruptcies exploded after the recession (see Chart 2), and their share of all bankruptcies in the district rose from 76 percent to 84 percent from 2006 to 2010. But last year the trend pivoted, with districtwide Chapter 7 filings dropping by 14 percent. Every district state saw a drop of at least 6 percent, and most had much larger drops (see Chart 3).

 Bankruptcy -- Ch 2&3 -- 3-26-12

Chapter 13 bankruptcies are designed for debtors that have regular income streams and the potential to repay debt if it is restructured to more favorable terms. Virtually all Chapter 13 bankruptcies are also filed by individuals—of the more than 9,000 Chapter 13 filings last year, 98 percent were nonbusinesses. But unlike its cousin, Chapter 13 filings actually rose very slightly (0.3 percent) last year—based entirely on the fact that Wisconsin saw a small increase and Minnesota only a very small decrease, underperforming the national average by a considerable margin (see Chart 3). By comparison, the Dakotas and Montana saw Chapter 13 filings that roughly equaled or beat the national average.

For historical context, district states have seen both better and worse bankruptcy levels in just the past decade. Bankruptcies trended higher during the 2001 recession, and in 2003 they reached levels similar to today. But bankruptcies rose even more strongly in 2004 and 2005 because of a change in bankruptcy laws that essentially pulled forward a huge number of filings. In 2005, districtwide filings approached 75,000 (compared with a recent peak of about 60,000 in 2010), but then fell to about 25,000 in 2006.

For more historical data and discussion of bankruptcy trends in the Ninth District, see the July 2009 fedgazette.

State tax credits are heavenly to angel investors

With a strong desire to spur job growth, states are eager to nurture young, entrepreneurial firms in hopes that they will develop into booming companies. And you might say the angels have been answering.

Angel investment groups have been popping up across Minnesota and Wisconsin. These are groups of high net worth individuals who seek investment opportunities, often in local or regional businesses. While other investment markets have been fairly static since the recession—and possibly because of it—angel investment groups in Wisconsin and Minnesota have been busy.

Last year, angel investors in Wisconsin doled out $61 million to needy startup firms, and the state has seen a heady increase in total (measured) angel investment since the recession (see Chart 1). Since 2005, the state has seen angel investment groups expand from a small handful to 24 today, sprinkled across the state, including six in the fairly sparsely populated northern and northwestern part of the state located in the Ninth District.

Angel investment -- ch. 1&2 -- 3-20-12

Many attribute that growth to the presence of tax incentives. Wisconsin was an early adopter of tax credits for investors who put their money into very young companies. The state has two such programs, initiated in 2005: an angel tax credit, which allows an accredited investor to offset up to 25 percent of an investment, and a similar program for so-called early-stage seed credit, which is considered the next financial step for a firm after angel investment, but before more sizable venture capital. Investor tax credits in the state topped $9 million for the first time last year (see Chart 2).

The net benefits of such tax credit programs are less obvious than recent activity might suggest. While data imply that tax credits have generated more angel investment, it’s unknown how much angel-like investment was occurring before tax credits and formal angel organizations came around, and how it would have evolved without tax credits. And it shouldn’t be surprising that investors are taking advantage of free money to cushion their risk-taking.

Still, angel activity across the border was enough to convince Minnesota lawmakers in 2010 to create a similar angel tax credit modeled after the cheesehead version, with annual program caps of $12 million in credits. The program wasn’t launched until July of that year, yet investors claimed $7 million in tax credits, and almost $16 million last year (thanks also to $4 million of unallocated credits from the previous year that were rolled over). The state saw $63 million in angel investments in 113 companies last year, which topped Wisconsin.

Not to be outdone, Wisconsin lawmakers greatly expanded their state’s investor tax credit program, allowing the program to allocate up to $40.5 million in tax credits per year, split between angel and early-stage seed investors.

Grads finding a tough labor market

Plenty has been written about the difficulty younger folks are having in the job market of late. The unemployment rate for workers ages 16 to 24 peaked close to 20 percent during the recession and has declined only marginally since.

Those recently graduating from college are supposed to have a better time of it, thanks to higher-level skills that help them compete for job openings. But traditional government data on employment do not specifically track these freshly minted workers, so a person has to look to other data sources to see how this population has fared during and since the recession.

One nontraditional source in Minnesota is a survey administered to all 31 higher education institutions by the Minnesota System of Colleges and Universities, which surveys its graduates every year to see if they are gainfully employed during the subsequent year in a job related to the program or major they studied in school. Survey data across these institutions show that graduates were having a tougher time landing a job in their field of study. Rates were holding steady for graduates through 2007, but the following two years have proven difficult for graduates from both 4-year universities and 2-year colleges (see chart).

MnSCU grad job -- Chart 1 3-12-12

As with any survey, overall results mask a lot of variance among institutions. Three colleges had placement rates above 90 percent in 2009, while seven institutions (including one university) had rates below 70 percent.

There are some additional qualifiers to keep in mind for context. Unemployment rates have been improving of late, and this survey suffers a bit of a time lag; the survey for 2010 grads (conducted last year) has not yet been published. This survey also depends on self-reports from graduates and response rates vary among institutions, both of which can induce some measurement error. Responses include, but do not distinguish between, those working part time or full time, and this composition possibly shifted as well during the recession given a slack job market. Neither does the survey publish responses from graduates employed in a field unrelated to their course of study, though a few institutions reported total employment on an anecdotal basis. The Inver Hills Community College, for example, reported that 68 percent of 2009 grads were employed in a related field during the following year and that 89 percent of all graduates found employment of some sort.

Despite caveats, this survey has the benefit of longevity and relative consistency over time, which makes it an interesting trend barometer. The ramifications for this labor decline are many. For example, difficulty in the labor market is one of the reasons why student loan defaults are on the rise, which is the subject of an upcoming article in the April fedgazette.

Minnesota job vacancies: Good news, with caveats

Job vacancies in Minnesota climbed 48 percent in the fourth quarter of 2011 compared with the same period a year earlier, according to a semi-annual survey recently released by the Minnesota Department of Employment and Economic Development (DEED).

That pencils out to almost 50,000 job openings last quarter—back to fourth quarter levels last seen in 2007, though short of the 65,000 vacancies in 2006. The survey also found that vacancies increased across a wide range of industry sectors (see Chart 1). In all, there were 3.2 unemployed people for each vacancy, compared with 5.8 a year earlier.

While certainly moving in the right direction, job vacancies still have some way to go before spurring the type of employment market many hope for. For example, DEED said 42 percent of the job vacancies were for part-time employment and another 13 percent were for temporary or seasonal work. The median wage offer for all job vacancies was $10.89 an hour—slightly lower than median wages seen in the same quarter of 2007 and 2008.

A breakdown of vacancies also shows that industry sectors with the greatest percentage of growth and the largest number of job vacancies generally offer lower wages (see Charts 1 and 2). This isn’t necessarily a surprise, or even a change. A look back at vacancies in the fourth quarter of 2006 shows a similar relationship regarding industry sector vacancies and median wages (see Chart 2).

Industry sectors like retail and accommodation employ many workers, are generally low-paying and typically see high turnover, which means they are perpetually looking for workers. In fact, health care traditionally has the most vacancies, reflecting the fact that it is a large and still-growing industry despite a sluggish economic recovery. Even though there are many high-paying jobs in the field, median wages for vacant jobs are just $11, a shade higher than the median wage for all vacancies. The biggest difference in job vacancy distribution among industry sectors is in transportation and warehousing, where vacancies remain considerably below 2006 levels (see Chart 2).

MN job vacancies -- Chart 1&2 -- 3-2-12