6 posts from January 2013

North Dakota: Rising star of the “new economy”?

The notion of the “new economy” has garnered a lot of attention over the past decade. In the view of some, state economies that are innovative, globally oriented and built around knowledge-based industries are in the best position to grow.

A recent report by the Information Technology and Innovation Foundation (ITIF), a Washington, D.C.-based think tank, ranks U.S. states on a number of new-economy attributes. Among district states, Minnesota ranked 13th on the 2012 State New Economy Index—not unexpected, given the concentration of medical device and other high-tech firms in the state. Minnesota and other district states posted rankings mostly similar to their performance in earlier surveys.

More surprising was the performance of North Dakota, a state associated with farming and, since the mid-2000s, intensive oil production. North Dakota placed 34th in the index, in the middle of the pack. But that score represents considerable progress over the past decade (see table); in 2002, it placed fourth from last among U.S. states. Moreover, North Dakota has raised its score on several new economy indicators, including job creation and destruction, venture capital investment (although the state lost ground in this measure in 2012) and educational level of recent immigrants.

Does this mean that the Peace Garden State is a rising star in the new economy, a potential rival to knowledge leaders such as Minnesota, Colorado and California? Probably not. North Dakota’s economic makeup suggests that the state’s index scores have risen because of rapid economic growth rooted as much in the old economy as the new.

More investment and increased job churn (a characteristic of innovative or fast-growing economies) may partly stem from high-tech manufacturing and software development along the Red River Corridor. But the oil boom in the western part of the state has likely contributed to North Dakota’s improved performance on those indicators. Over the past five years, hundreds of restaurants, retail stores and other traditional businesses have formed to serve the oil patch’s rising population. And oil and gas development has attracted billions of dollars in venture capital from outside the region.

As for North Dakota’s apparent attractiveness to well-educated immigrants, that’s largely due to the fact that, compared with states such as California and Texas, very few poorly educated immigrants settle in the state.

ND & New Economy rank -- 1-28-13

A rough road for townships

When springtime comes around this year, the harsh winter effects on roads will become obvious. So too will the effects of lagging state aid for roads to local governments.

The matter is particularly problematic for township governments. Roads make up the single largest expenditure for most of the thousands of township governments that provide public service to the rural expanses spanning the Ninth District. So when budgets get tight, rural roads are heavily affected.

In November, the fedgazette surveyed township officials on the subject of tight budgets and their consequences for public services (see January fedgazette). Among almost 150 respondents (about 85 percent from Minnesota, and the remainder from the Upper Peninsula of Michigan), more than two-thirds identified roads and transportation as the service most affected by tight local budgets (see chart).

MN & UP roads survey -- 1-22-13

Below are comments that respondents gave the fedgazette permission to share with readers.

“Road work suffers the most, dirt roads don’t get as much attention as they should. … (Residents) are not happy; they want the roads smooth but don’t realize the money isn’t there.” Cheryl Lincoln, clerk, Richardson Township, Minn.

“We blade the roads less often and also remove snow less often. We also cannot afford to apply as much gravel to our roads.” Jo Ann Kolbaske, clerk, Bismarck Township, Minn.

“With the retirement of a full-time employee, the position was eliminated in our road department. Our former four-person department continues with three people to operate and maintain 63 miles of roads in addition to 90,000 linear feet of sanitary sewer line.” Rhonda Peleski, clerk/treasurer, Thomson Township, Minn.

“Our largest expense is roads. There have been no improvements or upgrades. (We’re) trying to hang on to the status quo. The public would like to see road upgrades and improvements, such as paved roads, improve drainage issues and dust control. The number one issue would be more gravel for roads. We also have one bridge in jeopardy, (but) no money for repair.” Dave Tangen, clerk, Hawley Township, Minn.

“Gravel used for our township roads is becoming scarce, (and) the price per cubic yard is rising dramatically. The price for chloride that we use for dust control is going out of sight.” Daniel New, supervisor, Hudson Township, Minn.

“There is not enough money to keep up our roads and bridges the way we need to. There are no pluses when you have to cut services in the townships. Road ditches will fill up with brush and less money for rock on the roads. Soon it will need to be addressed, but what can we do? Still no money. … (T)he budget has to increase to keep up with some of the services, but we can’t keep up with them all.” Dave Tart, supervisor, Forestville Township, Minn.

“We do not blade our roads as often and only spot-gravel our roads. Snow plowing is important in our township. … The roads have more washboards and are slippery when it rains. If we get a lot of snow, that could be an issue to get the snow plowed off.” Lori Handyside, clerk, Clover Township, Minn.

“The cost of road maintenance is always on the rise. Our roads are being hammered by ever increasing size of farm machinery. They were not built to withstand the weights being put on them now.” Dale Kulberg, supervisor/chairman, Brookfield Township, Minn.

Another angle on 2013 business expectations

January is a time for economic forecasts for the coming year, and the Minneapolis Fed has already released its 2013 regional outlook, along with its business poll and manufacturers survey. These surveys showed that respondents generally expect more of the same; they have a moderate outlook for the growth of sales and hiring at their firms.

A separate ad hoc poll, conducted by the Minneapolis Fed about the same time as the above polls, provides further support for this modest outlook for 2013. The survey asked firms about capital expenditure plans and inventory levels, which are closely tied to firms’ expectations. Responses from 72 businesses, from a variety of industry sectors, showed an outlook mostly consistent with the Minneapolis Fed’s forecast.

More than half of respondents reported that their capital spending stayed the same in the second half of 2012 (see Chart 1), which is about what one might expect with continued growth. However, more firms reported decreases in capital spending than increases. The majority of firms reported that capital expenditures were primarily for replacement and maintenance of existing equipment. But more than 40 percent of respondents said that most or some of their capital spending was going toward expanding capacity.

Mpls Fed ad hoc survey -- 1-24-13

Among firms that said they were expanding capacity, the most common reason given was improved sales prospects, cited by just over a quarter of all the firms surveyed, followed by 19 percent who said current capacity was stretched too thin. Another 11 percent of firms also reported that their current equipment is not well suited to their future needs.

Slightly more than a quarter of firms surveyed reported that they were cutting capacity. Of those, about half cited reduced sales prospects. Current excess capacity and increased costs were each blamed by just over a third of firms trimming capacity.

Respondents appeared more optimistic about inventory levels (see Chart 2). Nearly two-thirds of all firms surveyed reported being comfortable or very comfortable with current inventory levels. The survey asked if there were signs of excessive inventories due to sluggish demand, and 80 percent reported no sign. Further, most district firms seem optimistic about their future demand prospects. More than half reported that they were optimistic or somewhat optimistic that they may be ready to build inventories; only 9 percent said they were pessimistic.

One final positive note: This survey was conducted late in 2012, before the resolution of the “fiscal cliff.” At the time, nearly two-thirds of respondents said uncertainty about the future was curtailing current capital spending, and more than half specifically cited the state of demand in the face of fiscal contraction as a source of uncertainty. With at least temporary resolution of that uncertainty, for better or for worse, the outlook may have brightened. Maybe.

Tax me for this, but not for that

Local governments have been facing tough budgets since the recession, or even longer in states like Minnesota and Wisconsin, where state budget deficits have been semiregular occurrences since the 2001 recession. One of the difficulties posed by tight budgets is deciding what services residents value most and which ones they’d prefer to scale back rather than see taxes go up.

The Michigan Public Policy Survey provides one perspective on that dilemma. A biannual (spring, fall) survey started a few years ago at the University of Michigan, it polls each of Michigan’s 1,856 units of general purpose local government, including several hundred in the Upper Peninsula (the only part of Michigan in the Ninth District, and the focus of this post).

Last year’s survey showed that 35 percent of U.P. respondents (who are local government officials) said their community was less able to meet its financial needs this year compared with last year. Almost 30 percent said there had been a decrease in federal aid (compared with just 7 percent that saw an increase), and more than half had their state aid cut (12 percent saw an increase). At the same time, almost half of U.P. respondents said infrastructure needs have increased, and 31 percent said similar for human services; virtually no local officials reported decreases in these public services.

So what to cut? Not fire services. Almost 60 percent of local U.P. officials believed residents would prefer higher taxes, while just 11 percent believed residents preferred a service cut over tax increases (see chart; the gap in responses for individual categories—why responses don’t add up to 100 percent—represents both “don’t know” and “doesn’t apply” answers). No other service had close to the same support. General government operations, economic development and public transit, as well as parks, recreation and libraries were conspicuous in the lack of support for higher taxes to avoid cutbacks for these services.

For more discussion on tight local government budgets, see the January issue of the fedgazette.

UP govt. taxes vs service cuts -- 1-21-13

Ninth District states: A little, and a lot, of government

The January fedgazette takes a close look at government employment. Every state has the same basic makeup of local, state and federal government workers. However, the mix and proportion of public sector workers—in sum, and by jurisdiction—can be quite different.

For example, on the basis of total employment, public sector employment in Wisconsin and Minnesota dwarfs the Dakotas and Montana because their populations are much larger (see left chart). However, on a per capita basis (see right chart), the relationship is reversed; the Dakotas and Montana having proportionately more public sector employees, particularly at state and federal levels, the latter of which is likely due to large federal military bases in each state. North Dakota hits the trifecta, with more public employees per 10,000 people at all three basic levels of government than other district states.

For much more on government employment, watch for online updates for the January fedgazette.

Govt. employment 1-17-13

A rebound for manufacturing in 2013?

After a strong 2011, last year was a season of some ups and downs for manufacturing in the Ninth District, according to the Mid-America Purchasing Management Index (PMI), a monthly survey of manufacturers in nine states, including Minnesota and the Dakotas.

Indexes are reported for new orders, production, inventories, employment, delivery lead time, prices and confidence. An overall PMI score is a composite of individual indexes. The first half of 2012 was fairly strong—with most indexes for district states over 50 (which indicates expansion)—but slowly lost steam. By June, the overall index showed that manufacturing was contracting in Minnesota and South Dakota. Employment was expanding for much of the year, but started contracting by July in South Dakota, and Minnesota followed two months later (see charts).

Mid-America & Manufacturing Ch 1-2   1-8-13

During this period, North Dakota manufacturers were almost oblivious to national and regional manufacturing trends. Though there have been some volatile dips—not surprisingly, given the state’s small manufacturing base and strong state economy—overall conditions and employment stayed doggedly in expansionary territory.

Now conditions appear to be reversed. By the December survey, many manufacturing indexes turned positive, including employment and the overall index, in both Minnesota and South Dakota. At the same time, conditions in North Dakota softened; in December the overall index barely stayed in expansion mode (50.9), while employment dipped into contraction (48.9). However, this doesn’t appear to be of great concern in the Peace Garden state, which has seen such fast growth from oil drilling and production that the recent lull is expected to be temporary.

The Federal Reserve Bank of Minneapolis also released it's own manufacturing survey earlier this month, which showed 2012 results roughly in line with the Mid-America survey. Respondents expect stable growth in the coming year.

And for a much broader discussion of manufacturing trends in Ninth District states, see the October issue of the fedgazette.