55 posts categorized "Economic Development"

Per capita income race: It’s North Dakota by a length

Personal income growth slowed last year for many states. And then there is North Dakota.

Nationwide, personal income increased by 2.6 percent last year, down from 4.2 percent in 2012, according to estimates from the U.S. Bureau of Economic Analysis. While every state saw total personal income rise at least 1.5 percent, North Dakota was doing laps around the rest of the field with 7.6 percent growth, almost double the next fastest rate (Utah, 4 percent). Among Ninth District states (highlighted in dark red in the chart), South Dakota saw the smallest increase, at 1.8 percent.

In fact, North Dakota has been among the leaders in income growth for more than a decade. From 2003 through 2013, personal income in the state has risen at a compound annual rate of 6.8 percent (not adjusted for inflation), according to BEA figures. That’s 50 percent faster than the next closest state (Louisiana, 4.45 percent). Other district states saw annual compound growth of between 2.3 percent (Michigan) and 3.9 percent (South Dakota). Over this period, North Dakota has climbed from 37th in per capita income in the country to third ($57,000), behind only the District of Columbia and Connecticut.

BEA personal income 2013 Ch1

Black fiscal gold: North Dakota oil taxes expected to keep pumping

In the midst of a federal government shutdown over raising the debt ceiling, it’s hard not to stop and gawk at North Dakota’s fiscal position stemming from rapidly rising oil and gas production in the western part of the state.

As recently as the 2003-05 biennium, oil and gas production taxes totaled just $120 million. A decade later, this tax revenue is expected to hit $5.2 billion in the current biennium through fiscal year 2015.

Comparatively little of that money—$300 million, by state statute—goes to the state general fund for lawmakers to spend as they please. Property tax relief has also been championed in recent budgets, but allocations for this priority remained unchanged at $342 million despite the rise in oil and gas tax revenue.

North Dakota has taken the unique step of funneling a significant amount of oil and gas taxes to permanent trust funds. This biennium, the state expects to divert $2 billion toward the Legacy and the Common Schools trust funds and does not include several hundred million in expected royalties from production on state lands that will also go to the school trust. (For more background and discussion on permanent trusts in North Dakota and other top energy producing states, see the recent fedgazette article, “Saving for a rainy, oil-free day.”)

But there was still plenty left over to finance new roads, schools and other infrastructure to deal with breakneck development across the Bakken oil-producing region. But rather than dramatically increase departmental budgets, the state has preferred to allocate money to special-use funds (which can be tapped for a variety of purposes), and to send more money directly to local governments to deal with local needs. These allocations also saw the largest increases in the current state budget. (For more on the fiscal trends among North Dakota local and state governments, see “Congratulations on your oil boom” in the July fedgazette.)

This tax revenue shows little sign of slowing. In late September, Department of Mineral Resources Director Lynn Helms told an audience of industry and local government officials that he expects the state’s daily oil production will double to 1.6 million barrels by 2017.

Oil & gas allocations -- 10-8-13

Little GDP engines that could: District metros see strong growth

Metropolitan regions now account for more than 90 percent of the nation’s gross domestic product (GDP), according to the Bureau of Economic Analysis. Given their economic and geographic diversity, metros offer a more detailed look at growth across states and the nation—one which shows that metros in the Ninth District are generally seeing faster growth.

Nationwide, 305 of 383 metropolitan regions (80 percent) saw economic growth in 2012. In the Ninth District, 13 of 15 metros grew last year, or almost 87 percent, and two of three district metros beat the national average of 2.5 percent (see left chart). A large region encompassing much of the lower half of Minnesota—including the Twin Cities, St. Cloud, Rochester and Mankato metros—saw growth over 3 percent (see map, at bottom).

But as has become the norm, North Dakota metros were leading the metro pack, with Bismarck at the top at 8.5 percent growth last year, one of the top rates in the country. The region is seeing spillover effects from strong growth in the Bakken oil shale region to the west. Other shale regions are also seeing explosive growth; in the Eagle Ford oil shale region of Texas, the metros of Midland and Odessa both saw growth of 14 percent.

There were two district metros whose economies shrank last year: Duluth, Minn., and Great Falls, Mont. The source of contraction is hard to determine exactly. In the case of Duluth, the city and broader region experienced a major flood in June, which likely dampened economic activity, particularly tourism; the previous two years it had experienced annual growth near 3 percent.

Last year’s growth among district metros continued a general trend in outperforming metros elsewhere. Over the previous three years, 11 of the district’s 15 metros had faster annual growth than the national average (see right chart).

GDP of metros -- CH1-2

GDP metro MAP - 9-18-13

West-central Minnesota is manufacturing strong job growth

While pundits and policymakers loudly mourn the general loss of manufacturing jobs, the west-central region of Minnesota has quietly enjoyed robust job growth in this sector.

From 1990 to 2012, the nation saw a continuation of the downward trend in manufacturing jobs. That trend was exacerbated by the Great Recession, which hit manufacturing states like Minnesota and Wisconsin hard. Minnesota has experienced a small uptick in manufacturing jobs in recent years, but not nearly enough to offset the losses just from the Great Recession.

But a nine-county region in west-central Minnesota—a federally designated economic development planning district bureaucratically referred to as Minnesota EDR4—has seen job growth above and beyond the recession’s downturn. These nine counties (Becker, Clay, Douglas, Grant, Otter Tail, Pope, Stevens, Traverse and Wilkin) have seen their manufacturing job base increase by 53 percent from 1990 to 2012. That contrasts with a national decline of 33 percent over the same period (see Chart 1).

Much of that growth occurred during the 1990s; in Minnesota, manufacturing jobs grew by almost 60,000 during the decade, and the “R4” region similarly grew by about 2,500 jobs, hitting close to 10,000. But over the next decade-plus, Minnesota manufacturing saw a steady decline, shedding about 95,000 jobs—about one in four—by 2012. But the R4 region grew another 15 percent over the same period.

Wages have also grown in the region, though their performance is less compelling. Since 1990, average weekly (inflation-adjusted) manufacturing wages have grown by about 36 percent both nationwide and for the R4 region (see Chart 2). However, there remains a considerable gap in actual weekly pay in the region compared with the national average for manufacturing workers.

West-central MN manufacturing jobs CH 1-2 -- 9-3-13

What makes for this island of good manufacturing activity? There are likely many reasons, including industry composition, available labor, transportation access and prevailing wage scales, which are lower in the region compared to the national average.

West Central Initiative (WCI), a nonprofit organization that provides financial support for worker training in the region, credits part of the success to intensive workforce development and training by employers. Regular surveys on business outcomes from employee training are conducted in the region by an independent firm and facilitated by Enterprise Minnesota, a manufacturing consulting organization and one of 59 federal Manufacturing Extension Partnership affiliates. These surveys suggest that training efforts often paid off for companies. Another recent study of labor turnover from 2006 to 2011, commissioned by WCI, also found that average labor turnover among regional firms participating in training programs was lower and statistically significant in 22 of 23 quarters studied. Sources in the region credit organic growth as well as growth from acquisition.

WCI identified about 30 companies with 100 or more employees in the region, and that size has allowed some to grow by acquisition.

“Growth accelerates with growth,” according to Bill Martinson, a business development adviser with Enterprise Minnesota. “As companies get bigger, they accumulate more human and capital resources with which to do things. A big boost is the ability to do acquisitions. We didn’t see acquisitions until the last few years.” Martinson added that many of the companies are now supplying multinational corporations, “which makes them less susceptible to a weakened U.S. economy.”

Bakken banks growing faster than peers in shale plays elsewhere

The Bakken energy boom in western North Dakota and eastern Montana has had a catapult effect on banks in the region, helping to fuel rising deposits, fast loan growth and growing profits. But the Bakken is only one of a handful of major, active shale plays across the country. How does the performance of Bakken banks compare with banks in other shale plays?

New research by the Federal Reserve Bank of Minneapolis measured bank performance among banks located inside and outside shale plays in the Bakken, Arkansas, Louisiana, Oklahoma, Pennsylvania and Texas. It found that Bakken banks saw significantly higher growth in deposits, construction and land development loans, and commercial and industrial loans, as well as an increase in profits compared with banks in other shale plays.

“While there are some points of similarity between the relative activity of Bakken banks and banks in other shale areas, the exceptional performance of Bakken banks has generally not been replicated in other shale areas,” noted bank authors Ron Feldman, executive vice president, and Stacy Jolly, financial analyst.

Among the more notable results (see also the accompanying charts at bottom):

• Deposits in Bakken banks increased 49 percent from 2010 to 2012. The next closest shale region was Louisiana, where bank deposits (in shale counties) rose 39 percent, but over a longer period (2008 to 2012).

• Construction and land development loans originating from Bakken banks almost doubled over the previous year ending in March 2013; over the previous three years, these loans grew by 165 percent to $209 million. Commercial and industrial loans within the Bakken saw a more modest rise (29 percent since the end of fourth quarter 2011), but that rate was still much higher than elsewhere. Owing in part to the Bakken’s rural nature and lack of population, residential loans were also higher as workers flocked to the region.

• Profitability of Bakken banks, as calculated by return on average assets, has been slightly higher and more consistent than banks in other shale regions, though banks in Pennsylvania’s Marcellus shale also have seen a persistent rise in profitability since 2009.

 Bakken banking 3 charts -- 8-20-13

For an extensive set of tabbed charts outlining bank performance in shale states, go the original research published online in the fedgazette.

County maps highlight the boom in the Bakken

The Minneapolis Fed’s Bakken Oil Boom web page features articles and data that describe the rapid expansion of economic activity in western North Dakota and eastern Montana. A recent addition to the site highlights changes in the region’s unemployment rates and employment growth rates during the boom relative to surrounding counties and to counties a few hundred miles away.

For example, in April 2004, just before horizontal drilling and hydraulic fracturing started to move into the area, unemployment rates in the Bakken already had relatively low unemployment rates (see counties in black outlines). The new online feature allows users to click through the maps and see how county unemployment rates have changed over time.

County maps Bakken 2013 (1) -- 8-13-13

After the recession ended in June 2009 and during the early part of the recovery, unemployment rates were relatively low in the Bakken area, while unemployment rates exceeded 7 percent in the western and eastern part of the Ninth District. Led by the Bakken region, North Dakota as a whole was an oasis of economic activity, while most other states were digging out of a hole. By April 2013, unemployment rates in most Bakken counties were below 3 percent.

While unemployment rates also decreased in other areas, the Bakken is unique in its concentration of low county unemployment rates. The exception in the Bakken is Roosevelt County, with an unemployment rate of almost 7 percent in April 2013. Roosevelt County has a lower share of oil production compared with many other Bakken counties and includes the Fort Peck Indian Reservation, which has relatively higher unemployment.

A similar story emerges with employment growth. In fourth quarter 2004, employment growth was mixed in the Bakken, with four of the 12 counties posting decreases. By fourth quarter 2010, employment in the Bakken was growing briskly in almost all of its counties, while employment levels were also decreasing in many areas outside the Bakken. Strong growth has continued in the Bakken through the fourth quarter of 2012. County maps of employment change over time are similarly available on the Bakken website (scroll toward the middle of the page).

Previous analysis by the fedgazette looked at the relationship between unemployment rates and wages in the Bakken relative to unemployment rates and wages in counties 100 miles to 400 miles away (see Bakken activity: How wide is the ripple effect?). Counties within 100 miles of the Bakken showed lower unemployment rates than those counties farther away, and counties within 100 miles to 200 miles of the Bakken saw higher unemployment than those within 100 miles, but lower unemployment than those beyond 300 miles.

See these trends by scrolling through the county maps. Since 2009, the counties directly surrounding the Bakken had relatively low unemployment rates, with the Bakken counties having the lowest rates. There is a similar pattern for employment growth in recent years, with relatively solid growth surrounding the oil patch but the strongest growth in Bakken counties.

Newborn businesses crawling again, jobs not following in tow

It’s well known that starting a business is tough. New data on establishments suggest that entrepreneurs are starting to regain their appetite for risk after getting scared to the sidelines during the recession and slow recovery.

According to figures from the U.S. Census Bureau, the annual number of establishments that are less than one year old has been slowly rising. While still not above prerecession levels across Ninth District states, all states saw positive growth in 2012; for most, it was the second consecutive year (see Chart 1). For North Dakota, it was the second straight year of record new establishments.

New establishments Ch1 -- 7-31-13

It’s also well known that these young businesses are an important source of employment because young companies tend to be growing and thus require more labor compared with older companies (for those who need convincing, see the July 2011 fedgazette). Jobs have been rising at these young establishments, but the overall track record is a little less consistent and upbeat. For most district states, last year was the first real year of solid job growth (see Chart 2). These jobs declined last year in Wisconsin, its trend line zig-zagging since 2009 along with Minnesota’s.

New establishments Ch2 -- 7-31-13

Annual job levels are still well below prerecession levels in four states. That’s because average employment at these young establishments has been going down steadily (see Chart 3). Minnesota’s average employment has gone down by one and a half workers since 2007; Wisconsin and South Dakota saw a drop of almost one worker.

The exception to all the job trends is North Dakota, whose economy is the best in the country and comparable to almost no other state right now. Last year, both new establishments and total jobs at these businesses outstripped those of Montana, whose population is more than 40 percent larger. North Dakota even saw small growth in the average number of jobs per young establishment between 2007 and 2012.

New establishments Ch3 -- 7-31-13

Ninth District manufacturing continues expansion ahead of nation

While manufacturers nationwide continue in something of a holding pattern according to recent surveys, manufacturers in three Ninth District states continue to see growth, according to a monthly survey of supply managers by Mid-America Business Conditions Index, published by Creighton University.

The May survey showed overall sentiment in Minnesota and the Dakotas mostly holding in the mid-50s (an index score over 50 indicates growth; below 50, contraction). The index for employment remained in growth territory but saw both positive and negative change from April in the three states (see charts). The overall index for the nation turned negative (at 49), while employment sentiment teetered on the growth fence (50.1).

The Dakotas are taking turns grabbing headlines. In May, South Dakota saw very strong growth in overall sentiment as well as for employment, while its northern neighbor declined marginally on overall sentiment and continued a volatile pattern in employment. Ernie Goss, director of Creighton's Economic Forecasting Group, said that wages have grown very strongly in North Dakota manufacturing, and “nondurable goods manufacturers, especially food processors, are experiencing very healthy growth. On the other hand, durable goods manufacturers are experiencing pullbacks in economic activity.”

Mid-America June survey -- 6-5-13

The economic impact of closing Minnesota's achievement gap: A theoretical construct

An education achievement gap by race and income has long persisted in the nation and in Minnesota. While there is a clear moral argument for closing the gap, there are some compelling economic ones as well.

Differences in high school graduation rates and achievement scores between white students and Native American, black and Hispanic students in Minnesota are some of the largest in the country. The chart below shows a substantial difference in average math scores of white and black eighth grade students since 2003.

Achievement gap charts -- 4-12-13

If test scores of black and Latino students and low-income students could be raised to those of white and higher-income students, presumably graduation rates would increase, as would the overall skills of the workforce, leading to productivity gains and stronger economic growth. But by how much, and what net effect would it have for closing these gaps in Minnesota?

A 2009 McKinsey report, using a methodology developed by Eric Hanushek in a 2008 study in the Journal of Economic Literature, projects that national GDP in 2008 could have been 2 percent to 4 percent higher had the United States bridged the racial achievement gap by raising the performance of black and Latino students to that of white students by 1998 after a successful 15-year reform period. The report estimates that GDP could have been 3 percent to 5 percent higher had the United States closed the income achievement gap by raising the performance of students with household incomes below $25,000 to that of students with higher household incomes.

The same framework discussed in the McKinsey report was applied to Minnesota using National Assessment of Educational Progress (NAEP) data for the last five survey years. Closing the racial achievement gap for eighth grade students in Minnesota would improve the state’s overall average math scores by about 2 percent; closing the income achievement gap would improve average math scores by about 3 percent.

Using Hanushek’s estimate – that long-run GDP growth rate increases by 1.3 percentage points per standard deviation improvement in test scores (about 0.6 percentage points per 10 percent increase in average test scores) – closing the achievement gap in Minnesota would translate into a 0.1 to 0.3 percentage point increase in the long-run economic growth rate.

Even a small change in a growth rate over time adds up. For example, if a hypothetical 15-year reform plan could close the achievement gaps, the level of Minnesota’s GDP would diverge from trend, raising the GDP level by 1 percent or more after 30 years and by more than 3 percent to 6 percent after 50 years (see table below).

Achievement gap table -- 4-10-13

In terms of dollars, these increases translate to a few hundred million dollars per annum after 15 years from the start of the reform period to a couple of billion dollars after 30 years to more than $10 billion after 50 years. In 2011, Minnesota’s real GDP was $282 billion. However, caution should be used with these projections because it’s unclear whether Hanushek’s estimate applies at the state level.

The calculated economic impact of closing the achievement gap in Minnesota is smaller than the national estimates by McKinsey. One explanation is the lower percentage of black and Latino students in Minnesota (22 percent) relative to the national average (45 percent). Likewise, low-income students also comprise a smaller percent of population in Minnesota than in the nation.

Another explanation could be different assumptions used in McKinsey’s and Hanushek’s models. Although details are not clear, the McKinsey report seems to assume that after the 15-year reform period, the entire workforce achieves the projected gains in cognitive skills commensurate with the closing of the achievement gap in test scores. Hanushek’s paper assumes a more gradual displacement of the existing workforce with higher-quality graduates. Correspondingly, estimates for Minnesota using this assumption yield a smaller impact of bridging the gap.

Even if the economic impact of closing the gap is estimated to be smaller in Minnesota than nationally, it is by no means a trivial one. As anyone planning a retirement learns, small changes in growth rates can have a big impact on the future value of investments, more so for longer-term investments.

Furthermore, this analysis doesn’t take into account benefits to government from closing the achievement gap, such as reductions in remedial education and crime costs, and eventually higher tax revenue, nor does this analysis estimate the cost of a 15-year education reform. Both of these data points are needed to assess whether the government would achieve a positive rate of return from investing in education reform. An analysis by Henry Levin and colleagues suggests that investments in early childhood education and some reforms for school-age children do just that.

And, finally, this is not the only achievement gap whose closure would likely lead to faster economic growth. Nationally, for example, Asian students have the highest average test scores. If, hypothetically, educational reform could boost the performance of white students to the level of Asian students, overall average math scores would increase by about 2 percent, with about a 0.2 percentage point increase in economic growth. Furthermore, if test scores of all non-Asian students were raised to the average of Asian students, average math scores would increase by over 6 percent, with about a 0.6 percentage point increase in economic growth, almost 70 percent larger than the effect of closing the black-Hispanic and white achievement gap. This particular analysis, however, isn’t relevant to Minnesota, where average test scores for Asian students are lower than both Asian students nationwide and Minnesota white students.

Personal income: One Dakota leaps, the other stumbles (kind of)

The Bureau of Economic Analysis just released figures on personal income, and Ninth District states fared comparatively well (see charts). Montana and Minnesota ranked in the top five in per capita income growth, and Michigan was ninth.

But the Dakotas stole the headlines, being the top and—maybe surprisingly—bottom state in terms of both total and per capita income growth last year. North Dakota was head and shoulders above other states, seeing a rise of 9.9 percent in per capita income. The next closest was Ohio, at 3.8 percent. Total personal income in North Dakota rose by 12.4 percent, thanks to strong worker migration to the state as well as rising wages.

Its southern sibling didn’t fare so well last year. In fact, South Dakota was the only state in the union to see a decline in per capita (-1.3 percent) or total personal (-0.2 percent) income. The likely culprit is agriculture, a volatile sector that suggests the state’s 2012 performance is not something to fret over.

Rewind to 2011. Farm income in South Dakota that year hit a record $4.6 billion—more than double 2010 levels—and was a big reason the state led the country in income gains in 2011, at 12 percent. Fast forward to 2012, a year with severe drought that hurt South Dakota ranchers and farmers more than in many neighboring states. Total farm income dropped to $3.3 billion—still a decent year on average. But the $1.3 billion drop in annual farm income last year represents significantly more than the $60 million drop in total state income recorded by the BEA.

Personal income in 2012 -- 3-28-13

 

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