A long road back for wood products firms

There’s good news for the Ninth District’s wood products industry: After years of retrenchment caused by the housing collapse and subsequent recession, the bleeding appears to have stopped.

Sawmills and manufacturers have reported increased output and revenues this year as the U.S. economy slowly improves, increasing demand for construction lumber and other wood products. After bottoming out in 2010, industry employment in Minnesota, Wisconsin, South Dakota and Montana rose slightly last year, according to government labor figures (see chart).

The bad news is that the industry has a way to go to recover thousands of jobs lost over the past decade. Montana saw the steepest drop in wood manufacturing jobs; employment fell by more than half between 2001 and 2010. The state’s sawmills were already in decline before the housing crisis, due to rising operating costs and log prices.

Employment in Minnesota and Wisconsin followed a similar downward path after the housing crash as demand sagged for oriented strand board, paperboard and office paper. Wood products workers in South Dakota fared better; during the housing downturn, many firms shifted their focus to the home remodeling market, shoring up sales and preserving jobs. But wood products manufacturers in the state still shed about 250 jobs over the past decade.

It’s questionable whether wood products employment will ever return to the levels seen at the height of the housing boom. In recent years, rising productivity has reduced the number of workers needed to run sawmills, paper mills, particle board plants and other forest products operations. Neiman Enterprises, a large sawmill operation in the Black Hills of South Dakota, has ramped up its lumber production since 2010. But over the same period, investments in automation have allowed the firm to reduce its headcount, said resource manager Dan Buehler.

And in western Montana and the Black Hills, a persistent infestation of mountain pine bark beetles has killed millions of pine trees, threatening to restrict future log supplies. (For much more on the impact of the pine beetle outbreak on the wood products industry, watch the fedgazette website for the upcoming article, “The beetle and the damage done.”)

Research Assistant Dulguun Batbold contributed to this Roundup post.

Beige Book, Minneapolis: Ninth District economy slowly improving

The Ninth District economy expanded modestly during late summer and early fall, according the most recent Beige Book released this week by the Federal Reserve Bank of Minneapolis.

Each of the 12 Federal Reserve district banks drafts a similar report, which in sum are a summary of regional economic conditions across the country, in preparation for the Oct. 23-24 Federal Open Market Committee meeting, where interest rates and other monetary policy issues are decided.

In the Ninth District, improved activity was seen in construction and real estate, consumer spending, tourism and professional services. Energy and mining continued to perform at high levels, while agriculture varied widely, with crop farmers generally in better condition than animal producers. On the softer side, manufacturing activity slowed in late summer, and wage increases remained subdued, although stronger increases were reported in some areas. But labor markets tightened somewhat, and price increases were generally modest.

For those interested in other regional, national or historical Beige Book reports on economic conditions, the Minneapolis Fed offers everything in one spot.

Minnesota’s lakes: More impaired, but don't be afraid to jump in

In the land of 10,000 lakes, the Minnesota economy has a unique relationship to water that is widely used for fishing, general recreation and even moving goods to market. So it raised some eyebrows when the state announced that more than 600 bodies of water were added this year to its list of impaired lakes and rivers.

But before the “ick” factor makes you put away that canoe, or pull the kids from their favorite swimming hole, it helps to get the background story. Turns out that the measure is more building block than condemnation—a work-in-progress assessment for preserving one of the state’s most valuable natural resources.

Since the mid-1990s, the federal government has required states to assess their water quality. Since then, the number of impaired bodies of water—those that don’t meet various federal water quality standards—has risen steadily and now stands at more than 3,600 (see chart). A map shows that these impaired water bodies are widespread (see map).

 

While this might not be “good” news for boaters and anglers, neither is it necessarily cause for great concern, according to officials with the Minnesota Pollution Control Agency, which puts the list together. The state has an incredibly large amount of water—92,000 miles of streams alone—and the growing impairment numbers “are indicative of our growing monitoring efforts,” said David Christopherson, who does environmental reporting and special studies for the agency’s water division.

Water bodies make the list if they exceed any number of water quality standards, like turbidity (excessive sediment), eutrophication (too much nutrient, often phosphorous from farm run-off), presence of fecal coliform or a host of other standards. In putting together its biennial impairment report, the agency “uses all available data” from internal and external sources with information about any of the state’s water bodies. As a result, the data are neither comprehensive nor systematic; given that the list comes from a partial assessment, it’s not even a random sample that could be considered scientifically representative.

The list also is highly sensitive to evolving standards for water quality. For example, a huge spike in listings in 1998 was the result of a first-time federal advisory on mercury and fish consumption, and mercury impairment is by far the biggest source of listings. Christopherson added that the state will be applying additional nutrient standards in the near future, “and I would expect to see a big jump (in impairments) then too.”

As a result, he said, “I don’t think (the impairment list) gives us much indication of overall water quality” in the state. Instead, Christopherson said the impairment list is more like a slow-growing benchmark that will give policymakers and others the data necessary to develop a more comprehensive approach to improving and maintaining water quality. “This is a primary driver in terms of what we’re doing” to improve water quality. “Once they get on the list, we have to deal with them.”

He acknowledged that “there are a lot of water quality issues out there. It’s a big issue and will take a long time to address … (but) I don’t think anyone here is particularly surprised” by the growing list of impaired lakes and rivers. The agency generally believes that about 40 percent of water bodies could stand some improvement, and the list “matches what we’ve been finding for years and kind of expected. A lot of other (states) are worse.”

The biggest trophy: Out-of-state hunters and anglers

A new U.S. Fish and Wildlife survey shows that district states have a unique profile when it comes to wildlife recreation, particularly when it comes to economic activity resulting from the great outdoors.

The survey, conducted every five years, measures participation in and expenditures for hunting, fishing and wildlife watching (observing, photographing and feeding wildlife; includes those who do it from home or nearby). Almost across the board, Ninth District states have higher than average rates than the nation as a whole—maybe not surprising given the natural assets and wide-open spaces in each state (see Chart 1).

Those activities bring with them considerable revenue, and the more who come for the outdoors, the higher the returns. Spending per participant in most district states is very consistent with the national average of about $1,500. But South Dakota and (especially) Montana are exceptions, seeing significantly higher spending by participants (see Chart 2, right bars). With high participation and high average spending by those participants, those states see almost quadruple the in-state spending on a per capita basis (see Chart 2, left bars).

 

The large majority of those revenues are generated by hunters and anglers, despite the fact that there are considerably more wildlife watchers in most states (Minnesota and South Dakota are exceptions). Across district states, the average hunter/angler spends two to five times more than the average wildlife watcher (see Chart 3, at bottom).

But more fundamentally, high participation rates and expenditures are driven by nonresidents, who tend to spend more money than residents on travel, accommodations, food, equipment and other needs. For example, Montana has high rates of nonresident hunters (31 percent) and anglers (30 percent) who come to find big game and to fish world-famous trout streams in the Rocky Mountains. Montana also sees much higher spending from nature watchers—double the average of most other district states—again, often attracted from other states to the natural splendor of the Rockies.

South Dakota has exceptionally high rates of nonresident hunters (53 percent) and anglers (42 percent) as well, many of whom come to hunt pheasants throughout the state and to fish walleyes and other species in the cavernous Missouri River reservoir system, among the largest freshwater bodies in the world. Though the state has the highest rates of nonresident participation in the district, the relative accessibility of good hunting and fishing spots in South Dakota likely helps keep a lid on nonresident spending, at least compared with a trip to Montana’s Rockies.

The survey is done to benefit natural resource and conservation agencies, academic researchers and wildlife related recreation industries, which use the information to estimate demand and identify recreation trends. The methodology used for this survey changed from previous versions, according to the agency, making current results incomparable with previous surveys.

Makin’ power while the wind (subsidy) is still blowin’

Like a nice, steady breeze, the nation’s wind power capacity has been expanding, with Ninth District states making a major contribution. But whether that arc of increase continues could well depend on what Congress decides regarding an expiring tax credit.

After five years of strong growth, the United States now trails only China in installed capacity (47 to 62 gigawatts, respectively) and has 1.5 times the wind-generating capacity of Germany and seven times that of France, according to a comprehensive August report by the U.S. Department of Energy. Wind still makes up a small portion of domestic power generation, at 3.3 percent, but that’s a fourfold increase just since 2006.

Texas is the leader in wind development, and by a wide margin (see Chart 1). But Minnesota and North Dakota are in the top 10 in wind capacity. Minnesota installed as much new wind capacity last year—542 megawatts (MW)—as many states have in sum. South Dakota also made its mark. It has almost 800 MW of wind capacity, virtually all of it installed since 2007, and representing almost all of the state’s increase in power generation over this period. Wind’s share of electricity capacity in the state leapt from less than 2 percent in 2007 to 22 percent, the highest rate in the country (see Table 1).

But the industry is nervously awaiting congressional action on a federal wind energy production tax credit of 2.2 cents per kilowatt hour—currently equal to more than $1 billion annually and set to expire at the end of the year. The credit was created two decades ago and has been extended numerous times or reborn after being allowed to expire. Its renewal is questionable this time around given sentiment in Congress about budget deficits.

The credit's expiration could affect not only future wind power generation in district states, but also district employment at a fair number of manufacturing facilities that supply the various components and services for wind farm development (see map).

Already there have been rumblings, according to local news reports. Otter Tail Corp., of Fergus Falls, Minn., has announced plans to sell DMI Industries, a maker of wind towers in West Fargo, N.D., with the eventual fate of 216 employees unknown. St. Paul-based WindLogics, a wind forecasting company, recently cut 10 employees because development work has stopped.

Officials with Mortenson Construction, one of the largest wind farm builders in the country and located in Golden Valley, Minn., said several hundred jobs could be eliminated if the tax credit expires. In Aberdeen, S.D., officials at the Molded Fiber Glass plant have reportedly put on hold a plan to add 100 to 200 jobs in light of the tax credit limbo.

 Source: U.S. Department of Energy

Minnesota lodging: Now I lay me down to sleep

Irrespective of the record heat, summer is a time for vacations, especially to places like the northwoods of Minnesota, where camping and old-time resorts with individual cabins are a time-tested tradition for many families. But as in any industry, things change, and the lodging industry in Minnesota has undergone some subtle shifts in the places people lay their heads during vacation or while on a work trip.

Explore Minnesota Tourism, the state’s tourism office, keeps a running (though unofficial) tally of lodging facilities of varying type, including indoor and outdoor. From 2002 to 2011, the total number shrank by 4 percent (see Chart 1). Resorts saw a 26 percent decline and had the largest loss in absolute numbers, losing about 290 operators. Private campgrounds saw a smaller loss in number (about 190) but a higher percentage loss (28 percent). That loss was somewhat offset by growth in state and other public campgrounds, which are fewer in number. Hotels and motels grew slightly, and vacation homes for rent (not listed in the chart) grew strongly from a percentage standpoint, but its listings are still small, at just 90 in 2011.

Despite the loss of facilities, the total number of lodging units has remained mostly unchanged over this period (see Chart 2). First, a little context: Riding the coattails of a hot economy in the 1990s, a tourism and lodging boom added thousands of hotel and other lodging units to the state. The echo of that boom started to die out in 2003, and the number of indoor lodging units in the state actually dropped by 1,500 by 2007. But by 2011, the number of indoor lodging units had bounced back by almost 1,900 units (about 2.5 percent).

At the campsite, it’s a fairly similar story (see Chart 2). Despite an erosion of campground operators, the number of individual campsites in 2011 is mostly unchanged from 2002, though there was some volatility in the middle. From 2006 to 2008, the number of tracked campsites fell by about 3,500 (10 percent), but then quickly rebounded by 2011.

Shifts in consumer demand underly these short- and long-term lodging patterns, as consumers demand new and different accommodations and amenities over time, and recessions tend to force out less competitive facilities from the market, leaving new opportunities when demand rebounds. Explore Minnesota reports that the state lodging industry saw “moderate improvement” through the first half of 2012, including a 1 percent increase in occupancy.

Wisconsin ratepayers hot over staying cool

In a summer with record heat, Wisconsin residents and businesses are finding out firsthand the high cost of keeping things cool inside. In fact, they are paying more than most for that comfort, according to a June energy assessment by the Public Service Commission of Wisconsin. But that wasn’t the case just a decade ago.

Back in 2002, retail power prices for residential, commercial and industrial customers were average to below average compared with neighboring states and the nation. Over the next eight years, Wisconsin’s electricity rates for all types of customers went up steadily. The state now has the highest, or nearly the highest, electricity rates among neighboring states across all three customer categories. It also has higher rates than the national average for residential and industrial power, and very similar rates for commercial power (see chart).

Among several drivers behind these rate increases, like higher costs for input fuels and spot-power purchases, the report offers some historical context, attributing the state’s rising prices mostly to its position in the long construction cycle for new power generation and transmission, and the subsequent timing of two recessions.

Improvements to electricity infrastructure to meet future power demand and service reliability needs are years—even decades—in the making for utilities. Wisconsin’s economy was quite strong in the 1980s and 1990s and, as a result, “Wisconsin entered the (electricity) construction cycle earlier than other states in the Midwest.” Utilities that built new generation facilities in the 1990s and early 2000s were entitled to recover those costs, which led to higher rates as the state’s economy—and particularly its power-hungry manufacturing base—started to struggle even before the official start of the 2001 recession.

The state’s economy has yet to regain strong footing, and the most recent recession compounded cost-recovery efforts by utilities because many saw a decline in electricity sales (and thus revenue) from the economic slowdown and increased energy conservation efforts. Still, because of their special regulated status, some utilities were allowed to raise rates again.

Even the commission acknowledged the irony, saying that “rate increases during a general usage downturn are confusing to customers … (m)any ratepayers have expressed their anger and frustration publicly and directly to the Commission about utilities raising rates during a time when they are using less in order to reduce their energy costs.”

The report notes, however, that all is not lost for ratepayers in Wisconsin. Having made the investments in new generation, if the economy ever returns to robust growth—and electricity use—“new cost-competitive plants will be positioned to potentially sell any additional energy into the wholesale market benefitting retail customers, because such revenues are directly credited to a utility’s expected revenue requirement during a rate proceeding, reducing the amount of money to be collected from ratepayers.”

Plenty of vacancy when it comes to rental data

While there seems to be more local news today about tight rental markets and new apartment developments, you’ll read or hear very little about rental markets on a national, statewide or even regional scale, and you’ll see even less hard data connected to those reports.

That’s because macro data on rental markets are sparse and decentralized. Most data are very local, and there is little aggregation of market activity like demand, rent levels and other matters the public takes for granted in the single-family housing market. In terms of centralized sources for data across states and cities, they start and end with multifamily permits from the U.S. Census Bureau. These data show that multifamily housing construction dried up after the recession and has only recently started to rebound (see cover article in the July fedgazette).

Other surveys by the Census offer some broad-based data on local markets, but come with considerable caveats. For example, the American Community Survey (ACS) and Current Population Survey (both conducted by the Census) measure vacancy rates in the Twin Cities. Unfortunately, annual data for each run only through 2010—a turning point in many rental markets. CPS offers quarterly vacancy rates for the Twin Cities, but these figures can have seasonal volatility. In any case, results from these two public surveys do not conform particularly well with vacancy surveys conducted by private firms in the Twin Cities (Marquette Advisors, CBRE; see chart).

Other “large” cities in the Ninth District are not large enough to attract much attention from private market research firms. The ACS offers data for smaller metropolitan statistical areas, including those in the district, but they tend to suffer the same caveats about timeliness and congruence with local sources.

As a result, understanding local markets is a hunt-and-peck effort. Local data sources are notoriously spotty, in both their volume and reliability, even for fundamental measures like rent levels and vacancies. Industry sources widely acknowledged the lack of good information on rental markets.

“We struggle with a lack of data,” particularly in outstate markets, said Mary Rippe, head of the Minnesota Multi Housing Association. She said rentals were harder to track because historically there’s been no Multiple Listing Service (MLS) that is standard with home sales (more on this in a bit). Turnover is also much higher for rentals and thus harder to track. Even the definition of vacancy introduces some complexity, as a corporate office might have a different definition of vacancy than a building manager for the same unit (if it’s empty but being repaired or updated, for example).

Some rental associations gather data; some do not. In their defense, local associations need to be wary of market surveys so as not to encourage collusion or rent setting, industry sources pointed out. For those associations that gather local data, some make that information available, but many do not. In more than a half-dozen cities with a rental association, information requests to rental associations via both phone and email were either refused or ignored.

The information gap is partially filled in some cities that publish annual reports on city housing, which typically include a section on rental housing. But most local governments “do not track rents charged by owners, and many communities do not even have a rental registration or license program. So they don’t even know who is operating rental housing in the community,” said Sue Speakman-Gomez, president of HousingLink, a Twin Cities clearinghouse of affordable rental housing information. The organization is trying to fill that void, she said, but acknowledged that “we still have a lot of work to do.”

Private data firms are starting to get their rental toes wet. Companies like Zillow have increased their abilities to identify and market local rental properties; the downside is that aggregate data are thin—there are no historical benchmarks for comparison—and privately held. MLS also has started to include rental housing, but Realtor.com—home of the National Association of Realtors—currently lists fewer than 350,000 units nationwide; this for a nation with about 40 million renter-occupied households, according to the Census.

Even among subjects with a strong policy bent, like affordable housing, surprisingly little centralized data are available that might allow for the analysis of broader patterns. For example, the U.S. Department of Housing and Urban Development confirmed that it does not aggregate waiting lists for various housing assistance programs, nor does any state, despite the fact that local housing authorities are required to gather this information. A check of local housing agencies shows that wait lists for public housing and Section 8 assistance vouchers have skyrocketed. (For more, see the July fedgazette article on low-income rental markets.)

Frac sand mining spurs rural rail

On average, railroads are four times more fuel efficient than trucks. In west-central Wisconsin, which is in the midst of a frac sand boom, that fact has increased business for railroads and spurred reinvestment in long-disused rural lines.

The region is a rich source of fine quartz sand, a vital ingredient in the hydraulic fracturing process that has opened up fresh reserves of shale oil and natural gas in North Dakota, eastern Montana, Texas and other parts of the country. Over the past five years, more than 40 frac sand mines have either opened or expanded their operations in west-central Wisconsin and in neighboring southeastern Minnesota.

In Wisconsin, many sand mining companies have built facilities adjacent to rail lines—a cost-effective way to ship raw or processed sand, often in “unit trains” of over 100 cars. In response to increased demand, railroads have ramped up their operations and rehabilitated little-used or dormant lines, at a cost of roughly $1 million to $2 million per mile.

Lakeville, Minn.-based Progressive Rail operates a 62-mile line running north from Chippewa Falls to Rice Lake and Almena, in Barron County (see accompanying map). Freight volume has increased fivefold to about 1,800 cars a month since EOG Resources completed a new sand processing plant in Chippewa Falls last December, said company President Dave Fellon. Over 90 percent of that volume consists of frac sand from the EOG plant and other mining facilities along the route.

Rising revenue has allowed Progressive to invest in human capital (payroll has increased from 65 to 100 workers over the past year) and critical line improvements. Fellon said the firm will spend $30 million to $50 million over the next five years on new railroad ties, bridges, loading facilities and other infrastructure.

Canadian National and Union Pacific have also refurbished long-neglected rail lines linking Wisconsin frac sand operations to distant markets. This summer, CN began clearing brush and laying new ties on a 45-mile section of rail between Cameron and Ladysmith to connect existing and proposed sand mines with a main CN line running north into Canada and south to Texas. The railroad backed out of a pending sale to the state that would have let Progressive operate the line, opting to retain ownership of a potentially profitable sand route.

For more on the economic impact of frac sand mining in the district, see the recent article in the July fedgazette.

In the state-economy race, it’s North Dakota, and everyone else

Everyone loves a good race, except when it’s a runaway, a laugher. In the case of gross domestic product at the state level, nobody’s much enjoying the race, save for North Dakota.

In recent data published by the Bureau of Economic Analysis, North Dakota had easily the highest gross state product in the country, at 7.6 percent, almost 3 percentage points higher than next-place Oregon. Among Ninth District states, Michigan’s economy appears to be finding some footing, thanks to a resurgent auto industry, ranking sixth in the country last year at 2.3 percent (see Chart 1). No other district state managed to outperform the national average of 1.5 percent.*

Maybe more impressive has been the Peace Garden state’s economic stamina. Since 2008, the state has seen its economy grow by 19.7 percent. Only one other state (Louisiana, at 11.9 percent) saw a growth rate even half as fast as North Dakota’s over this period.

There was also some shuffling among district states in their economic performance over this longer period. For example, Minnesota and Wisconsin economies both outperformed the national average since 2008, while Michigan went from the top quintile last year to bottom quintile for this longer period (see Chart 2).

*One methodological note: U.S. GDP values listed here may differ from the National Income and Product Account (NIPA) values because of revisions to both NIPA values and GDP-by-state accounts, which exclude federal military and civilian activity located overseas, which cannot be attributed to particular states.