Driving to the bank: Auto loans rebounding in Ninth District

Maybe people like their cars more than their homes. While the housing market appears to be finally finding its legs, auto sales have been on a tear—especially in the Ninth District.

During and subsequent to the Great Recession, total auto loan debt declined precipitously to its trough around the end of 2011 (see first set of charts). Since then, however, auto loans have been squealing the tires. In the district, inflation-adjusted auto loan debt rose to 98 percent of prerecession levels, while national auto loan balances are at 88 percent, according to data from the Federal Reserve Bank of New York Credit Panel/Equifax.

The lending rebound has been shared among various financing options, but banks are in the lead car, particularly in the Ninth District. Federal Reserve Bank of New York Credit Panel/Equifax data show that banks (which include credit unions and savings and loans) hold the majority of vehicle loan debt in the district, and debt balances didn’t dip as far during the recession. Debt balances have since rebounded above prerecession levels, to $9.5 billion (see charts below). At the same time, vehicle loan debt held by finance companies (dealers and auto or sales finance companies, like car makers) plunged during the recession and remains considerably below the prerecession peak.

Nationally, the share is flipped. Finance companies still account for a majority of loans, but the margin has narrowed, in part because finance company loans saw a steeper drop through 2010 compared with banks, and their subsequent growth since 2011 has been very modest.

Performance among Ninth District states has varied—in fact, some states saw inflation-adjusted auto loan balances decline well before the recession. Northwestern Wisconsin has experienced little recovery since the end of the recession; by the end of 2012, real auto loan balances stand at only 90 percent of 2003 levels. At the other end of the spectrum, North Dakota auto loan balances are 40 percent higher over the same period. Other district states lie somewhere in the middle, though Montana did have a notable runup in debt levels prior to the onset of the recession.

Creditworthiness and delinquency also play a big role in the rebound. Vehicle loan balances generally dropped less during the recession and rose more afterward as borrower Equifax Risk Scores rose. So-called super-prime borrowers are responsible for a large percentage of vehicle debt, and they have been taking advantage of their access to credit to take out more vehicle loans given today’s low interest rates. And, again, this trend has been more prevalent in the Ninth District. Ninth District loan delinquency rates in the district also have been well above national rates before, during and after the recession.

Revamping the district stock index

The composition and methodology of the Ninth District Mid-Cap Stock Index changed at the beginning of April 2013.

In terms of composition, four companies were removed from the index as they relocated their headquarters outside the district or their market capitalization exceeded the maximum threshold for the index. Five new companies were added to the index, expanding the diversity of industries represented as well as geographical coverage. Details on these changes and a current list of companies in the index are available here: Ninth District Mid-Cap Stock Index.

In terms of methodology, the index is now more closely aligned with calculations used in the benchmark S&P MidCap 400 index. Conceptually the district index, like other market-capitalization-based indexes, such as the S&P MidCap 400 and S&P 500, represents the total value of underlying companies normalized to a base year. The rate of change in the index therefore represents the rate of change in the total value of companies included. Under the previous methodology, price changes had a stronger weight and tended to overestimate growth.

As shown in the chart below, the Ninth District Mid-Cap Stock Index moves closely with the benchmark S&P Midcap 400 index. District mid-cap companies appear to have weathered the financial crisis better than the national average; the cumulative growth rate since February 2008 was about 8 percentage points higher than the S&P 400 index. For more details on the Ninth District Mid-Cap Stock Index, see the index methodology.

Banks paring back their branches

It has taken some time for the ball to start rolling the other way, but banks across the country and Ninth District are slowly pulling back on branches. Call it “too small to bail.”

The total number of Ninth District bank branches rose steadily from 2001 to 2006—increasing by nearly 25 percent—before plateauing during the recession (see Chart 1). Branches saw some gains and losses over the next several years, but still rose on net from 2006 to the fourth quarter of 2009, to 3,027 branches. But since then the Ninth District has officially lost about 70 branches (more on this in a bit; the actual number is likely higher).

The Upper Peninsula of Michigan has seen the biggest loss of branches, but the trend started well before the recession. Branches there peaked in 2004 at 172 and were down to 139 by the end of 2009. By the fourth quarter of last year, the U.P. had lost another six branches. Minnesota has shed 35 bank branches, but from a much larger base of more than 1,400 branches. Other district states (including northwestern Wisconsin, the only portion technically in the Ninth District) lost only a small handful of branches—even booming North Dakota saw branches drop by a half dozen over this period.

The outlier, with caveats, is Montana, which officially saw the number of branches rise by nine, or almost 3 percent since the end of 2009 (see Chart 2). However, at least part of this bump appears to come from full-fledged banks getting converted by a parent company to branch status. Last year, for example, Glacier Bancorp, one of the largest bank holding companies in that state, consolidated 11 bank subsidiaries—five of them in Montana—into a single commercial bank, effectively converting previously independent banks into branches; nothing else changed except the regulatory designation of the building.

At the same time, Montana is still something of an outlier in terms of total “banking service locations”—in essence, the number of banks plus branches. Montana saw a net-zero change from 2009 to 2012, while every other district state saw a decline of banking locations of between six (in the U.P.) and 72 (Minnesota).

For more information on the health of Ninth District banks, see the Minneapolis Fed’s Banking Conditions website, which is updated quarterly.

 Economist Jason Schmidt contributed to this post.

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.

Negative equity in homes improving, but not everywhere

Signs of housing and financial recovery are becoming more common, including recent data from CoreLogic showing that the percentage of homeowners with negative equity is slowly dropping in many states.

Despite modest improvements from fourth quarter 2011 to fourth quarter 2012, almost 22 percent of homeowners nationwide with a mortgage owed more on their loan than the domicile was worth (see chart). With the exception of Michigan, all district states have negative equity rates considerably below the national average.

District states also saw decent improvements over the prior year, including Minnesota, whose rate dropped by 2 percentage points. The lone exception was Wisconsin, whose rate rose by 0.8 percentage points and was one of relatively few states that saw rates tick up slightly.

More evidence that businesses expect to grow, increase hiring

Signs are upbeat that the Ninth District economy will continue to grow, according to a recent poll of more than 300 business contacts from across the district (see methodology below).

For starters, 40 percent plan to increase employment at their firms, and nearly three-quarters of these firms cited expected high sales growth as the most important factor. Only 7 percent plan to decrease employment. In the same survey a year ago, 38 percent planned to increase employment and 10 percent planned to cut jobs.

Other important factors cited for new hiring were overworked staff, improved financial condition of firms and the need for additional skills. The majority of respondents plan to use word of mouth and advertising to get new employees. Twenty-eight percent plan to use a recruiting firm, and surprisingly few (9 percent) plan to raise starting pay.

For those respondents not planning to hire additional people this year, most expected low growth sales and a desire to keep operating costs low. Many reported difficulty finding skilled candidates. Though fiscal policy developments were not a factor for most respondents, 35 percent said they had a detrimental effect on hiring and 4 percent said they would increase hiring plans.

The survey also asked about wages and benefits; 36 percent expected wage growth of 2.5 percent or more, and a similar amount expected positive wage growth of less than 2.5 percent (see Chart 1). Respondents generally believed benefit increases would be larger than those for wages (see Chart 2).

 

Methodology: On Jan. 15, the Minneapolis Fed invited, via email, about 1,000 Beige Book contacts from across the Ninth District to answer the special question in a web-based survey. By Jan. 31, 303 contacts had filled out the survey. The respondents come from a variety of industries (see table below).

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).

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.

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.

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.