District tourism hopes upward trend continues

With summer travel around the corner, many Ninth District businesses hope they can improve on 2012’s good-to-great tourism year, according to data from state tourism offices and university research centers in district states.

District states that track visitors or lodging stays reported 2012 increases across the board (see chart, at bottom). Gains were larger in Montana and especially North Dakota, where total visitors increased by 7 percent. South Dakota did not publish annual figures for visitors or spending change over the previous year, but reported that state park visitation last summer was up by 8 percent. North Dakota saw the same trend, with national park visitation there up 13 percent last year. Canadian border crossings were also up 8 percent.

States that track visitor spending saw it increase faster than visitor numbers. Wisconsin tourism spending grew by almost 5 percent last year, while Montana tourists were feeling particularly flush, spending 15 percent more in 2012 than the previous year. While Minnesota’s total lodging demand increased by 1.4 percent, total lodging revenue rose by 3.7 percent.

Higher visitor spending has been a consistent trend for several years, as tourists have found their wallets again after the recession. In Wisconsin, visitor spending has grown by 25 percent since 2009, to $10.4 billion. Montana has seen even stronger spending growth (40 percent) over the same period. However, the state experienced a steep downturn in visitor spending from 2007 to 2009, and last year’s $3.2 billion in spending finally reached above the state’s previous peak ($3.1 billion) in 2007.

Some positive early signs for the 2013 season are already evident. Early projections in Montana for the 2013 season were pegged at 2 percent growth of nonresident visits, and a 4 percent increase in spending. In Minnesota, lodging demand grew by 4.3 percent in the first quarter of this year compared with the same period in 2012.

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.

Wisconsin public pensions: Retirees gasping, taxpayers exhaling

When the Wisconsin Retirement System released its annual annuity adjustment for pensioners earlier this month, members groaned while taxpayers breathed a sigh of relief.

The WRS is the ninth largest pension fund in the country. It is also among the country’s best funded plans in terms of long-term assets and liabilities; since 2004, its funding ratio has been near 100 percent. Yet starting May 1, certain WRS retirees will see their monthly checks fall by almost 10 percent—unheard of among the millions of public sector pensioners. In fact, it’s the fourth consecutive year of annuity cuts for some retirees. There are several sources behind this seeming financial contradiction. But the most important is that WRS retirees assume the large majority of investment return risk.

Along with worker and employer contributions, pension funds depend heavily on investment returns on their assets. Pension plans assume a certain rate of return—7.2 percent for the WRS, while many others hover around 8 percent—to project member annuities upon retirement. Most pension plans also average returns over five years to “smooth” volatility. But two of the past five years’ returns have fallen well short of the WRS benchmark, including 2008, when two WRS pension funds lost roughly 30 percent of their combined value (see charts).

When investment returns fall short of this benchmark, all other things equal, unfunded liabilities accrue. For most plans, this gap typically requires additional contributions from government employers (via taxpayers) and often existing workers; by and large, retirees are financially exempt.

In sharp contrast, WRS retirees bear the majority of investment risk and therefore reap both more benefits and more hardship. Unlike many public pension plans, the WRS plan offers no automatic cost-of-living adjustment. Instead, it uses investment returns to pad monthly pension checks on a compound basis. Such a policy worked well for retirees during the 1990s, when heady investment returns led to annual pension adjustments (called dividends) averaging almost 7 percent.

But when investment returns go south—which they did during the 2001 and (especially) 2008 recessions—those dividends can be clawed back to ensure the plan’s long-term financial solvency. But a retiree’s annuity can never go lower than the original amount established at retirement. The investment drop in 2008 was so severe—and compounded by a weak 2011—that the WRS has been forced to take back dividends from its Core Fund (which funds roughly 90 percent of annuities) for four consecutive years. (The smaller Variable Fund has no such annuity floor, and investment gains and losses are fully recognized each year.)

The amount of annuity decrease for a retiree depends on the dividends previously earned. Given three previous years of negative adjustments, the Wisconsin Department of Employee Trust Funds anticipates that close to half of all WRS retirees will see no downward adjustment this year because they have no dividends left to take and are back at their original retirement annuity. This year’s clawback also was larger on a percentage basis because of the shrinking pool of retirees with dividends remaining. After this year’s adjustments, virtually anyone who has been retired since 2000 will be back to his or her original annuity level, according to WRS's latest actuarial report.

The good news for retirees is that this is the last year that 2008 returns will be averaged into investment returns for the Core Fund. Barring another market downturn, retirees should see a little more on their monthly checks next year.

Mortgage defaults: District fares better than nation

When times are tough, some people cannot afford to pay on their mortgage. This was especially true during the Great Recession when nearly 9 percent of mortgage loans in the United States were at least 90 days past due or in foreclosure. But today, more people are paying their mortgage, particularly in Ninth District states.

In January 2013, the mortgage delinquency rate dropped to 6.5 percent nationwide, while district states fared better—considerably so in many cases (see chart). The lowest state delinquency rate in the nation goes to booming North Dakota. The fourth lowest is South Dakota, followed by Montana (5th) and Minnesota (6th). Wisconsin is something of an outlier among district states at 27th. The highest seriously delinquent rate goes to Florida, where nearly 15 percent of loans are at least 90 days past due or in foreclosure.

Dusting off the construction hammers

It’s been a long road, but signs of the housing recovery continue to build.

The U.S. Census recently released annual housing data showing that last year saw significant housing growth across the Ninth District and the country (see Chart 1). While growth is good news, the data context is critical. The preceding year was one of the poorest on record. Still, five Ninth District states saw total permits rise at least 20 percent; all but Wisconsin saw permits increase more than 30 percent. Growth occurred in both single-family and multifamily categories; booming North Dakota was the only state to see a bigger increase in single-family permits.

But the show stopper was multifamily permit growth in Minnesota last year, which rose more than 200 percent over 2011. While the state’s outlier growth comes in part from a poor 2011, the 6,700 multifamily permits were the most since 2005. A dearth of new multifamily units since then has led to steadily tighter rental vacancy rates in the Twin Cities and across the state (see Chart 2), and is likely a major factor in the state’s hyper multifamily growth last year.

For more discussion about rental markets in Minnesota and the rest of the Ninth District, see the July 2012 fedgazette.

An economic development idea worth patenting?

What helps economies grow? That question vexes economists, economic development professionals, policymakers and local government officials looking for something to generate faster growth in local and state economies.

Innovation is widely believed to be important for local economies because the invention and introduction of new ideas can create long-lasting effects for business. But getting your hands around that notion and turning it into pursuable policy might be another matter.

Some equate innovation with patents. A recent Brookings Institution argued that “inventions, embodied in patents, are a major driver of long-term regional economic performance.” The study mapped patents nationwide and found that U.S. patent levels have been increasing in recent decades, and an increasing concentration of patents is coming from the top 20 metropolitan statistical areas (MSAs).

But do high patent levels lead to measurably better economies? The Brookings report did not answer that question definitively, and there are enough struggling metros in the top 20—Detroit, Philadelphia, Phoenix—to suggest that it’s not a perfect correlation. California has four of the top eight MSAs in patent production, yet all of them have high unemployment rates; San Francisco took the top patent spot, but its average unemployment rate from 1990 to 2011 ranked 161st of almost 360 MSAs analyzed.

Among 24 MSAs in Ninth District states (including 10 in Wisconsin that are located outside Ninth District boundaries), there was a wide range of patents per thousand workers (see Chart 1). Rochester, Minn., lapped much of the competition several times over—it ranked third best nationwide in patents on a population basis, thanks mostly to being home to an IBM campus. Wisconsin MSAs, many of them manufacturing hubs, also tended to rank high. But patent levels at a majority of MSAs in district states were less than one per thousand workers; only one in three regional MSAs was above the national average of 0.6 patents per thousand workers.

Not surprisingly, the top ranking MSAs tended to have a larger share of technology jobs as a share of all employment, as well as a higher proportion of workers with degrees in science, technology, engineering and math (so-called “STEM” degrees; see Charts 2 and 3. In the four scatter graphs, the MSAs from Chart 1 are rank-ordered, so low-ranking Great Falls = 1, high-ranking Rochester = 24).

However, patents themselves are not a particularly good predictor of economic growth over time. As Charts 4 and 5 demonstrate, there is virtually no relationship between recent patent trends and either growth rates per worker or unemployment rates.

None of this means that patents and other innovations are not valuable to local economies. It only means that local economic activity is a complex recipe, and patents are likely only one ingredient for faster growth.