New Geography

Author: Matthew Leiphon

  • Entrepreneurship on the Rise?

    The Kauffman Foundation, the “world’s largest foundation devoted to entrepreneurship,” recently released the 2008 edition of their “Index of Entrepreneurial Activity.”

    The index, which measures the rate of business creation at the individual owner level, reports that despite the recession, “new business formation increased in 2008.” This growth was not present in all sections of the nation, however. According to the Kauffman survey, the Midwest saw a slight decline in business start-ups in 2008. Unfortunately, while entrepreneurship was apparently on the rise, there was a drop in the formation of the “highest-income-potential types of businesses”.

    On a more local level, the states of Georgia, New Mexico, and Montana led the pack, each showing over 500 per 100,000 adults creating businesses each month. Bringing up the rear were West Virginia, Iowa, and Ohio, with the last showing a rate of creation of 190 per 100,000 adults per month.

    In general, 2008 rates of entrepreneurial activity as reported by the Kauffman survey are higher along the west coast and in the Rocky Mountain states, and lower in the midwest and mid-atlantic regions. These findings would seem to have some overlap with the patterns reported by Newgeography’s “2009 Best Cities for Job Growth” rankings, which, in general, showed stronger conditions in the west (outside of California) and pockets of weakness in the midwest and mid-atlantic regions.

  • Economic Resilience in Rural America?

    This week Reuters is hosting a Food and Agriculture Summit in Chicago. On Tuesday presenters, including leading agribusiness executives and business economists, reported that despite the challenging global economic climate, the U.S. rural economy has weathered the recession better than most sectors due to steady demand for agricultural products, stable land prices and healthy credit lines for farmers”.

    Jim Borel, a VP at DuPont Co stated that “fundamentally, food demand is there,” as “people need to eat,” which “helps to stabilize things.” According to Reuters such claims were echoed by other participants, including Mark Palmquist, CEO of CHS Inc, who noted that the world keeps “adding mouths to feed,” and that “food demand… tends to be pretty insensitive to what the global economy is doing.”

    While there appears to be some anticipation of stability at large agribusiness corporations, such optimism may be tempered among farmers, who have seen commodity prices drop by 50% or more over the past year. Such drops will create a more difficult business environment for producers. However, there is some hope that the strong prices received by farmers over the past couple of years will make them better able to, as one agricultural official in Wisconsin stated recently, “ride it out for somewhat longer than otherwise would have been the case”.

  • A (New) Place to Call Home

    A recent survey by Pew Research finds that nearly half of Americans (46%) “would rather live in a different type of community from the one they’re living in now,” with those living in cities expressing the highest desire to live elsewhere.

    Even though many Americans say they are interested in giving somewhere new a try, most of us seem to think that our current communities aren’t so bad. According to Pew, over 80% of respondents rated their current community as excellent, very good, or good. The survey also reports that “ideal community type” was not dominated by any one class of place, with 30% preferring small towns, 25% suburbs, 23% cities, and 21% rural areas.

    Pew also asked those surveyed about their interest in living in specific big cities. Denver came out on top, with 43% of respondents stating that they would be interested in living in its metro area. Other western cities also fared quite well, with seven of the top ten “popular” cities being located in the west. The remainder of the top ten was made up of southern cities. Cities in the north and east lagged behind in popularity, with the rustbelt cities of Detroit and Cleveland registering the lowest popularity. (8% and 10%)

  • State Budget Woes

    A new report from the Center on Budget and Policy Priorities highlights the increasingly precarious fiscal situation faced by state governments confronting the ongoing economic downturn. According to CBPP, “at least 44 states faced or are facing shortfalls in their budgets for this and/or next year, and severe fiscal problems are highly likely to continue into the following year as well.”

    The scope of these emerging deficits varies greatly. Mississippi currently has a budget deficit of around $33 million, which “could reach as high as $70 million-$80 million by the end of the fiscal year.” On the high end of the spectrum, California faces the daunting prospect of a $15 Billion deficit for the fiscal year ending June 30, with the potential for “another $25-billion-plus for the next fiscal year,” if nothing is done to bring the shortfall under control.

    The process of bringing budgets into balance should be the source of much political turmoil over the next year. In Minnesota, which has a predicted two-year deficit of $6 Billion, legislators are beginning to spar over the potential tax increases and budget cuts. On Dec. 26, Gov. Tim Pawlenty announced $271 million in “emergency cuts,” with a large share coming from aid payments to local governments. Legally required to have a balanced budget, as are many states, legislative leaders in Minnesota face the prospect of a challenge “so ugly that a special summer session will be needed to finish the budget.” In New York, which faces the “largest deficit in state history,” Governor David Patterson recently presented an “austerity budget,” calling for cuts in state aid to local governments, education funding, and property tax rebate programs. Looking at all potential options to fill the gap, Patterson has also “appointed a commission to look into leasing state assets,” including bridges, roads, and parks. The privatization of state assets and infrastructure as a means to raise funds is also being considered in Minnesota and Massachusetts, which faces a FY2009 deficit of over $2 billion.

    With states potentially facing a combined deficit of $350 billion through FY2011, the pressure to make difficult policy decisions is sure to increase, as are requests for outside aid. Already, there are calls for the federal government to step into the fray, with governments across the nation “lining up to ask President-elect Barack Obama and the new Congress for hundreds of billions of dollars to plug holes in their budgets”. Gov. Ted Strickland of Ohio, facing a two-year deficit of $7.3 billion, is “preparing a pitch for three chunks of money,” to be delivered to the states to support education, infrastructure, and aid to the poor. CBPP also argues that there is a need for federal assistance, in order to “lessen the extent to which states take pro-cyclical actions that can further harm the economy.” Facing an increasingly challenging economic situation which may limit the options at their disposal, it appears that states will look to the incoming Obama administration to find ways to stop “the bleeding.”

  • The Recession Hits the Plains

    On Monday, Creighton University’s Economic Forecasting Group released the latest installment of the Mid-America Economic Survey. The survey of supply managers in nine plains states has been conducted monthly since 1994 to “produce leading economic indicators of the Mid-America economy.” The survey provides a snapshot of economic activity in the states of Arkansas, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, Oklahoma and South Dakota.

    For November, the economic picture was less than positive. The survey’s primary index hit a second straight all-time low in November, recording a score of 37.8. Any score below 50 “indicates a contracting economy over the next six to eight months.” Only one state surveyed, North Dakota, showed a growing economy, with an index reading of 55.7, down from both September and October.

    Employment prospects in the area were also negative, with the region showing “job losses for the tenth time in the past 11 months.” This led to a “very weak” November employment index figure of 39.0, down from 49.7 in October, another record low. Creighton economics professor Ernie Goss, a member of the forecast group, expects “regional job losses to mount in the months ahead with rapidly rising unemployment rates for most states.” According to Goss, the area is “now in a recession and I expect it to rival the recession of 1981-82 in terms of joblessness and job losses.”

    Echoing such findings today, the Federal Reserve released the latest edition of the Summary of Commentary on Current Economic Conditions, more commonly referred to as the Beige Book. According to the report, “overall economic activity weakened across all Federal Reserve Districts,” with declines in retail sales, manufacturing activity, and housing prices being reported in nearly all districts. On the plains, the Minneapolis and Kansas City Fed districts both reported weaker overall economic activity.

    Hopes for a quick rebound are subdued. According to the Kansas City Fed, their “business contacts expressed little optimism about economic activity going forward.” The Mid-America survey reports that economic optimism “captured by the confidence index, slipped to another record low of 22.4” in November. While pockets of strength such as North Dakota remain, communities across the plains now face the prospect of a significant economic downturn.

  • The Transmission Infrastructure Dilemma

    Last week, Bismarck, ND was host to the second annual Great Plains Energy Expo and Showcase. Hosted by Bismarck State College and Senator Byron Dorgan, the conference focused on North Dakota’s growing energy industry, including the wind energy sector, with presenters such as T. Boone Pickens discussing the opportunities and challenges facing the industry.

    Wind is a readily available resource on the plains of North Dakota, which have been referred to as the “Saudi Arabia of wind”. According to David Hadley of the Midwest ISO, a transmission coordination agency, North Dakota is the top state in the nation for wind energy potential. At 40% capacity, the state would have over 345,000 MW of potential generation capacity.

    Current generating capacity is a minuscule fraction of this potential output. However, North Dakota has seen a major increase in investment in wind energy projects over the past several years. In 2005, there was only 80 MW of wind generation in the state. As of June, 2008, that number stands at “716 MW either in service or under construction, plus another 807.5 MW that has either been site permitted or is in some stage of the siting process.” According to the Midwest ISO, potential North Dakota projects being discussed or currently under way add up to 7656 MW of potential generation. One major project under discussion would include 2000 MW of generation, costing around 4 billion dollars. The development is, in the words of one elected official interviewed by the Bismarck Tribune, “truly eye-popping.”

    Standing in the way of exploiting the Great Plains’ wind bonanza is a major challenge- transmission capacity. North Dakota currently has a transmission export limit of 1950 MW, which is fully subscribed by current power producers. While several upgrades to the system are in the works, they will fall far short of the massive build up in transmission infrastructure needed to allow for continued rapid expansion of generation capacity. As one presenter at the Great Plains Expo put it, the region is “a victim of [its] own location.”

    In August the New York Times discussed the challenge posed by transmission limitations, noting that “North Dakota and South Dakota, could in principle generate half the nation’s electricity from turbines. But the way the national grid is configured, half the country would have to move to the Dakotas in order to use the power.” If unaddressed, the inadequacy of the electric grid will serve as a check on energy driven economic development on the Great Plains. Rick Sergel, President of the North American Electricity Reliability Corp. (NERC), argues that “Without new transmission development needed to support these resources,” it is likely “only a fraction,” of currently proposed wind projects will be built. Speaking to Reuters, Sergel called for serious consideration of “comprehensive plans that cross state lines and international borders to build the clean-energy superhighway that will provide everyone equally with access to carbon-free generation”.

    It appears that expansion and modernization of transmission infrastructure will receive significant attention from the incoming administration. President-elect Obama stated in an interview on MSNBC that “the most important infrastructure projects that we need is a whole new electricity grid,” and that he wants such projects “to be able to get wind power from North Dakota to population centers, like Chicago.” With the current economic slowdown increasing calls for an economic stimulus package, investment in infrastructure, including grid expansion and modernization, appears set to take a central role in policy discussions in the coming year.

  • European Housing Woes

    While the decline in housing prices in America has been making news for some time now, less attention has been paid on this side of the Atlantic to the downturn in European housing. The housing market in Europe, much like that of the United States, “soared during the first half of this decade, rising far beyond the levels that you’d expect, based on traditional economic factors.”

    The fallout from the bubble is beginning to look the same, if not worse. According to Newsweek, over the first six months of 2008, housing prices in several European nations, including the United Kingdom, Spain, Sweden, and Norway, have fallen “at a faster rate than is occurring in the United States.” According to one analyst interviewed by Newsweek, the European downturn is still in an “early stage”.

    Eastern Europe is also seeing major fallout from deflation of the real estate bubble. According to Reuters, nations such as Bulgaria, Romania, and the Baltic republics of Latvia, Estonia, and Lithuania, have seen property prices plummet as easy access to credit has dried up. A Bulgarian property agent interviewed by Reuters reported that “No-one is buying. Everything has frozen”. The credit crunch has led to fears of “a wave of bank and currency crises,” which might necessitate IMF bailouts of several Eastern European nations. In the past two weeks Hungary and Ukraine have been bailed out, with the IMF providing loans “totaling $32 billion, in exchange for belt-tightening.”

    A recent report on European housing by Stratfor argues that the housing bubble faced by Europe was larger than that seen in the United States, and in correcting could lead to a “long-term deflationary spiral”. The report points out that in addition to facing overheated housing markets, Europe, over the long-term, faces a “poor demographic situation,” with a birth rate well below replacement level. According to Stratfor, this situation “will dampen the demand for housing in the long term and possibly create a deflationary spiral in the housing market”.

    Not all analysts are so gloomy, with some arguing that “the practice of giving mortgages to less credit-worthy buyers,” never reached the same levels in Europe, and that while prices did boom, there is not a “vast glut of never-lived-in houses sitting vacant on the market,” which should help to mitigate the situation. Regardless of the severity, it appears clear that Europe is set to face a continued period of real estate value contraction.

  • Down on the Farm

    2007 was a good year for rural America. Driven by “bumper crops, strong demand, and high prices” in commodity markets, farmers across the United States enjoyed an “exceptional year”. Strong conditions continued into the first half of 2008, spurring farmers to increase “purchases of capital equipment and household consumption,” and fueling “double-digit percentage gains in cropland values,” in many areas of the nation.

    Unfortunately for rural America, these boom times appear to be drawing to a close. Over the past few months, prices for wheat, soybeans, corn, and other commodities have come back to earth, while input costs have soared. According to the Fargo Forum, the USDA calculates that expenses faced by farmers “increased half as much in just the past year as they rose in the previous 15 years combined,” leaving farmers “hard-pressed to make money next year even if they enjoy good yields”. This has left many farmers concerned that farm country may be facing a repeat of the lean times faced during the farm crisis of the late 70’s and early 80’s. One long-time farmer, Harlan Meyer of Davenport, Iowa, expressed his reservations about the situation to the AP, stating that,

    “I guess you could say there’s an awful lot of concern in the rural communities and with some of the city people… I would think there would be a lot of cautiousness among farmers because most of the people can remember the ’80s and I would think there’s probably a lot of cautious people now on spending a lot of money.”

    While rural communities may be facing tougher economic times in the face of a bursting commodity bubble, it appears that their banks will be able to meet such challenges from a position of relative strength. According to Reuters, banks throughout rural America “are not freezing credit to customers like large money center banks, offering a bright spot in an otherwise gloomy economy”. Such banks have “largely steered clear of the subprime housing loans,” have “low to no exposure,” to credit derivative instruments, and are able to draw on a strong base of deposits to continue to provide loans. Those loans will also be made at far better terms than those seen during the farm crisis, with banks today offering farmers “interest rates that are one-third or one-half of what they were in the late 1970s.”

    While conditions may have some ways to go to match the bleak days of the farm crisis, some legislators are already expressing concern about access to credit in farm country. This week, Sen. John Thune of South Dakota called for a hearing to explore the impact of the credit crisis on rural America. While rural banks may be in relatively sound health, it appears that those same banks are, according to the AP, requiring “more collateral and higher interest rates,” for loans, and are, in the words of a Texas A&M economist, “turning conservative”. However, the AP also notes that even in the face of such tightening, lending will continue, as “the industry’s traditional lenders — independent commercial banks — are on more solid financial footing than the country’s largest investment banks and commercial banks”.

  • As Goes North Dakota…

    North Dakota is not a state known for supporting Democratic candidates in Presidential elections. In the the past 80 years, it has only backed the Democrat three times- Franklin D. Roosevelt in 1932 and 1936, and Lyndon B. Johnson in 1964.

    Notably, these three elections mark the three largest popular vote landslides by Democrats during that period of time. In 1932, FDR won nationally by a margin of 18%, in 1936 he won by 24%, and in 1964, LBJ defeated Barry Goldwater nationally by 22%. No other Democratic presidential candidate has run up a double digit margin during that period, with FDR coming closest in 1940, winning by 9.9%. (And, it should be noted, losing North Dakota.)

    This year, however, North Dakota may be in play. While President Bush won the state in 2004, 63% to 35% over John Kerry, the most recent polls of the state, by Research 2000 and the Fargo Forum, place the 2008 race in a dead heat.

    This may be a reflection of a wider trend in rural areas. A survey of rural voters in 13 battleground states released in late October by the Center for Rural Strategies, showed Sen. Obama and Sen. McCain tied among rural voters. In September, similar polling by the center had shown McCain with a 10 point lead among rural voters. According to Reuters, in 2004, President Bush “won rural districts nationwide by 19 points.”

    If the recent 2008 polling proves accurate, Tuesday night may be an unhappy evening for McCain supporters, with Sen. Obama facing the possibility of winning by a healthy margin, potentially bringing rural states such as North Dakota along for the ride.

  • A Fistful of (Out of State) Dollars

    A new study from Maplight.org, a “nonpartisan, nonprofit research group illuminating the connection between money and politics,” reports that “U.S. House members raised $700 million in campaign funds,” during the 2005-2007 time period, with 79%, or $551 million of that amount coming from outside the district of the House member running for office.

    According to Maplight, around 21% of campaign contributions to U.S. House members originated in Washington, D.C., with Virginia, California, New York, and Texas rounding out the top five source locations for contributions. The reports states that the majority of campaign funds not only came from out of district, but out of state sources as well:

    About two-thirds of House members, 274 out of 421 (65%), raised half or more of their funds from out-of-state. Ninety-two House members (22%) raised 70% or more of their funds from out-of-state. Eight House members raised 90% or more of their funds from out-of-state. The average percentage of funds each Representative raised from out-of-state is 56.7%, and the median percentage is 56.1%.

    It should be noted that the Maplight report only looks at donations of over $200, the point above which the donor must be identified to the Federal Elections Committee. Much has been made of the move, particularly by the Obama campaign, towards utilizing a base of small donations, under this $200 dollar threshold. Estimates place somewhere between one quarter and one half of Sen. Obama’s $600 million of campaign contributions in this class.

    This potential move towards smaller donations does not appear to have had as much of an impact on Congressional races. According to the Campaign Finance Institute, registered candidates for the U.S. House raised $447 million in the first four months of 2008, with “less than 10% of this total [arriving] in amounts of $200 or less.” This, states the CFI, marks little or no change from prior years.