The Nebraska Economy
Historical
i
i l Perspective
i and
d
Economic Outlook for 2010
MIDLANDS FINANACIAL PROFESSIONALS
M A R C H 9 TH, 2 0 1 0
ERIC THOMPSON, DIRECTOR
BUREAU OF BUSINESS RESEARCH
UNIVERSITY OF NEBRASKA – LINCOLN
ETHOMPSON@UNL.EDU
CHRISTOPHER DECKER, ASSOC. PROFESSOR OF
ECONOMICS
DEPT. OF ECONOMICS
UNIVERSITY OF NEBRASKA – OMAHA
CHRISTOPHERDECKER@MAIL.UNOMAHA.EDU
Outline
2
y Comparing Business Cycles
{ Nebraska vs. US
{ Omaha vs. US
{ Reasons for differences
y Employment conditions for 2010
y Opportunities/challenges related to the recession
y Long-term opportunities in manufacturing
y Regional conditions within the State
UNL Bureau of Business Research
Recession duration
3
y Recessionary periods (1980s and 1990s)
{ Research
ÙUnited
indicates:
States Average:
ÙCalifornia:
ÙNew York:
ÙIowa:
ÙNebraska:
6.11 quarters
6
8.0 quarters
7.7 quarters
7.0 quarters
3.2 quarters
Crone and Clayton-Matthews (2005) Review of Economics and Statistics
Unemployment rates, 2004 – 2009
4
11.0
11
0
10.0
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
9.3
5.5
3.94.3
5.1
4.3
3.9
2004
2005
5.8
4.6
3.03.4
4.6
3.03.4
2006
2007
Nebraska
Source: Bureau of Labor Statistics
Omaha
4.65.0
3.33.7
2008
United States
2009
Unemployment rate cycles, 1980 – 2009
5
12 00
12.00
10.00
P
Percent
8.00
6.00
4.00
2.00
0.00
1980
1984
1988
Nebraska
Source: Bureau of Labor Statistics
1992
1996
O
Omaha
2000
2004
United States
S
2008
Existing home prices
6
260 000
260,000
240,000
220,000
200 000
200,000
180,000
160,000
140,000
140
000
120,000
100,000
2000
2001
2002
2003
Omaha
2004
2005
2006
2007
2008
United States
Source: National Association of Realtors and the Omaha Chamber of Commerce
Existing home price appreciation
7
2000 to 2005
2005 tto 2008
United States
7.27%
-4.80%
4 80%
Omaha
4.53%
-1.77%
1 77%
Source: National Association of Realtors and the Omaha Chamber of Commerce
Non-farm employment, indexed 1999:1 = 100
8
115.00
110.00
105.00
100.00
95.00
90.00
1999 1
1999:1
2001 1
2001:1
2003 1
2003:1
Nebraska
Source: Bureau of Labor Statistics
2005 1
2005:1
Omaha
2007 1
2007:1
United States
2009 1
2009:1
Non-farm employment, Nebraska’s share of US
9
Nebraska/United States
.0074
.0073
.0072
.0071
.0070
.0069
.0068
0068
99
00
01
02
03
04
05
06
07
08
09
Non-farm employment, Omaha’s share of US
10
Omaha/United States
.00356
.00352
.00348
.00344
.00340
.00336
.00332
99
00
01
02
03
04
05
06
07
08
09
Why the more modest cycle?
11
y Favorable Industrial (sectoral) diversification
y Favorable Industrial (sectoral) composition
{ Agriculture
{ Insurance
{ Health Services
y Banking
B ki stability
t bilit
y Favorable energy prices and the cost of doing
business
Industrial (sectoral) diversification
12
y Recent Research* has demonstrated that economies
that are more diversified in their industrial
composition experience reduced unemployment
{
{
{
{
Diversification
i
ifi i provides
id a fform off employment
l
iinsurance to
states during cyclical downturns
Acts much like a diversified p
portfolio in reducing
g investor risk
Some sectors are less cyclical than others
Some healthier sectors can absorb labor released from other
sectors
*Izraeli and Murphy, The Annals of Regional Science
Industrial (sectoral) diversification, cont.
13
y How do we measure an economy’s level of
diversity?
y There are many measures BUT the most common
i called
is
ll d a H
Herfindahl-Hirschman
fi d hl Hi h
Index
I d (HHI)
y Usually constructed using data on sector
employment for a particular economy
Industrial ((sectoral)) diversification,, cont.
14
y For a given economy (state, city, country), j, there
are a set of sectors (construction, manufacturing,
health services, etc.) i.
y To
T construct
t t an HHI
HHI,
{
Calculate each sector’s share of total employment in an
economy:
y
Ù
{
Square the share
Ù
{
{
Si = empi/emptotal
Si
Si2
Add up the squared shares (and multiply by 10,000 for fun)
HHI = (ΣSi2)*10,000
(
)
,
Industrial (sectoral) diversification, cont.
15
y So how do we interpret the resulting HHI?
y The LOWER the HHI, the more diversified the
economy
y The HIGHER the HHI, the less diversified the
economy
{
Consider an economy
econom with
ith onl
only one ind
industrial
strial sector
Ù
{
Consider an economy with two equally sized industrial
sectors
Ù
{
The HHI is 12 = 1*10,000 = 10,000
The HHI is .52+.52 = .25+.25 = .5*10,000 = 5,000
Consider an economy with two unequal sectors
Ù
The HHI is .92+.12 =.81*10,000 = 8,100
Industrial (sectoral) diversification, cont.
16
Nebraska the United States
Nebraska,
States, and select states
900.00
849 05
849.05
H
HHI
850.00
800.00
819.67
762.50
773.81
Nebraska
United States
750.00
700.00
Ohio
Kansas
State
Source: Author’s Calculation based on BEA Regional Economic Information Service data
Industrial (sectoral) diversification, cont.
17
Omaha, NE vs. Akron, OH
850.00
831 29
831.29
H
HHI
830.00
810.00
790.00
786 97
786.97
770.00
750 00
750.00
Omaha, NE
Akron, OH
City
Source: Author’s Calculation based on BEA Regional Economic Information Service data
Industrial (sectoral) composition
18
y Some sectors are less prone to recessions than
others
{
A-cyclical or counter-cyclical
y An economy with more such industries will tend to
experience less-dramatic downturns
{
The
h reverse, h
however, iis true as well;
ll such
h economies
i tend
d
not to experience substantial booms during economic
expansions
Sectors that experience larger declines during
recessions
19
y Manufacturing
y Construction
y Retail Trade
y Food Services and Accommodations
Troubling news for Omaha and Nebraska
20
Share of Employment by Sector
US Nebraska
Manufacturing
9.43%
10.31%
Construction
7.56%
7.20%
Retail Trade
12.53%
13.62%
Accomm. and food services
7.96%
7.42%
Omaha
7.09%
7.84%
13.27%
7.79%
Source: Author’s Calculation based on BEA Regional Economic Information Service data
Sectors that experience smaller declines during
recessions
21
y Transportation and Warehousing
y Information
y Finance and Insurance
y Health Services
y Education
y Agriculture
Better news for Omaha and Nebraska
22
Sh off E
Share
Employment
l
t by
b Sector
S t
US Nebraska
T
Trans.
andd Ware.
W
3 83%
3.83%
6 29%
6.29%
Information
2.30%
2.16%
Fi
Finance
andd Insurance
I
5 48%
5.48%
6 94%
6.94%
Manag. Of Companies
1.27%
1.75%
H lth Services
Health
S i
11 82%
11.82%
12 56%
12.56%
Omaha
5 91%
5.91%
2.92%
8 01%
8.01%
2.27%
11 74%
11.74%
Source: Author’s Calculation based on BEA Regional Economic Information Service data
Growth of business enterprises – Nebraska vs.
United States
23
Business growth - select industries
Finance and Insurance
Health Services
Management of Companies and
Enterprises
Information
Transportation and
Warehousing
0.00
5.00
10.00
15.00
Percent
Neb
Source: Author’s Calculation based on US Census data
US
20.00
25.00
Growth of business enterprises – Omaha vs.
United States
24
B i
Business
Growth
G th - select
l t industries
i d t i - Omaha
O h
Health Services
Management of Companies and Enterprises
Finance and Insurance
Information
T
Transportation
t ti andd Warehousing
W h i
0.00
5.00
10.00
15.00
20.00
Percent
Omaha
Source: Author’s Calculation based on US Census data
US
25.00
30.00
Sectors and business cycles, cont.
25
y Notice that recently both Omaha and Nebraska
have been experiencing business growth (that outpaces the United States) in sectors that tend to be
less cyclical than average.
{
In particular, Health Services
y This
Thi h
helps
l our economy weather
th th
the currentt
recession better than in other states of the country.
Nebraska Agriculture
26
y Farm Income
{ There has been a big drop in farm income in 2009 and
livestock producers are suffering.
{ However,
However while farm incomes in 2009 are down from record
levels in 2007 and 2008, incomes remain above the 10-year
average
y Therefore, in agriculture, 2009 is not a good year,
but it is (overall) not a disastrous year either
UNL Bureau of Business Research
Agriculture and Nebraska
27
y During
g 2008,, there was a substantial run-up
p in
farm-land prices
y So, there was no dramatic decrease in household
property wealth in Nebraska during the 2008-2009
period, as in other parts of the country
y Of course, one potential
t ti l concern ffor 2010 iis a
collapse in the price of farm land (this did not
happen in 2009)
UNL Bureau of Business Research
Cost of doing business in Nebraska
28
y
Milken Institute’s Cost of Doing Business Index:
{
5 most expensive states
1.
2.
3.
4.
5.
{
5 least expensive states
46.
47.
48.
4
49.
50.
{
Hawaii
New York
M
Massachusetts
h tt
California
Connecticut
Idaho
Montana
Iowa
North Dakota
South Dakota
Nebraska ranks 38th.
Cost of doing business in Nebraska
29
y Reasons
{ Wage costs tend to be comparatively lower
{ Industrial
I d t i l and
d commercial
i l rental
t l costs
t ttend
d tto b
be
comparatively lower
{ Energy costs tend to be comparatively lower
Energy
gy costs
30
Total cost of Energy for Commercial Buyers
$p
per BTU
25
20
15
10
5
0
2
2008
Source: US Department of Energy’s Energy Information Administration
2
2006
United States
2
2004
2
2002
2
2000
1
1998
1
1996
1
1994
1
1992
1
1990
1
1988
1
1986
1
1984
1
1982
1
1980
Nebraska
Energy costs, cont.
31
% off US
Ratio of Nebraska to US energy costs
85.0%
80 0%
80.0%
75.0%
70.0%
65.0%
60.0%
55.0%
50.0%
45 0%
45.0%
40.0%
77.8% 76.4% 75.9% 76.0%
73 8% 73.2%
73.8%
68.2% 68.3%
2000
2001
2002
2003
2004
2005
Source: US Department of Energy’s Energy Information Administration
2006
2007
Banking Sector
32
y Omaha and Nebraska area banks are in comparatively good
shape
h
relative
l ti tto th
the larger
l
national
ti
l banks
b k we hear
h
about
b t iin
the popular press
y Many
y local loans are in the farming
g sector
{
Recent years agriculture has been quite strong
Ù
Ù
Ù
Farm commodity prices have been strong
Demand for corn
corn-based
based fuel has been strong
Loan repayments are steady
y Banking in this region for the most part avoided sub-prime
mortgage exposure
{
Nebraska is one of the 10 states least affected by sub-prime
lending
Source: Omaha World Herald: March 11, 2009
Recovery Gains Steam Throughout 2010
33
y Incomes are g
growing
g again
g
in Nebraska
{ This has spurred growth in consumer spending
y A relatively weak dollar also has aided Nebraska’s
export-oriented industries in agriculture,
manufacturing, and services
y As
A the
th year continues,
ti
growing
i consumer spending
di
and exports will support business investment
UNL Bureau of Business Research
Employment Trends and Outlook
Non-Farm Employment
34
Non-Farm Employment
970
965
960
955
950
945
940
UNL Bureau of Business Research
2010.4
4
2010.3
3
2010.2
2
2010.1
1
2009.4
4
2009.3
3
2009.2
2
2009.1
1
2008.4
4
2008.3
3
2008.2
2
2008.1
1
2007.4
4
2007.3
3
2007.2
2
2007.1
1
935
Employment Outlook (pro-cyclical sector)
Construction Employment
35
Construction
52
51
50
49
48
47
UNL Bureau of Business Research
2010.4
2010.3
2010.2
2010.1
2009.4
2009.3
2009.2
2009.1
2008.4
2008.3
2008.2
2008.1
2007.4
2007.3
2007.2
2007.1
46
Employment Outlook (pro-cyclical sectors)
Business and Professional Services
36
Bus & Professional Services
108
106
104
102
100
98
96
UNL Bureau of Business Research
20
010.4
20
010.3
20
010.2
20
010.1
20
009.4
20
009.3
20
009.2
20
009.1
20
008.4
20
008.3
20
008.2
20
008.1
20
007.4
20
007.3
20
007.2
20
007.1
94
Employment Growth By Industry
2009 and 2010
37
Industry
y
Total Non-Farm
Construction
Manufacturing
p
Transportation
Wholesale Trade
Retail Trade
Growth 2009
9
-1.6%
-3.0%
3
-8.4%
-2.0%
-1.5%
-1.8%
UNL Bureau of Business Research
Growth 2010
+1.0%
+1.0%
-2.1%
+1.3%
3
+0.2%
+0.1%
Employment Growth By Industry
2009 and
2010
38
Industry
y
Growth 2009
9
Information
-5.5%
Financial Activities
-0.2%
Services
-1.2%
5
Federal Government
+2.5%
State & Local Gov’t
+2.5%
UNL Bureau of Business Research
Growth 2010
-1.7%
+1.3%
3
+2.2%
+2.4%
4
+0.8%
Other Measures of Growth
2009 and 2010
39
Measure
Nominal Income
Taxable Sales
Population
Growth 2009
9
-0.5%
-3.2%
3
+0.8%
Unemployment
p y
Rate
2009
4.8%
4
UNL Bureau of Business Research
Growth 2010
+4.1%
+3.5%
35
+0.8%
2010
4.8%
4
Unemployment Rate Trends and Outlook
40
Unemployment Rate
5 0%
5.0%
4.5%
4.0%
3.5%
3.0%
2.5%
UNL Bureau of Business Research
20
010.4
20
010.3
20
010.2
20
010.1
20
009.4
20
009.3
20
009.2
20
009.1
20
008.4
20
008.3
20
008.2
20
008.1
20
007.4
20
007.3
20
007.2
20
007.1
2.0%
Risks For Nebraska Economy–
A Lost Cost Advantage
41
y In the latter half of this decade,, an exaggerated
gg
cost
of living made many areas on the West and East
Coasts less competitive.
{
Climate,
l
access to oceans h
have amenity value,
l
b
but property
prices had risen far in excess of those amenity values on the
East and West Coasts
y This problem has now been addressed
{ Property prices have declined, more in line with the real value
off amenities
iti
y As a result, Nebraska has lost a competitive
advantage that it held in the 2005
2005-2008
2008 period
UNL Bureau of Business Research
Opportunities For Nebraska Economy–
Temporary Spike in Population Growth?
42
Year
2005
5
2006
7
2007
2008
2009
9
Nebraska Population
p
Growth Rate
0.6%
0.5%
0.6%
0.8%
0.8%
UNL Bureau of Business Research
Opportunities for the Nebraska Economy–
Strength and Decentralization of Manufacturing
43
Average
g Annual Growth Rate
Manufacturing Value-Added 1972 to 2002
United States:
p
Areas:
Metropolitan
Non-Metropolitan Areas:
3.1%
3.0%
3
3.9%
Source: Hammond and Thompson (2009)
UNL Bureau of Business Research
Decentralization of Manufacturing
44
Component
p
of Growth 1972-2002
97
Metro
Labor Hours
-0.6
Capital Stock
1.3
2.3
3
Productivityy
Total
3.0
3
Source: Hammond and Thompson (2009)
UNL Bureau of Business Research
Non-Metro
0.1
1.6
2.2
3.9
3
9
Nebraska – A Leading Indicator for the United
States and The West?
45
y Nebraska’s recent strengths
g
and emerging
g g
advantages will carry it through the next few years
y But, more generally, he strength of the entire “Upper
Midwest” may provide a roadmap for national
recovery.
{
Stabilization of household wealth and a recovery in household
income
Ù
{
Both portend solid, steady growth in consumer spending
An economy with a larger export sector and a smaller housing
and real estate sector
UNL Bureau of Business Research