Region’s financial strength a benefit to business

BY DAVID FLYNN

Federal budget issues continue to dominate headlines in seemingly endless repetition. The divide between political parties is so extreme that budget crises and the possibility of government shutdowns have become a routine part of life. There is significant uncertainty about the future of government tax and expenditure policies and how this will impact the country, and the region. Similar problems exist on the monetary policy front as well.

Anyone will tell you that interest rates have nowhere to go except up. When monetary policy is keeping rates between 0 and 0.25 percent the only direction to go is up. The possibility of reduced bond purchases by the Federal Reserve introduced significant volatility into financial markets in the past few months. The impacts are evident in the equity markets, the bond markets and mortgage markets. As these policies gain momentum the internal strength in regional financial institutions will permit them to continue to lend, keeping businesses growing and the regional economy moving forward.

On just about any measure chosen, including unemployment, labor force growth or income, the economies in Minnesota, North Dakota and South Dakota are outpacing the United States. People in our region are familiar with the contrasting success of regional businesses and the area’s economy compared to the national picture, but to put it into context, the U.S. median income grew 2.49 percent from 2009 to 2012. In Minnesota, the median income increased by 10.14 percent over the same time period. North Dakota witnessed an 11.36 percent increase and South Dakota’s median income increased by 7.83 percent.

Among the many factors contributing to an expansion of this sort is the strength of the financial sector. The CredAbility Consumer Distress Index (see graph) provides great insight into the different paths the three states took versus the U.S. (index available from the St. Louis Federal Reserve FRED website). This index combines measures such as unemployment, credit delinquencies, income and saving, and net worth. A measure of 80 or higher is indicative of a good or stable environment, while a measurement in the 70s is indicative of an at-risk environment. Being in the 60s, which the U.S. was after the onset of the crisis, is viewed as an unstable situation.

The Dakotas never really fell out of the 80s despite the massive problems in the national economy. Minnesota followed the U.S. pattern more closely, but overall, the region fared very well. Banks in the region were less likely to engage in subprime lending than those in larger cities, business lending was stronger and problem loans were fewer than in the rest of the country. The combined effects meant that lending channels remained open, firms could expand when necessary or able, and growth continued in the region. Regional strengths are important to keep in mind against the backdrop of a national policy quagmire. PB

David T. Flynn Professor and Chair, Department of Economics Director, Bureau of Business & Economic Research University of North Dakota David.flynn@business.und.edu