Sunday, August 2, 2009

AP: Slice of Central US Safe from Recession Shrinking

These doom and gloom types over at the Associated Press did not get the memo; as they write stories about the shrinking safe havens from the ills of the recession, we already know we're coming out of the recession. Next quarter, the onslaught of government money ($2 Billion more approved for Cash for Clunkers 2.0 in the House late Friday) and "we can't go down forever" will lead the government calculations to say we've exited with a positive GDP quarter. That will end our streak of 4 down GDP quarters in a row - a record. So turn that frown upside down AP! I don't care about the unemployed (backwards looking) and Main Street (Main Street = Wall Street) - those are just details. The government reports are what matter: recession over.

However, since it never hurts to look at old history (like the days Main Street was hurting and was in recession) I am bringing the story here to the site. We were early calling for the disaster that would afflict state budgets [Dec 16, 2007: California in a State of Fiscal Emergency - Coming to a Theater Near You] [Apr 25, 2008: Shoes Beginning to Fall in the States] knowing how many were addicted to easy money from the bubble years - while this is a national epidemic, unfortunately the states, unlike the federal, cannot just print more money whenever there is an issue. While the states are not in the clear (in fact next year will be worse than this), many are using the "stimulus" money to plug gaping holes in their budgets. And I expect next year when Stimulus 4.0 passes they will use that money to fill the bigger holes. See how it works? Many still don't have to "really" balance their budgets - they can do the job halfway [Apr 14, 2009: Cities Turn to Fees to Fill Budget Gaps; States Slash Social Programs]- then just wait for the largess from federal government since it's pockets are unlimited. It's all part of the bailout nation mindset. Why save for a rainy day during good times, when you can promise benefits you cannot afford to your select group of workers and stick the bill to the taxpayer? Boo Yah.

That said, as negative as we were - we still believed this would be more of a regional recession - those states more reliant on natural resources would hold up much better than others. Of course the states reliant on housing bubbles or US consumer consumption are much more heavily populated hence get 99% of the press. We pointed out how the Dakotas were holding up much better on a relative basis a few months ago [Jun 8, 2008: A Real Green Shoot - the Dakotas]

While some think this is the home of yellow or indeed brown shoots, I have no problem pointing out green shoots... as long as they are rooted in reality rather than hope. Even as we discussed the coming recession in 2007 (denied by politicians until late 2008, and denied by economists until 3rd quarter 2008) we said there would be regional pockets of strength. The upper plains is one of those regions; we can think of them as mini Australia's or Canada's. Resource heavy (producing product other countries actually want) & running fiscally tight ships.

I actually received a fund pledge last week from a reader in South Dakota (struck me, because I believe that's the first from these relatively sparsely populated locales) and he said even these areas are slowing down, but again - it is all relative. What is a slowdown in those areas would be considered a return to growth in parts of the industrial Midwest or some portions of the coasts

We're not adverse to pointing out real green shoots ... however, the mirage variety created by government paper printing to hide the dysfunction going on under the surface is just not our thing. In fact that ethos of government taking away the pain in the short run (never taking away the punch bowl) is a large culprit for what happened the past decade. Of course, after seeing the implications of this policy (the worst episode in our economy in some 80 years) we are once again cheering the exact same road map (PPP = Paper Printing Prosperity) that got us here... only this time on steroids. So we'll feel good in the short run as the government "saved us" and then we'll deal with the implications "some other day". It's always some other day in the United States of Bailout... kick the can.

Let's us delve into the obviously incorrect AP story which somehow thinks the US is still in recession, and that there are even signs of strain in the most recession immune parts of our union. I can't wait for the positive GDP print in Q3 to prove their reporters wrong. Also proven wrong will be all the people quoted in the story who obviously do not recognize an expanding (green shoot) economy when they see it.

As we have said for 2 years now, there is some merit to producing things the rest of the world actually needs ex movie stars, aircraft, iPods, and weapons. So despite the respective slowdowns, the fields of agriculture and energy are doing (relatively) well. As I've said many times - no matter what idiocy progresses through this economy, there will always be food and farming. Until they find a way to outsource our heartland, we still will have that bright spot. [Jun 2, 2009: The Economist - Outsourcing's 3rd Wave, Buying Farmland Abroad] I've been on record stating (before Mr. Rogers) if I had to only have 1 long term investment (30+ years out) it would be farmland.
  • Carl Rupp and his neighbors follow the old rancher's creed: "Keep your money in your pocket." Rupp has farmed his whole life. He lives in Goshen County, a rural spot along the Nebraska line where cattle outnumber humans 16 to 1 and you can still see the ruts cut by wagons that hauled pioneers along the Oregon Trail. "We're very conservative," said Rupp, 62. "We don't go out too far on a limb."
  • That prudent financial bent, matched with the high prices paid for crops and energy in the past few years, has largely protected Goshen County and a core group of several hundred other counties in 10 states from the recession's chokehold. The Associated Press Economic Stress Index shows they make up a "safe zone" that covers a long swath of middle America, from the Great Plains south to Texas. The contiguous counties in the safe zone start in Montana and North Dakota, and cascade into Wyoming, South Dakota, Nebraska, Iowa, Kansas and Oklahoma, and end in northern Texas and eastern New Mexico.
Essentially "commodities" (food mostly but some energy) make up the safe zone.
  • But the safe zone is shrinking. Energy production and prices are sliding, especially for coal and natural gas. Crop prices are dropping, too, as there's less demand in Asia for American wheat, corn and soybeans. There were 800 counties in the safe zone a year ago, a number that dropped to about 300 counties in May and slid further to 200 counties in June.
  • The safe zone is largely rural -- all but a dozen of the counties have populations of less than 25,000 people, many of whom make a living in agriculture. As the rest of the nation was riding the mortgage bubble, many farmers and ranchers in the safe zone who suffered through the agriculture crisis of the 1980s took on comparatively little debt. And when the recession hit, it didn't dampen demand for the row crops grown on the Great Plains.
  • Consumption of food and feed grains has increased 3 to 4 percent annually in recent years, while a federal mandate that gasoline contain certain levels of ethanol has also kept demand for corn and soybeans high. "If you really want to hurt the economy, beat the heck out of agriculture," Goehring said. "It is a primary sector in our economy. It is generating new wealth. You can't just rely on services to drive your economy."
  • "The last few years, ag has been pretty good," said Rupp, who sells alfalfa to dairies and feedlots. "In the long run, if there is such a thing, it's more stable than being in a county with energy as a primary industry. We miss out on the booms and busts, but overall we're in pretty good shape."
  • But while not in a bust cycle, ag prices are still down enough from last summer's highs to worry Doug Goehring, North Dakota's agriculture commissioner.
  • Elsewhere in the safe zone, the business is energy, and the recession is starting to take a toll on a business that was booming. While oil prices have increased this summer, it's the price of natural gas and coal that matters most here. Natural gas that traded for nearly $13 per 1,000 cubic feet last summer is now available for less than $4. The spot price for coal is running around $9 a ton, down from about $13 last year.
  • The number of rigs in Wyoming drilling for coal bed methane dropped to zero in May, down from 19 the previous year, while the number of conventional rigs drilling for natural gas and oil is off by more than half. No coal mines have closed, but annual production could drop as much as 10 percent as the recession stalls the need for electricity nationwide.
  • When booming, energy extraction kept unemployment low. In Oklahoma, for example, unemployment began creeping upward not long after as energy prices began sliding in September. It stood at 6.3 percent in June, up from 3.8 percent in June 2008. Wyoming's unemployment rate was 5.9 percent in June -- far below the national average of 9.5 percent, but the highest in the state since June 1999.
  • ....there is widespread anecdotal evidence that real estate is an anchor in a place where many families proudly trace their land titles to homesteading ancestors who settled the frontier in the 1800s. Aided by low interest rates, the value of farm and ranch land has grown by double digits this decade. Unlike California or Florida, there was no largely speculative housing bubble here.
So if our Fed chairman is successful in reinflating commodity prices via the hammering of the US dollar - the nominal prices of crops and energy should again start surging in 2010-2011. Meanwhile we'll point the finger at China and India or the evil oil titans as the problem, while the true problems are snickering in D.C. that they "pulled it off again".

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