A Strong Midwest

Midwestern bankers can expect the U.S. economy to continue to grow in 2013. And, while growth will be at a historically low rate, the Midwest will be at the front of the pack with the strongest small town economies in the country. .Over the last three years, Midwestern banks have regained health. In 2012, with asset quality returning to historic norms and with less set aside for loan losses, earnings have improved. Now, bankers can look to a growing national economy, strong local economies, an upbeat manufacturing sector and a healthy agriculture environment as they search for loan growth and higher returns this year..No cautions, no alerts, and no recession .Bankers should prepare for a year of continued economic growth, according to economist Clare Zempel, owner of Zempel Strategic of Fox Point, Wis.."If I were advising a bank, I would tell the board of directors to exploit a competitor's fears about the market. If a competitor is holding back, now is the time to push forward," Zempel said.."There is nothing indicating recession in 2013," he said..A positive direction in the yield curve is the economist's first reason for optimism. According to Zempel, the most reliable indicator for the economy is yield spreads, which have predicted recessions since 1955. "There has never been a recession until after the yield spread has inverted: until short-term rates have risen above long-term rates," he said. "Right now, the yield spread is still very much positively directed. If it behaves the same way it did before, then we are not going to have another recession this year." .Zempel also points to applications for unemployment assistance to add force to his forecast. Unlike employment statistics, which are based on survey data collected by the Bureau of Labor Statistics, the number of unemployment assistance applications correlates with the number of people who have lost their jobs. A strong uptick in applications would signal recession. "But the latest four-week average [for unemployment assistance applications] is the lowest it has been since the beginning of the recovery," Zempel reported. "Unemployment continues to decline which further confirms that there will be continued recovery.".Zempel is bullish on the economy and predicts 2 percent growth in U.S. gross domestic product. "While growth will not reach historic norms, I think the economic outlook continues to be better than most people expect," he said. .A strong Midwest.Despite the sluggish national economy, many small communities in NorthWestern Financial Review's 14-state region are among the strongest local economies in the United States, according to an economic strength ranking created by POLICOM Corporation, an independent economics research firm based in Palm City, Fla..The economics firm uses data collected by the Bureau of Economic Analysis to rank 942 local economies across the country. POLICOM subdivides these local economies into 366 small towns with population between 10,000 and 50,000; and 576 cities with a population of 50,000 or more. POLICOM gives each city a scored rank based on what local workers earn, how much they work, and how many jobs are available in the area. The ranking also incorporates data on earnings, wages and jobs provided by small businesses, and the construction and retail industries. It also takes into account negative economic indicators such as welfare and Medicaid payments in a community..According to the firm's 2012 ranking, of the 130 small economies in the Midwest, 61 percent (80) are in the top 50 percent of all U.S. small economies. Thirty-six communities saw their ranking improve each of the last three years, while 68 of them saw their ranking improve over its 2010 rank..The Midwest's larger cities have fared nearly as well. Of the 74 metro economies, nearly 45 percent (33) are in the top 50 percent of metro economies in the United States. Also, nearly 41 percent (30) scored better in the 2012 ranking than they did in 2010, and 25 percent (19) have had three consecutive years of improvement..(Look for a ranking of Midwest cities and towns in the Jan. 21 blog post at www.northwesternfinancialreview.com.)."The formulas used to determine economic strength measure how the economy has behaved; it is not based on survey data," said POLICOM President and Economist William Fruth. "The highest ranked [cities] have had rapid, consistent growth in both size and quality for an extended period of time.".Healthy industries.Agriculture and manufacturing, which have buoyed the Midwest through the recession, are expected to continue stable activity in 2013, according Federal Reserve Bank of Minneapolis economists Rob Grunewald and Toby Madden, who teamed to brief reporters on the Ninth District's 2013 economic outlook on Jan. 3.."In spite of a sluggish economy, manufacturers have seen solid gains in recent years, and they expect continued growth in the coming year," said Madden, reporting the results of a survey of 2,644 Ninth District manufacturers conducted by the Minneapolis Fed in November..While orders were down for 27 percent of the survey respondents, which indicated moderation in the recent expansion in manufacturing, orders were up for half of survey respondents in 2012. Also, a third of respondents reported increased employment in 2012, while 27 percent had reduced staff. Large and medium size companies reported a stronger performance than smaller competitors..With the exception of those in the Upper Peninsula of Michigan, district manufacturers expect solid productivity gains, higher selling prices and increases in orders to bolster profits in 2013. One-quarter of respondents expect employment to grow in 2013, while 16 percent expect job cuts. "This industry's optimism runs counter to the negative outlook many have for their state economies," Madden said..North versus south in ag.While drought hampered farmers in 2012, it did not cause much damage to the agricultural economy, according to Ernie Goss, a Creighton University economist focusing on the Midwest. "The drought failed to put much of a dent in farmland prices, which continue to grow at a pretty brisk pace," said Goss from his office in Omaha, Neb. "Commodity prices are also likely to remain strong."."Those hit the hardest were livestock, hog and milk producers," Goss said. "And 2013 could be an even worse year for those producers." In 2012, livestock producers were the most affected by the drought, with the price of corn and wheat climbing to $6.22 and $7.24 respectively, according to the Minneapolis Fed. These producers will feel even more of a squeeze on their margins next year as the Minneapolis Fed expects corn and wheat prices to rise to at least $6.80 and $7.70 per bushel respectively. .The Midwest's northern states are also expected to have better growing conditions than the southern states, Goss said. In 2012, farmers in the Minneapolis region of the Federal Reserve were spared the worst of the dryness and were able to produce more than farmers in the Kansas City region of the Federal Reserve. While low production boosted prices for all farmers, those in the Minneapolis district benefited most from smaller crop yields elsewhere. The upward pressure on prices caused by a smaller supply of commodities brought increased income for Minneapolis district farmers. "This year, it will be a north versus south year again," Goss said. "The southern states have gotten some snow, but not enough to diminish the dry conditions."