Sources of Business Enterprise Growth in Nebraska: The Current Picture and Prospects for the Future
By Christopher Decker, Ph.D., University of Nebraska-Omaha
|Christopher Decker, Ph.D.|
By any measure, the United States' economy is currently experiencing substantial contraction. With home foreclosures on the rise, tightening credit markets, a troubled domestic auto market, and a general slowdown in consumer spending (which alone represents nearly 70 percent of the gross domestic product (GDP), it seems clear that the nation's economy has been in a recession and will likely not see any sustained recovery until late 2009. According to Vincent and Pierson (2008), business closures are increasing as well, particularly for retail establishments and small businesses.
While it seems to be the case that the east and west coasts are the regions hardest hit by the current downturn, one might still wonder about the prospects for Nebraska and its ability to weather the current storm. While the state's major metropolitan areas have a relatively diverse industrial composition and have not been as hard hit by the downturn in the housing market, there may be greater concern in Nebraska's non-metropolitan communities. Historically, rural areas tend to be harder hit by recessions largely because their economies tend to be less diverse in nature. Therefore, on a nationwide basis, a downturn in one sector, such as manufacturing, can spell disaster for a rural area dependent upon manufacturing for its economic well-being.
However, in Nebraska there may be some sources of economic strength during such a cycle. First, the state is heavily vested in agriculture. Food and land prices are still relatively high, as well as land values, and, as Da Rocha and Restucca (2008) point out, employment in agricultural sectors tends to be counter-cyclical. Hence, Nebraska may be able to avoid as dramatic a recession when compared to other states.
Beyond that, however, there may be other sources of economic strength other than agriculture that contribute significantly to both Nebraska's metropolitan and non-metropolitan economies. These non-agriculture-based sectors are the focus of this essay. The goal is to identify sources of economic growth in Nebraska with focus on its non-metropolitan areas.
There are a number of ways to measure economic growth regionally. One of the most common is to measure employment (see, e.g. Goss, Decker, Burkhart-Kriesel, Johnson, Thompson, Saenz, Schmitz, Neira, and Jeutang, 2006). Alternatively, some authors such as Gabe (2004) and Falck (2007) have focused on new business startups. In some respects this is a viable measure to consider both for short- and long-term analysis. Employment is an input to production and tends to be highly volatile. Businesses, particularly the large- and medium-sized enterprises, are somewhat less volatile. Therefore, data on business startups tend to depict an economic environment conducive to some belief in long term success, at least on the part of those entrepreneurs starting a new business.
This essay utilizes data on net business growth as the main measure of economic activity, employing data on new enterprises and establishments from the U.S. Census Bureau.1 In the next section, a comparison of new business growth in Nebraska relative to its neighboring states, as well as to the United States as a whole, is undertaken. Key industrial sectors in the state are identified. Then, these industrial sectors as analyzed within nine separate regions within the state to identify potential sources of both metropolitan and non-metropolitan business growth. Prospects for future short- and long-term growth are then addressed and finally, the essay concludes.
Nebraska, the Region and the Nation
To provide context for the state of business establishment growth in Nebraska, it is useful to compare such growth with both the United States as a whole, as well as business growth in those states in close proximity to Nebraska. This not only provides a picture of how Nebraska fares with respect to the nation, but to what extent Nebraska competes with neighboring states for new business growth. The neighboring states considered in this study are Nebraska's primary bordering states: Colorado, Kansas, Iowa, South Dakota, and Wyoming.
As can be seen in Table 1, it is true that between the years 2000 and 2005, business establishment growth in Nebraska lagged behind both the bordering states region as well as the nation. In the United States, the number of business establishments increased 5.8 percent between 2000 and 2005 and in the bordering region it increased 5.66 percent. Nebraska, by contrast, experienced a 4.33 percent increase in business establishment counts during that same period.
That said, there were also a number of sectors where business growth in Nebraska out-paced both the nation and the neighboring region. Those sectors include mining, manufacturing, transportation and warehousing, information firms, profession and technical service firms, management of companies, and health services.
Mining firms are those enterprises engaged in the extraction and quarrying of naturally occurring solids, such as oil and gas, as well as minerals. In Nebraska, these types of entities increased 8.91 percent between 2000 and 2005. In the United States, the increase was 5.74 percent. The increased cost of crude oil and other natural resources over the past few years has certainly prompted increased mining and extraction activities across the country. A significant amount of new business growth has occurred in many western states, such as Wyoming and Colorado, as well as in Kansas. These states have traditionally had a significant presence in this sector. However, evidence also seems to suggest that states like South Dakota are also witnessing increased business activity in mining. In fact, mining in Nebraska's neighboring region outpaced the state, registering a 14.34 percent increase in businesses engaged in mining.
Due to increased globalization, free-trade agreements, and the transition to more service-oriented business activity, manufacturing is a sector of the nation's economy that has been experiencing contraction over the last thirty years. Many have lamented this sectoral shift away from manufacturing as many of the associated jobs are relatively high-paying positions that generated a substantial amount of economic activity. That said, Nebraska appears to be effectively attracting new manufacturing business to the state. While both the nation and the neighboring region experienced net losses in manufacturing business, between 2000 and 2005 Nebraska posted a 1.06 percent increase in manufacturing.
Transportation and Warehousing has been a source of substantial economic success in the Midwest and Great Plains regions of the United States for a number of years. Firms in this sector are those engaged in the transportation of passengers and cargo (including trucking, rail, pipelines, and air transport), as well as the warehousing and storage of goods. Nationwide the number of businesses engaged in such activities increased 11.86 percent between 2000 and 2005, a substantial gain indeed. Yet, Nebraska and its neighboring states outpaced the nation in business growth here as well. For Nebraska, the increase was 13.40 percent and for the region it was 13.30 percent.
"While the general trend has been a declining non-metropolitan population as many residents seek opportunities in urban areas, there are nonetheless some potential sources of economic activity in non-metropolitan areas as well.
Another major source of business growth for Nebraska has been in the number of firms in the Information sector. This sector is comprised of firms involved with the creation and distribution of information and cultural products such as books, software, and other electronic media. It employs a highly educated workforce, including authors, editors, software engineers and the like, many of which are quite high-paying positions. Nationwide, growth in such businesses registered a 10.06 percent increase. In Nebraska's neighboring region, the growth was slightly higher, 11.02 percent. However, the pace of business growth in Nebraska was substantially greater than both its neighboring states and the nation as a whole. Between 2000 and 2005, the number of businesses engaged in information activities increased 19.08 percent.
The Real Estate sector includes enterprises primarily engaged in selling, renting, and/or leasing stationary properties such as homes and commercial establishments. Perhaps due to increased residential property construction and selling throughout most of the first five years of the 2000s, the nation experienced a substantial increase in the number of such establishments. Between 2000 and 2005, these businesses increased 19.66 percent in number. While this outpaced the Nebraska neighboring region which witnessed a 16.57 percent increase in businesses, the number of business enterprises in Nebraska increased by 24.20 percent. Clearly, the state experienced substantial gains in this sector in the first part of this decade.
In recent years, Nebraska has also experienced substantial increases in businesses that engage in professional and technical services. These enterprises are in essence consulting services firms. They specialize in performing professional, scientific, and technical activities such as accounting, engineering and specialized architectural design, computer services, and legal advice for other firms. By their very nature, these firms tend to employ highly educated professionals from a variety of vocations. The number of such businesses in this sector increased 12.84 percent nationally between 2000 and 2005. However, in Nebraska, the increase was 14.85 percent, only slightly slower than the 15.32 percent increase posted in the state's neighboring region.
The sector "Management of Companies and Enterprises" is essentially companies that hold and manage securities and other equity interests for other firms. Here, too, Nebraska has well outpaced the national and regional growth rates. Between 2000 and 2005, while the number of these establishments nationally increased just under three percent, in Nebraska a 17.06 percent increase was recorded.
The final sector where Nebraska appears to be out-flanking the nation and its neighboring region is in the Heath Care Services sector. In the neighboring region and the nation, the number of heath services firms increased 13.33 percent and 15.03 percent, respectively, between 2000 and 2005. In Nebraska, the number of enterprises in the health services sector increased 16.45 percent.
Hence, while the overall increase in Nebraska businesses is slower than its neighbors or the nation, certain key sectors register faster growth in new enterprises. The potential benefit for Nebraska, however, is that the sectors where the state is gaining are relatively high wage and salary sectors. Table 2 supplies average wages per worker from the US Bureau of Economic Analysis in the United States for the sectors of interest for the year 2007. As one can see, in every instance save one, the average wage and salary levels are greater than the national average. Hence, where business growth is making gains in Nebraska, the resulting impact on incomes is favorable to the state.
A natural question to ask at this point is: where are most of these new enterprises located within Nebraska? Nearly 50 percent of the state's population is located in its two largest cities - Omaha, and Lincoln. The remainder of the state can largely be characterized as having a far less dense concentration of residents. This might suggest that most of the new businesses are being established in the Omaha and Lincoln area. However, upon further investigation, it appears that this is not the case in every instance. In some cases, enterprise growth is much more rapid in less densely populated areas of the state.
To investigate this further, the state is subdivided into nine regions, following the designations delineated in a study developed of the University of Nebraska's Rural Initiative by Goss, et al. (2006). Of the nine regions, two are metropolitan centers, primarily Omaha and Lincoln. The remaining seven regions are mainly non-metropolitan. These regions were defined based on clusters of smaller cites (and adjacent non-metropolitan areas), agricultural production activity, and proximity to key economic characteristics, such as Interstate 80 or cities in adjacent states (such as Sioux City, Iowa). Each of the industrial sectors cited above will be analyzed in these regions. Table 3 lists the Nebraska Counties that comprise each region and Map (above) provides a depiction of these areas.
These nine areas comprise the different economic regions of Nebraska:
- Region 1 includes Omaha and counties where most of its suburbs are located.
- Region 2 includes Lincoln and counties with substantial commuting to Lincoln or to other adjacent counties in the region.
- Region 3 (Southeast Nebraska) includes the agricultural regions of Southeast Nebraska. The area also contains Nebraska City.
- Region 4 (South Central Nebraska) is defined in large part by counties that are in the vicinity of Interstate 80 and include Grand Island, Kearney, and Hastings.
- Region 5 (Northeast Nebraska) encompasses the portion of northern and eastern Nebraska that is closest to Sioux City, Iowa.
- Region 6 (Sandhills) is composed of counties in the Sandhills region of Nebraska. The largest towns in the region include Broken Bow and Valentine.
- Region 7 (Norfolk/Columbus) is defined by Columbus and Norfolk as urban centers. The region also contains surrounding counties with commuting links to the two cities.
- Region 8 (Southwest Nebraska) also is defined in large part by counties that are in the vicinity of Interstate 80 and includes North Platte, Lexington, and Ogallala.
- Region 9 (Western Panhandle) encompasses the Panhandle area of Nebraska. Scottsbluff is the largest city in the region.
In summary, these nine regions delineate recognizable areas of the Nebraska economy and include the principal cities and counties in each of these economic areas.2
Table 4 shows growth in business enterprises between 2000 and 2005 for Nebraska's nine regions in each of the sectors where Nebraska outperforms the nation. In some instances, the primary areas of locational preferences for business enterprises are in Regions 1 (primarily Omaha) and 2 (primarily Lincoln). This tends to be the case with firms in the Information, Professional and Technical Service, and Health Care sectors. That said, even within these sectors, there has been some substantial growth in business enterprises in more non-metropolitan regions of the state. In regions 7 (Norfolk/Columbus), 8 (Southwest Nebraska), and 9 (Western Panhandle), for instance, the number of Health Care entities increased by 16.32, 12.64, and 11.35 percent, respectively, between 2000 and 2005. Growth in Professional and Technical Service firms was 15.71 percent in region 8 as well, outpacing the state.
Moreover, there are a number of sectors that were significant sources of business growth for the state that tended to locate in primarily non-metropolitan areas. For instance, the mining sector has experienced substantial growth in regions 6 (Sandhills), 7 (Norfolk/Columbus), and 8 (Southwest Nebraska) at rates that far outpace the state as a whole. In the manufacturing sector, business growth proved to be quite rapid between 2000 and 2005 in regions 4 (South Central Nebraska), 6 (Sandhills), and 7 (Norfolk/Columbus) l. In the Real Estate sector, new firms grew 25 percent between 2000 and 2005 in region 3 (Southeast Nebraska, primarily Nebraska City).
Although their numbers are relatively small, the regional growth in firms in the Management of Companies sector has been quite robust and widespread. Substantial gains were made between 2000 and 2005 in regions 3 (Southeast Nebraska), 4 (South Central Nebraska), 7 (Norfolk/Columbus), and 9 (Western Panhandle). Finally, a major source of regional business growth in Nebraska has been the Transportation and Warehousing sector. Between 2000 and 2005, the state experienced substantial growth in these enterprises with little concentration in any particular region. Indeed, four regions outpaced state growth in this sector. In regions 3 (Southeast Nebraska), 5 (Northeast Nebraska), 6 (Sandhills), and 7 Norfolk/Columbus), growth in the number of these enterprises increased faster than that state as a whole, posting 27.50, 22.22, 14.46, and 13.37 percent gains, respectively.
Prospects for the Future
The current evidence does suggest some positive economic conditions for the state of Nebraska and its associated non-metropolitan regions. However, it is important to address how the gains made between 2000 and 2005 can be sustained in the future. This is particularly important to consider given the current state of the national economy. According to the Bureau of Economic Analysis, the United States' economy slipped into recession in December of 2007, driven mostly by substantial declines in the nation's housing sector. At the time of this writing, the current economic downturn will in all likelihood prove to be one of the more substantial in history, both in terms of duration and magnitude. Looking forward, what are the prospects for Nebraska given both the current national economic climate as well as the source of business growth the state experienced between 2000 and 2005?
A potential benefit of Nebraska's economy, particularly in its metropolitan regions, is that it tends to be more diversified in sector composition than in many other states. For instance, states such as Ohio and Michigan have economies that are heavily concentrated in manufacturing sectors - in particular, the automobile market. Manufacturing sectors tend to be highly cyclical in nature. They enjoy substantial gains in business activity during economic expansions but also experience substantial job losses and business closings during economic contractions.
As discussed above, the sources of business growth over the period 2000 to 2005 in Nebraska have come from a variety of different sources. However, none of the sectors highlighted above, except possibly for the health services industry which is influenced more by demographic changes than economic ones, are immune to the ravages of a national (indeed, worldwide) recession. That said, these sectors do respond differently to economic cycles.
Table 5 displays information, based on national employment figures, on how Nebraska's key growth sectors have responded in previous recession periods. Specifically, they illustrate the average percent change in employment from the beginning to the end of a national recession. Two recessions were considered in these calculations: the recession dated from July 1990 to March 1991, and the recession dated March 2001 to December 2001.3
As can be seen from the table, there is reason for concern over new business activity in the manufacturing sector of Nebraska. Of the sectors identified, manufacturing tends to be the most susceptible to contraction during recessions, averaging a 4.5 percent employment reduction during recessions.
It is noteworthy that Nebraska has enjoyed increased business activity in the health services sector, a sector which is largely driven by demographic composition of a region and is, in effect, not susceptible to business cycles. Indeed, over the last two recessions, employment actually expanded in this sector by 2.9 percent. Since most of the new business growth was concentrated in Region 1 of the state, this tends to bode well for the city of Omaha and its ability to weather the current economic storm better than other comparably-sized cities elsewhere in the nation.
Key Sources of Growth
Focusing particular attention on Nebraska's non-metropolitan regions, it is worth pointing out that, while it is likely that the current national recession will adversely impact these economies, there is some hope that any contraction in business growth will be mitigated relative to other non-metropolitan regions in the nation. One key source of business growth in Nebraska has been the transportation and trucking sectors, where many regions experienced significant expansion in such businesses between 2000 and 2005. While this sector is not immune from recessionary slowdowns, the effect is muted, at least with respect to manufacturing sectors. Indeed, the average employment decline over the previous two recessions was a relatively modest 2.0 percent. Hence, for certain sectors of the non-metropolitan economy, a large cyclical downturn will likely be avoided.
From a longer term perspective, one might wonder about sustained growth in Nebraska and its non-metropolitan economies. For Nebraska's metropolitan economies (Omaha and Lincoln), it is reasonable that continued growth will arise from the information and health care services sectors. We live in an information and media-based economy. Demand for computer software, both for professional as well as entertainment purposes, shows little sign of abating any time in the near future. Moreover, computer technology will continue to advance as well, further increasing the need for information-based skill sets. Hence, the Information sector is, and will likely continue to be, a major source of business growth nationwide. Given recent gains in this sector in Nebraska's metropolitan economies, this sector will likely continue to benefit the state.
The Health Services sector has been a substantial source of business growth for the state's metropolitan economies. This trend is expected to continue in Nebraska in the long term. The demographic makeup of the United States tends to support an increased need for health services. Life expectancy is on the rise and the post-World War II baby-boomer generation, a substantial demographic cohort, will be placing increased demand on health services. With several major university hospitals and countless clinics, Nebraska's metropolitan centers have developed over the years a substantial infrastructure in health services. This, combined with the relatively low cost of living, has prompted increases in retirees choosing to locate in these areas. These demographic and infrastructural characteristics will likely support continued expansion of health service enterprises for the long term for the state.
As for Nebraska's non-metropolitan areas, there are a few sources of long-term sustainable growth prospects as well. Recall from an earlier discussion that one key sector of business growth has been in transportation and warehousing. This sector in particular may indeed be a long-term source of economic growth for non-metropolitan economies in the state. There are roughly 8,000 licensed motor carriers in the state. Nebraska is also home to two top ten major truck freighting companies, Werner Enterprises and Crete Carrier Corporation. In fact, the Nebraska Department of Economic Development (DED) has targeted this sector as being a key growth sector to the state's economic future.
Indeed, substantial efforts have been made recently by the DED, in conjunction with the Nebraska Trucking Association, to bill Nebraska as a natural warehousing and distribution center for the nation, exploiting a number of characteristics favorable to trucking and transportation in the state. According to a recent study of Nebraska transportation and logistics potential, the state has a number of natural advantages over other states for this purpose. First, the transportation infrastructure in Nebraska is quite favorable, with its nearly 500-mile Interstate 80 east-west stretch across the state, and nearly 23,000 miles of north-south routes that support the north-south flow of goods along the so-called NAFTA trade corridor. Second, the state's geographic location is advantageous. It has been estimated, for instance, that one day's worth of truck travel will reach 26 percent of the continental United States' population and households.4 Finally, there is a substantial amount of surplus labor with demographic characteristics conducive to trucking in many non-metropolitan areas of the state. Much of this labor comes from individuals who are closely tied to the area, ill-inclined to relocate, yet are finding agricultural employment more difficult to come by. As a matter of employment alternative, trucking is a relatively low cost alternative for many such individuals. Indeed, several Nebraska colleges and universities have developed certification programs to aid in the education and training of truckers. It is also to the point that major companies such as Walmart, Farmland Foods, Oriental Trading Company, and Iams, have in the past few years established and/or expanded major distribution centers within Nebraska.
In short, while the general trend has been a declining non-metropolitan population as many residents seek opportunities in urban areas, there are nonetheless some potential sources of economic activity in non-metropolitan areas as well. Transportation and warehousing is one possible sector, and a sector which is relatively well-paying.
Given the rather bleak economic outlook for the United States' economy, it is natural to conclude that as goes the nation, so goes Nebraska. However, while some economic contraction should be expected in the state and some concerns are quite justified, it is advisable to consider a few sources of possible short- and long-term growth for the state. As far as Nebraska's metropolitan regions are concerned, there appears to be some positive prospects for continued growth in the health services sector of those economies. In non-metropolitan regions, sectors such as transportation and trucking are likely to continue to be a source of long-term growth in those economies. Despite economists' best efforts, the ability to accurately predict the future path of any economy has proven quite elusive. How things will ultimately play out is anyone's guess. This essay has highlighted some potential bright spots that are worthy of attention.
Armstrong, James. 2006. "Nebraska: America's Emerging Logistics Center," Inbound Logistics, March Issue.
Da Rocha, Jose M., and Restucca, Diego. "The Role of Agriculture in Aggregate Business Cycle Fluctuations," working paper, University of Toronto. 2008.
Falck, Oliver. 2007. "Survival Chances of New Businesses: Do Regional Conditions Matter?" Applied Economics. 39: 2039-2048.
Gabe, Todd M. 2004. "Establishment Growth in Small Cities and Towns," Growth and Change. 27: 164-186.
Goss Ernie, Decker Christopher S., Burkhart-Kriesel, Cheryl, Johnson, Bruce, Thompson, Eric C., Saenz, Mariana, Schmitz, Ben, Neira, Julian, and Jeutang, Pavel. Pillars of Growth in Nebraska's Non-metropolitan Economy. Prepared for The University of Nebraska Rural Initiative. 2006.
Tolbert Charles M. and Sizer, Molly, "US Commuting Zones and Labor Market Areas: A 1990 Update," ERS Staff Paper #9614. Economic Research Services, Rural Economy Division, 1996.
Vincent, Roger, and Pierson, David. "Malls are Running on Empty," Los Angeles Times, November 24, 2008, C-1.
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