Nebraska’s economy cooled in step with national economic trends at the end of 2012. A weaker global econ-omy and a contraction in government spending weighed on the U.S. and Nebraska economies. After a fall surge, hiring at Nebraska firms slowed in the fourth quarter amid heightened uncertainty regarding fiscal policies and economic growth. Still, consumers sustained the state’s economic growth with stronger retail and home sales.

Similar to the nation as a whole, a weaker global economy was a drag on the Nebraska economy. Softer economic growth, especially in developing countries, contributed to flat export activity and slower hiring at Nebraska factories. With limited growth in shipments, wholesalers and transportation companies reduced staff. In addition, local spending cuts translated to fewer jobs in government services and education.

Yet, Nebraska’s economy continued to expand with consumer spending. Employment rose 0.8 percent in the fourth quarter, slower than the 1.5-percent growth in the third quarter. The housing recovery gained further momentum as more people bought homes, which lifted home prices, boosted building activity and spurred hiring in the construction trades. At the same time, rising incomes fueled strong retail sales during the holiday season and store owners and entertainment venues added staff to handle

holiday crowds. The healthcare industry continued to expand to meet consumer needs, with the strongest job gains at hospitals and outpatient care facilities.

Despite drought, Nebraska’s farm economy produced stronger incomes and a surge in capital spending. Prof-its on irrigated cropland with adequate access to water soared, while crop insurance payments compensated for drought-reduced yields on nonirrigated land. A post-harvest decline in crop prices and strengthening cattle and hog prices narrowed losses for the livestock industry. Potential changes in tax policies at year-end prompted a flurry of capital spending. Furthermore, strong demand for farmland drove values higher despite more farmland for sale.

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NebraskaEconomic information for the Cornhusker State

T H E

E C O N O M I S T :

The Nebraska Economy Cooled Heading into Winterby Jason Henderson, Omaha Branch Executive, and Maria Akers, Associate Economist

Executive Summary

As Omaha Branch executive, Jason Henderson is the Federal Reserve Bank of Kansas City’s regional economist and lead officer in the state of Nebraska and is responsible for briefing the Kansas City Fed’s president on business activity in the state.

w w w. K a n s a s C i t y Fe d . o r g / O m a h a 1

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NebraskaEconomic information for the Cornhusker State

T H E

E C O N O M I S T :

With modest job gains at the end of the year, Nebraska’s

unemployment rate fell slightly to 3.7 percent by December

(Chart 1). Still, Nebraska’s labor market lost momentum in

the fourth quarter. After strengthening during the past year,

annual nonfarm job growth in Nebraska tapered to less than

1.0 percent. Some businesses delayed hiring amid uncer-

tainty surrounding potential tax policy changes and immi-

nent federal spending cuts. At the local level, cost reductions

trimmed government service jobs and educational staffing

(Chart 2). In addition, information and financial activities

firms continued to shrink payrolls in the fourth quarter.

Weaker global economic growth, particularly in emerg-

ing markets, also dampened economic growth in Nebraska.

Since 2010, developing countries have accounted for more

than half of Nebraska’s manufactured exports, driven by sales

to Mexico and China. After rising sharply in 2011, total ex-

port sales leveled off in 2012 (Chart 3). Softer global demand

for processed food products led to a slight drop in shipments

of nondurable goods compared to last year. Foreign demand

for durable goods, however, remained solid with an uptick in

sales of machinery and manufactured metal products offset-

ting a decline in orders for transportation equipment.

With flat export demand, the pace of hiring at Nebraska

factories fell below year-ago levels. Durable goods factories

were still hiring, particularly for specialized skills, while em-

ployment at nondurable goods plants edged down. In ad-

dition, wholesalers and transportation firms reduced staff

further in 2012, though job losses were not as steep as the

year before.

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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Job Growth (Left Scale)

Unemployment Rate (Right Scale)

Percent change from year ago Percent

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Chart 1: Nebraska Nonfarm Job Growth and Unemployment Rate

Chart 2: Nebraska Employment Growth by Sector

Chart 3: Nebraska Manufactured Exports

Source: Bureau of Labor Statistics.

Source: Bureau of Labor Statistics.

Note: Number in parentheses is the industry share of total manufactured exports in Nebraska for 2012.Source: WISERTrade.

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0

2

4

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10

Construction Health Services

Manufacturing Retail Trade, Leisure and Hospitality Services

Professional and Business

Services

Wholesale Trade and

Transportation

Information and Financial

Activities

Education

Q4 2011

Q4 2012

Percent change from year ago

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Food and Kindred Products (41%)

Machinery, Except Electrical (23%)

Chemicals (10%) Transportation Equipment (8%)

Metal Manufacturing (5%)

2010

2011

2012

Billion dollars

Consumers helped propel Nebraska’s economic growth in the fourth quarter. Rising incomes supported consumer spending and boosted employment in the retail and lei-sure and hospitality industries. Retailers added staff as re-tail sales ramped up during the holiday shopping season and eclipsed the previous year’s total by almost 4.0 percent (Chart 4). Auto sales in particular strengthened at year-end, especially in rural areas of the state. Performing arts and sports venues were also hiring in the fourth quarter, as were quick-service restaurants. Healthcare providers con-tinued to fill job openings, primarily at medical centers.

Housing markets in Nebraska improved further dur-ing the fourth quarter. The number of building permits issued climbed as home sales strengthened and mild win-ter weather kept construction sites busy (Chart 5). In fact, hiring by builders and developers pushed construction employment 10 percent higher than year-ago levels. Ne-braska home prices rose further and some real estate agents in metro markets noted a shift toward a “seller’s market” as houses typically sold faster. With reduced home invento-ries, the number of homes for sale in the Omaha and Lin-coln markets dropped below a five-month supply. In ad-dition, the number of multifamily housing projects under construction in Nebraska during 2012 jumped 45 percent compared to 2011 with strong demand for rental units.

In contrast, commercial construction activity waned with fewer projects under way at year-end. Though still higher than year-ago levels, the value of commercial con-struction contracts in Nebraska fell further during the fourth quarter (Chart 6). Existing office and industrial space was readily available for rent with relatively stable va-cancy rates in Omaha and Lincoln.

Nebraska E C O N O M I S TTHE

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Chart 4: Nebraska Net Taxable Retail Sales

Chart 5: Nebraska Residential Real Estate

Chart 6: Value of Nebraska Construction Contracts

Source: Nebraska Department of Revenue

Sources: Census Bureau and FHFA

Source: FW Dodge

1.5

1.7

1.9

2.1

2.3

2.5

2.7

1.5

1.7

1.9

2.1

2.3

2.5

2.7

J F M A M J J A S O N D

2012 2011 2010

Billion dollars

0

50

100

150

200

250

300

350

400

450

2010:Q1 2010:Q3 2011:Q1 2011:Q3 2012:Q1 2012:Q3

Commercial

Residential

Million dollars

97

98

99

100

101

102

103

104

105

-60

-40

-20

0

20

40

60

80

100

2006:Q1 2007:Q1 2008:Q1 2009:Q1 2010:Q1 2011:Q1 2012:Q1

Single-family building permits (Left Scale)

Home Price Index (Right Scale)

Percent change from year ago Index (2006Q1 = 100)

Despite the drought, farm income in Nebraska re-bounded in the fourth quarter (Chart 7). With a substan-tial share of Nebraska farmland under irrigation, farmers with dependable access to water sold bumper harvests at high crop prices. For farmers that relied on scant rainfall to grow a crop, crop insurance payments supplemented farm income. In addition, a post-harvest dip in crop pric-es provided some relief to the livestock industry by lower-ing feed costs.

Higher farm income and pending changes to the tax code prompted a wave of farm capital spending before the end of the year. Farm machinery and equipment sales spiked as farmers rushed to take advantage of bonus de-preciation allowances originally set to expire at the end of 2012 that were later extended through 2013.

Farmland values surged again at year-end despite more farmland for sale. Irrigated farmland values posted the strongest year-over-year increase at 32 percent, with a 27-percent rise in both the value of nonirrigated acre-age and ranchland (Chart 8). The typical upswing in the number of farms placed up for sale at the end of the year was greater than usual due to record-high farmland prices and uncertainty about impending tax changes.

Ad space.View and subscribe to the Nebraska Economist online at http://nebraskaeconomist.kcfed.org.

For more Nebraska economic insights,visit www.KansasCityFed.org/Omaha.

Nebraska E C O N O M I S TTHE

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Chart 7: Nebraska Farm Income and Farm Capital Spending

Chart 8: Nebraska Farmland Value Gains

* Bankers responded to each item by indicating whether conditions during the current quarter were higher than, lower than, or the same as in the year-earlier period. The index numbers are computed by subtracting the percentage of bankers who responded “lower” from the percentage that responded “higher” and adding 100.

Source: Federal Reserve Bank of Kansas City

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40

60

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100

120

140

160

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200

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20

40

60

80

100

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2004 2005 2006 2007 2008 2009 2010 2011 2012

Farm Income Capital Spending

Diffusion Index *

-10

-5

0

5

10

15

20

25

30

35

40

45

-10

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10

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30

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2006:Q1 2007:Q1 2008:Q1 2009:Q1 2010:Q1 2011:Q1 2012:Q1

Non-irrigated

Irrigated

Ranchland

Percent change from year ago