May 15, 2012

Economics Group
Special Commentary
John Silvia, Chief Economist
john.silvia@wellsfargo.com (704) 374-7034

Michael A. Brown, Economist

michael.a.brown@wellsfargo.com (704) 715-0569

Joe Seydl, Economic Analyst

joseph.seydl@wellsfargo.com (704) 715-1488

The Not So Great Migration

Recently, the television program 60 Minutes ran a news segment on the African Serengeti-Masai Mara Great Migration, which is the worlds last remaining large-scale movement of land mammals. 1 A 350-mile round trip beginning in northern Tanzania that reaches parts of Kenya, this Great Migration is comprised of wildebeest, zebra, impala, buffalo and numerous other herbivore species. The migration, which begins in late-January each year, is said to be one of the most impressive wildlife spectacles on Earth. But the purpose of the 60 Minutes news segment was not to highlight the impressiveness of the Serengeti-Masai Mara Great Migration. Rather, the news segments purpose was to document the migrations impending demise. The migration cuts through the Mara River, which serves as a crucial source of nourishment for the migrations participants. In recent decades, however, the Mara River has been receding, due to increased human development in surrounding regions. According to migration experts, if current trends continue and the Mara River dries up completely, then the migration could collapse, killing millions of animals. A similar story can be said of the recent human migration experience in the United States, though the matter of life or death is thankfully not at stake. That is to say, U.S. net migration was strong during the previous expansion in the 2000s, but migration trends have slowed more recently. In this report, we highlight regional net migration trends around the country by comparing the experience before and after the 2007-2009 recession. In addition, we describe the economies of those areas in which net in-migration has been strong in recent years, along with the characteristics of those regions from which residents have migrated elsewhere.

Regional Trends in Net Migration

Regional net migration patterns across the country have changed dramatically over the past decade, mostly as a result of the effects of the 2007-2009 recession. Our analysis begins with a comparison of the regional migration trends leading up to the recession and then highlights the deviation from this pattern that emerged during the post-recession period. Figure 1 below displays a county-level map of the United States, with each county ranked by its average net migration flows from 2002 to 2007. During this period leading up to the recession, the majority of counties, 1,620 of them, saw relatively flat net migration, while 792 counties saw positive net migration. Many of the areas in which population inflows were the strongest during the previous expansion are regions where housing markets overheated, such as parts of Florida, the major metropolitan areas in New England and several regions in the West, including Arizona, Nevada, California and the coastal regions of Washington and Oregon.

Regional net migration patterns across the country have changed dramatically over the past decade.

Pelley, Scott. (January, 2012). The Great Migration. 60 Minutes. CBS News.

This report is available on wellsfargo.com/economics and on Bloomberg WFEC.

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The 698 counties that saw net population outflows during the previous expansion include rural regions in the South, a large swath of the middle part of the nation and parts of Nebraska, Kansas the Dakotas and northern Montana. Figure 1
Average Net Migration Rate 2002 - 2007

Average Net Migration Rate

2002 - 2007
Negativ e Weak Negativ e Fla t P ositive P ositive Strong

Source: U.S. Department of Commerce and Wells Fargo Securities, LLC

Figure 2
Net Migration Rate 2011

Net Migration Rate

2011
Ne ga tive Weak Ne ga tive Fl at Po sitiv e Po sitiv e Strong

Source: U.S. Department of Commerce and Wells Fargo Securities, LLC

If we fast forward to today, it appears as though net migration has slowed considerably. Figure 2 presents the net migration flows at the county level from 2010 to 2011 using the same scale as that used in Figure 1. Thus, those areas that saw net migration grind to a halt are highlighted in blue, while those counties that saw negative net migration (population loss) are highlighted in darker colors.

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There are several interesting trends that appear when comparing the pre-recession period (20022007) to the post-recession period (2011). Most of the in-migration observed leading up to the recession slowed and in many cases turned negative, as tough labor markets forced workers to look elsewhere for jobs in the wake of the construction bust. As can be seen, large parts of the country experienced a significant slowdown in population in-flows and out-flows, represented by the large number of counties highlighted in blue in Figure 2. Some regions of the country are seeing much stronger population growth in the post-recession period. A case in point is North Dakota, in which four of the nations top 10 fastest-growing counties lie, including McKenzie and Williams counties. Each of these counties is home to the Bakken Well, around which oil sands exploration has picked up significantly not only in North Dakota, but also in parts of Montana and southern Canada. Other areas that also saw particularly strong net in-migration from 2010 to 2011 were mostly rural counties, with low population bases, thus underscoring the extreme halt in migration activity around the nation. While it is difficult to discern the exact causal relationship that explains why individuals migrate from one region to another, we can describe the economic characteristics of those areas that are adding residents compared to those of the regions that are experiencing population losses. It is important to note, however, that economic conditions are not always the most important factor in an individuals decision to migrate. Indeed, a recent paper from the Federal Reserve Bank of St. Louis finds evidence to suggest that individuals often move to less economically desirable areas. 2 The St. Louis Fed finding underscores the difficulty in attempting to identify the determinants of net migration. Therefore, our primary focus is to identify areasrather than general economic characteristicsthat have the potential for future economic growth based on strong in-migration. In Table 1 and Table 2, we highlight our findings. Table 1 shows a select list of economic metrics for the five metropolitan areas in which net in-migration was the strongest in 2011, while Table 2 shows the same list of economic metrics for the five metropolitan areas in which net inmigration was the weakest. Table 1
Top 5 Metro Areas With Fastest Net In-Migration
Metro Area Hinesville, GA Kennewick, WA Austin, TX Myrtle Beach, SC Cape Coral, FL Net Migraton Rate 2010-2011 2.40% 2.18% 2.06% 1.84% 1.65% Unemployment Rate (March 2012) 7.2% 9.6% 6.0% 10.3% 8.9% Employment Growth (March 2012) Yr/Yr % Change -0.7% -1.1% 2.2% 5.4% 1.4% Population Growth (2011) Yr/Yr % Change 4.1% 3.3% 3.2% 2.1% 1.8% Building Permits (March 2012) Yr/Yr % Change 108.3% 120.7% 140.0% 72.0% 35.2% Percent of Population w/ Bachelor's Degree (2010) 7.2% 10.1% 16.2% 10.6% 10.8%

Most of the inmigration observed leading up to the recession slowed and in many cases turned negative, as tough labor markets forced workers to look elsewhere for jobs.

Economic Characteristics of Regions with High Net Migration

Source: U.S. Department of Labor, U.S. Department of C ommerce and Wells Fargo Securities, LLC

Table 2
Top 5 Metro Areas With Slowest Net In-Migration
Metro Area Detroit, MI Wichita Falls, TX Pine Bluff, AR Jacksonville, NC Farmington, NM Net Migraton Rate 2010-2011 -1.1% -1.2% -1.4% -1.8% -2.5% Unemployment Rate (March 2012) 9.4% 6.5% 9.3% 8.9% 7.4% Employment Growth (March 2012) Yr/Yr % Change 1.7% -1.5% 1.0% 2.7% 0.0% Population Growth (2011) Yr/Yr % Change -0.1% -0.8% -1.2% 0.1% -1.5% Building Permits (March 2012) Yr/Yr % Change 55.9% 21.7% 241.7% 47.7% 60.7% Percent of Population w/ Bachelor's Degree (2010) 11.3% 7.8% 6.9% 6.6% 6.0%

Source: U.S. Department of Labor, U.S. Department of C ommerce and Wells Fargo Securities, LLC

In general, those areas in which net in-migration has been strongest since the recession ended have tended to exhibit somewhat higher unemployment rates, a counterintuitive finding to be sure. But this finding makes sense when one considers what the unemployment rate measures. Since the unemployment rate measures the total number of unemployed workers who are actively
2 Murillo, R.H., Ott, L.S., Owyang, M.T., and Whalen, D. (2011). Patterns of Interstate Migration in the United States from the Survey of Income and Program Participation. Federal Reserve Bank of St. Louis Review: 93(3), pp. 169-85. Federal Reserve Bank of St. Louis.

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searching for work as a percentage of the overall pool of available labor, strong net in-migration, when measured over short periods of time, should be associated with a rise in the unemployment rateor a least should prevent the unemployment rate from dropping quicklybecause stronger net in-migration increases the overall pool of available labor. This is one of the reasons why the unemployment rate is often a misleading measure of the strength of a regions labor market. In our current national economic environment, in which job opportunities across the country are still scarce (Figure 3), it is likely that more workers than those that have been needed have migrated to places like Myrtle Beach and Cape Coral, putting upward pressure on unemployment rates in those areas. Figure 3
Number of Job Seekers Per Job Opening
8.0 Ratio, Seasonally Adjusted Job Seekers to Job Openings: Mar @ 3.4 8.0
Existing Home Sales: 2011 Percent Change
25.0%

Figure 4
FL Home Price Declines vs. Sales Activity
% Change in Existing Sales, Peak-to-Current % Decline

Miami

20.0%
Daytona Sebastian

6.0

6.0

15.0%
Naples Cape Coral

North Port Orlando

Palm Bay Punta Gorda Fort Lauderdale

Panama City

10.0%

West Palm Beach Port St. Lucie Tampa

4.0

4.0

5.0%

Ocala

Jacksonville

0.0%

Pensacola

2.0

2.0

Gainesville

-5.0%

Tallahassee

0.0 01 02 03 04 05 06 07 08 09 10 11 12

0.0

-10.0% -60.0%

-55.0%

-50.0%

-45.0%

-40.0%

-35.0%

-30.0%

-25.0%

Peak-to-Current Home Price Decline

Source: U.S Department of Labor, CoreLogic and Wells Fargo Securities, LLC

Conversely, regions that have experienced population outflows during the post-recession period tend to have lower unemployment rates but weaker job growth. This is true in Farmington, New Mexico, where the unemployment rate is currently much lower than the national average, but where job growth has been flat over the past year. In general, permitting activity for construction was strong in the areas that experienced robust net in-migration flows in the postrecession period. In general, permitting activity for construction was strong in the areas that experienced robust net in-migration flows in the post-recession period. The exceptions to this finding include many coastal markets, which became severely overbuilt during last decades housing boom and which are still struggling with a glut of excess vacant housing inventory. Florida is a perfect example of this trend: Even though Figure 2 shows that net in-migration into many parts of southern Florida was robust in 2011, construction activity remains muted, in part because Florida has the highest shadow inventory rate in the country. 3 In recent quarters, however, home sales activity has picked up noticeably across the state, reflecting the fact that home prices have fallen so far in many marketssuch as Miami, Naples, Daytona Beach and Palm Baythat investors are now reentering the market, looking for good deals (Figure 4). Finally, the level of educational attainment in a region is correlated with migration flows. As evidenced by Table 1 and Table 2, the areas in which net in-migration was strongest in 2011 tend to have more highly educated population bases. This is especially true in Austin, Texas, where more than 16 percent of residents hold at least a bachelors degree. With the exception of Detroit, Michigan, each of the metropolitan areas that experienced the weakest net in-migration in 2011 is home to a relatively low proportion of college graduates. In a recent report published by the Federal Reserve Bank of New York, researchers find a positive relationship between the number of colleges in a regionand thus the number of degrees

According to data from CoreLogic, nearly 30 percent of outstanding mortgages in Florida are either 90 days or more delinquent, in some stage of foreclosure or real-estate owned. The comparable shadow inventory rate at the national level is only around 11 percent.

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produced in the regionand the regions overall stock of human capital. 4 In other words, the areas with more colleges are producing higher-skilled workers and retaining at least some of those higher-skilled workers on a permanent basis. Areas in which a higher number of college degrees are being produced and in which a high degree of scientific research and development is being conducted also tend to attract highly educated workers from other parts of the country. This is precisely the type of net in-migration that is most valuable, because highly educated workers tend to earn higher salaries, which can boost a regions tax collections. Moreover, higher tax collections can often lead to a positive feedback loop, enabling the public sector to make more key investments in infrastructure and education, which further boosts a regions human capital stock. In a future in which available jobs will require more technical training and higher degrees of education, we expect the regions that are home to a larger number of colleges and universities to experience stronger population inflows.

Conclusion: Implications for Future Economic Growth

Migration patterns play a critical role in the development of a local economy. Positive inflows of population contribute to the local housing market by stimulating demand for new construction, boosting retail sales and providing incentives for future economic development investments, all of which add to the tax base of a locality. While there are several positive by-products of population growth, too rapid population growth can also present problems for local economies. Population booms can put pressure on local infrastructure and strain local schools, as is currently the case in North Dakota, which has experienced strong net in-migration due to the recent natural gas boom. Conversely, regions across the country that face strong outflows of residents are left with declining tax bases and selfreinforcing economic decline. In the wake of the 2007-2009 recession, net migration across the country has slowed substantially. However, some regions are performing better than others, and the flexibility of the U.S. labor market has enabled many workers to relocate to areas in which job opportunities are most abundant. The challenge for many workers, however, is that todays job opportunities increasingly require a specific skill set and an advanced education. To that end, many workers in the United States are falling behind. Regions of the country that can attract and maintain higherskilled workers will be at a competitive advantage for future economic growth. Regions in which a highly educated workforce produces a steady stream of knowledge spillover effects will be best positioned to take advantage of new technologies, leading to stronger business development. In turn, these investments will attract more highly educated households, creating a positive feedback loop that leads to more development and even stronger economic growth. Much like the African Serengeti-Masai Mara Great Migration, the United States does not have to suffer from a permanent slowdown in net migration among states; the country just needs to recognize the problems that are preventing stronger migration from occurring and address them. Much like the African SerengetiMasai Mara Great Migration, the United States does not have to suffer from a permanent slowdown in net migration among states.

4 Abel, Jaison and Deitz, Richard. (2011). The Role of Colleges and Universities in Building Local Human Capital. Current Issues: Vol. 17, No. 6. Federal Reserve Bank of New York.

Wells Fargo Securities, LLC Economics Group

Diane Schumaker-Krieg John E. Silvia, Ph.D. Mark Vitner Jay Bryson, Ph.D. Scott Anderson, Ph.D. Eugenio Aleman, Ph.D. Sam Bullard Anika Khan Azhar Iqbal Tim Quinlan Ed Kashmarek Michael A. Brown Joe Seydl Sarah Watt Kaylyn Swankoski

Global Head of Research (704) 715-8437 & Economics (212) 214-5070 Chief Economist Senior Economist Global Economist Senior Economist Senior Economist Senior Economist Senior Economist Econometrician Economist Economist Economist Economic Analyst Economic Analyst Economic Analyst (704) 374-7034 (704) 383-5635 (704) 383-3518 (612) 667-9281 (704) 715-0314 (704) 383-7372 (704) 715-0575 (704) 383-6805 (704) 374-4407 (612) 667-0479 (704) 715-0569 (704) 715-1488 (704) 374-7142 (704) 715-0526

diane.schumaker@wellsfargo.com john.silvia@wellsfargo.com mark.vitner@wellsfargo.com jay.bryson@wellsfargo.com scott.a.anderson@wellsfargo.com eugenio.j.aleman@wellsfargo.com sam.bullard@wellsfargo.com anika.khan@wellsfargo.com azhar.iqbal@wellsfargo.com tim.quinlan@wellsfargo.com ed.kashmarek@wellsfargo.com michael.a.brown@wellsfargo.com joseph.seydl@wellsfargo.com sarah.watt@wellsfargo.com kaylyn.swankoski@wellsfargo.com

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