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The estimated economic impacts of a mortgage banking firm in Hillsborough County, Florida
h [electronic resource] /
an analysis performed by Center for Economic Development Research, College of Business Administration, University of South Florida.
Tampa, Fla. :
b Center for Economic Development Research,
1 online resource (iii, 10 p.)
Title from PDF of title page (viewed Aug. 6, 2009).
Hillsborough County (Fla.)
x Economic conditions.
University of South Florida.
Center for Economic Development Research.
1 8 773
t Center for Economic Development Research (CEDR) Collection
The Estimated Economic Impacts of a Mortgage Banking Firm in Hillsborough County, Florida An Analysis Performed by CENTER FOR ECONOMIC DEVELOPMENT RESEARCH College of Business Administration 1101 Channelside Dr., 2 nd Floor N., Tampa, Florida 33602 Office: (813) 905-5854 or Fax: (813) 905-5856 July 2005
i Table of Contents Preface........................................................................................................................ .....................ii Executive Summary.............................................................................................................. .........iii I. Introduction ...............................................................................................................................1 II. Parameters for Analysis.................................................................................................... ..........3 III. Estimated Economic Impact of a Mortgage Banking Firm.......................................................4 Appendix A. Regional Economic Development Impact Analysis............................................................6
ii Preface This study was commissioned by the Corporate Business Development section of the Hillsborough County Economic Development Department and performed by the Center for Economic Development Research, College of Bu siness Administration, University of South Florida. The purpose of the report is to quantify the estimated economic impact to Hillsborough County by a type of financial service firm moving into the county. The Center for Economic Development Research provides information and conducts research on issues related to economic growth and development in the Nation, in the state of Florida, and particularly in the central Florida region. The Center serves the faculty, staff, and students of the College of Business Administration, the University, and i ndividuals and organizations in the Tampa Bay region and statewide. Activities of the Center for Economic Development Research are designed to further the objectives of the University and specifically the objectives of the College of Business Administration. Robert Anderson, Dean, College of Business Administration (COBA), USF Dennis G. Colie, Director, Center for Economic Development Research (CEDR), COBA, USF, Economist and Principal Investigator Alex A. McPherson, Research Associate, CEDR, COBA, USF
iii Executive Summary This study quantifies the economic impact in Hillsborough County of a type of financial services firm. The Hillsborough County Economic Devel opment Department (HCEDD) provided the parameters of the hypothetical firm for the study. If this type of firm could be attracted to the county, there would be a gain of jobs, labor income, and production within the county. Specifically, we examine the quantifiable economic impact of capital investment and operations by a mortgage banking firm. The impact is measured by employment, labor income, and output. These are three measurements of the same phenomenon just like weight, density, and shape are all ways to measure a solid. The parameters for the mortgage banking firm are 499 workers in North American Industrial Classification System (NAICS) Industry 522292 (Real Estate Credit). The workers in this firm will earn a total of $33,857,150 per year in labor income. The work facility costs $29,406,086 to build and another $12,602,608 to equip. We estimate the total economic impact of the firm in Hillsborough County for a construction phase (non-recurring) and for an operations phase (recurring year over year). During the construction phase, the construction and equipping activities generate jobs for about 882 workers who earn $32.4 million in labor income and produce output valued $77.6 million. For the operations phase, we estimate the economic impact of the firm and calculate multipliers. A multiplier indicates the proportional increase in a measurement of impact given a direct level of change introduced in an economy. For example, an Employment multiplier of 2.0 means that for each job a new firm brings, another job is created elsewhere in the economy so that the total increase is two jobs for every one job at the new firm. The greater the multiplier, the bigger a new firms bang on the economy. We calculate Employment, Labor Income, and Output multipliers. For the mortgage banking firm, the multipliers are 1.774, 1.383 and 1.494, respectively. We also estimate the absolute values of the annual economic impacts of the firm. During the operations phase, a mortgage banking firm generates jobs for about 885 workers who earn $46.8 million in labor income and produce output valued at $103.7 million.
1 I. Introduction This study quantifies the economic impact in Hillsborough County of a mortgage banking type of financial services firm. If this type of firm could be attracted to the county, there would be a gain of jobs, labor income, and production within the county. This study estimates these impacts if a firm opened for business and all their employees lived in the county. Specifically, we examine the quantifiable economic effects of capital investment and operations by a mortgage banking type of financial services firm. Because of the circulation of funds within the countys economy, the overall impact of the economic activities is a multiple of the initial, or first round, of production. That is, there are links among the various commercial elements of Hillsborough Countys economy. Through these links, second and subsequent rounds of production occur following the initial productivity by a new firm. In Section II, we describe the parameters for the type of firm. The Hillsborough County Economic Development Department (HCEDD) provided the parameters to CEDR. We consider all employment as continuous, so that our quantifiable estimate of the firms operations may be measured and understood as an annual occurrence. That is, as long as the firms doors remain open, the quantifiable impact will continue year to year. We analyze each of the parameters using the IMPLAN Professional TM Impact Analysis Software (IMPLAN TM ), a widely accepted application of input-output analysis that relies on historical data for making estimates of impact. We use Type II multipliers for the analysis. A description of the IMPLAN TM model, including multipliers, is in Appendix A. We explain the estimated economic impact to the county attributable to the mortgage banking firm in Section III. The impact is measured by employment, labor income, and output. These are three measurements of the same phenomenon just like weight, density, and shape are ways to measure a solid. The impact on employment is measured in terms of jobs. Labor income, which is aggregated from all sources, including employment income and proprietors income, is denominated in 2002 dollars. Output, akin to sales, is also measured in 2002 dollars. The measures of economic impact include the dir ect, indirect, and induced effects. For example, when a firm purchases locally produced milk, the dairy, in turn, must spend a portion of the funds received from the firm to hire workers, buy milking machines, and pay for veterinary services. The first round, or initial, spending produces a di rect effect on the countys economy. The effects of subsequent spending by businesses, such as the purchase of milking machines and veterinary services, are called the indirect effects. And, workers spending, which becomes possible due to their incomes motivated by direct and indirect expenditures, leads to induced effects. So it goes, round by round, with the initial spending by the firm having a multiple effect on employment, labor income, and output within the county. These rounds of spending continue within the county until the initial expenditures that were made by the firm leak out of the countys economy. Leaks occur due to taxes, savings, and spending
2 for goods and services produced outside of Hillsborough County.
II. Parameters for Analysis We show the parameters for the hypothetical firm, as provided by the HCEDD, in Table 1 below. The parameters for the mortgage banking firm are 499 workers in North American Industrial Classification System (NAICS) Industry 522292 (Real Estate Credit). 1 The workers in this firm will earn a total of $33,857,150 per year in labor income. The work facility costs $29,406,086 to build and another $12,602,608 to equip. Mortgage Banking Firm Model:Activities:Mortgage BankingAvg.Capital Sq. Ft.EmployeesUnit CostInvestmentWages CommercialClass A Office & Support Space Construction 154,188 191 $ 29,406,086 $ Equipment 154,188 82 $ 12,602,608 $ Employees 49967,850 $ 33,857,150 $ Sq. Ft.Employees InvestmentWages Totals 154,188499 42,008,694 $ 33,857,150 $ Table 1 Parameters of Hypothetical Firm We analyze the construction of work facilities using IMPLAN TM Industry 38, Commercial and Institutional Buildings, which is a part of NAICS Industry Sector 23, Construction. Then, we analyze the equipment expenditure for the firm using IMPLAN TM Industry 390, Wholesale Trade, which equates to NAICS Industry Sector 42, Wholesale Trade. A mortgage banking firm produces output cate gorized by NAICS Industry 522292, Real Estate Credit. We analyze output in this industry using IMPLAN TM Industry 425, Non-depository Credit Intermediation and related activities, which equates to the NAICS Industries 5222 and 5223. 3 1 The North American Industry Classification System (NAICS) has replaced the Standard Industry Classification (SIC) system. NAICS was developed join tly by the U.S., Canada, and Mexico to provide new comparability in statistics about business activity across North America.
III. Estimated Economic Impact of a Financial Services Firm This section explains the estimated economic impact in Hillsborough County of operations and capital investment by a hypothetical mortgage banking firm. The construction phase of this project requires capital investment of $29,406,086 for the work facility and $12,602,608 for equipment. We present the results of analysis of the construction phase in Table 2 for the work facility and Table 3 for the equipment. EmploymentLabor IncomeOutput (2002$)(2002$) Direct 383.613,744,914 $ 29,406,086 $ Indirect 130.14,862,240 11,268,393 Induced 196.66,173,508 17,453,159 Total 710.324,780,662 $ 58,127,638 $ Table 2 Construction of $29,406,086 Commercial and Institutional Building in Hillsborough County, Florida Results of IMPLAN Analysis The construction of the $29.4 million work facility will result in over $58.1 million of increased output generated in Hillsborough County during the year of the construction phase. The construction phase generates employment for about 710 workers who will earn almost $24.8 million in labor income. EmploymentLabor IncomeOutput (2002$)(2002$) Direct 83.84,627,587 $ 11,444,430 $ Indirect 28.01,077,305 2,683,813 Induced 60.31,892,776 5,351,077 Total 172.17,597,668 $ 19,479,320 $ Table 3 Furnishing of $12,602,608 of Equipment through Wholesale Suppliers in Hillsborough County, Florida Results of IMPLAN Analysis We estimate that of the $12.6 million investment in equipment, purchased through wholesalers, about $11.4 million will be purchased in Hillsborough County. This generates an increase in output in Hillsborough County of over $19.4 million. This is a one-time increase as a part of the construction phase. The equipment purchases generate about 172 jobs paying almost $7.6 million in labor income. 4 When the construction phase is complete, the mortgage banking firm begins operations. We show the economic impact of the operation of a single mo rtgage banking type of financial services firm in Table 4
EmploymentLabor IncomeOutput (2002$)(2002$) Direct 499.033,857,150 $ 69,419,872 $ Indirect 142.95,328,157 12,692,746 Induced 243.37,641,251 21,602,622 Total 885.246,826,558 $ 103,715,240 $ Table 4 Operations of a Mortgage Banking Firm in Hillsborough County, Florida Results of IMPLAN Analysis The 499 workers employed by the firm are the direct effect. These workers annually earn almost $33.9 million and produce output valued at more than $69.4 million. Of the direct output produced by the 499 workers, almost $47.7 million is consumed locally (Hillsborough County), while the remaining $21.7 million is consumed in domestic trade destinations elsewhere in the United States. The indirect effect of local supp liers to the firm is 143 new jobs paying about $5.3 million and producing sales of almost $12.7 million each year. The induced effect of workers consumption expenditures on the local economy are 243 new jobs with income approximately $7.6 million and sales around $21.6 million each year. For the operation of the mortgage banking firm, we develop a multiplier that summarizes the direct, indirect, and induced impacts, which combine to produce its total effect. Table 5 shows multipliers for the mortgage banking firm. EmploymentLabor IncomeOutput MultiplierMultiplierMultiplier Direct 1.0001.0001.000 Indirect 0.2860.1570.183 Induced 0.4880.2260.311 Total 1.7741.3831.494 Table 5 Operations of a Mortgage Banking Firm in Hillsborough County, Florida IMPLAN Multipliers We calculate the multipliers by dividing a Total measurement of impact by the Direct effect for that measurement. For instance, we find the mortgage banking firms Total Employment Multiplier of 1.774 by dividing Total Employment of 885.2 by the Direct Employment of 499.0. The interpretation of this multiplier is that for every job generated at the mortgage banking firm, another 0.774 jobs, or a total of 1.774 jobs, are generated for Hillsborough Countys economy. We similarly interpret the Total Labor Income and Total Output multipliers. 5
6 Appendix A. Regional Economic Development Impact Analysis The Center for Economic Development Research (CEDR), College of Business Administration, University of South Florida (USF), uses the IMPLAN Professional TM Social Accounting and Impact Analysis Software (an input-output model) for economic impact analyses. Data (year 2002 currently available) for each county in the st ate of Florida are available. County-wide data may be aggregated to focus on a region, such as the 7-county region Hernando, Hillsborough, Manatee, Pasco, Pinellas, Polk and Sarasota of special importance to the USF community. The following article briefly explains the economic impact analysis and the assumptions upon which the analysis is based. The Impact Analysis. Economic impact analysis is based on conditional, predictive models of the form: If ...then... An input-output model is one type of model used in impact analysis. Other generally accepted models are the economic base model and the income-expenditure model. Compared with the input-output model, both the economic base and income-expenditure models are limited in application to small economic regions in which the interdependencies (sales/purchase relationships) between producing sectors are insignificant. Interindustry relationships were first described in 1758 by the Frenchman Francois Quesnay, founder of the physiocratic or natural order philosophy of economic thought. The physiocrats depicted the flow of goods and money in a nation, and thus made the first attempt to describe the circular flow of wealth on a macroeconmic basis. Wassily Leontief was born in Russia in 1906 and first studied economic geography at the University of St. Petersburg before moving to Berlin and China. He came to the United States in 1931 and, after a brief 3-month stint at the National Bureau of Economic Research in New York, he was hired by Harvard University. At Harvard, Professor Leontief undertook a research project th at encompassed a 42-industry input-output table showing how changes in one sector of the economy lead to changes in other sectors. From this research, he developed the concept of multipliers from input-output tables, and was subsequently awarded the Nobel prize in economics in 1973 for his development of input-output (I-O) economics. The historical transactions data in the I-O model represent the sales and purchases between sectors that occurred over an estimation period. These data describe each sectors purchases and sales linkages with the rest of the economy. For each productive sector the transaction data take into account all sales revenue and costs, with the difference between revenue and costs being profit, which is a part of value added. (Total value added to a product at each stage of its production is the sum of wages and salaries, rents, profits, interest, and dividends.) The historical transaction or descriptive data are used to create the descriptive model of information about local economic interactions called regional economic accounts. These accounts, or transaction tables, describe a local economy in terms of the flow of dollars from purchasers to producers within the defined region.
7 For example, an increase in government purchases (first round) of output from the manufacturing sector of a region may require the manufacturing industry, in order to expand output, to purchase (second round) factor inputs fr om other sectors of the regional economy. In turn, these other sectors may have to purchase (third round) inputs to deliver the supporting production of factors to the manufacturing sect or. The rounds of spending will continue with each round becoming increasingly weaker in its impact because of leakages from the region attributable to imports, savings, and taxes. The first round is called the direct effects of the change in final demand (consumption) in a sector(s) of the economy. The second and subsequent rounds are collectively referred to as the indirect effects of interindustry purchases (reducti on in purchases) in response to direct effects. The open I-O model just described does not take into account changes in spending in the region, in response to the direct effects, for household consumption. Changes in spending from households as income or population increases (decreases) due to changes in the level of production are called induced effects. Induced effects are incorporated into the I-O descriptive model by forming a closed model. That is, transactions of the household sector are made endogenous to the model by treating households as a producing sector. The household sector sells its labor to the other producing sectors and purchases factor inputs, i.e. consumption expenditures, in order to maintain its labor. There are two steps in impact analysis using the I-O model. First, the descriptive model is created; then, the predictive model is derived from the descriptive model. The descriptive model contains information about interindustry transactions called the regional economic accounts. The information describes the flow of dollars from purchasers to producers within the region. In addition to the regional economic accounts, the descriptive I-O model includes the social accounts Social accounting data include, for example, taxes paid by businesses and households to government, and transfer payments from government to businesses and households. Trade flows also are a part of the social accounts. Trade flows describe the movement of goods and services between the region and the rest of the world, that is imports and exports. The analyst must choose between regional purchase coefficients (RPCs) or supply/demand pooling. RPCs are econometrically derived to predict local purchases based upon a regions characteristics. In contrast, supply/demand pooling presumes everything than can be purchased locally, will be. Hence, it will lead to larger multipliers than RPCs, because the leakages for imports are less. (The analyst also decides if local purchase coefficients LPCs are to be applied to an event during impact analysis. If the LPCs were to be applied, the models RPCs are used to determine how much of the first-round expenditure is used to purchase local products and how much is for imported items. Otherwise, the RPCs are applied to second and subsequent rounds of spending only.)
8 The regional economic accounts and social accounts are used to build multipliers The multipliers are the predictive I-O model. A set of multipliers are expected changes in output for each industry in the model given a one dollar change in final demand for any particular industry or commodity. A multiplier measures the effects of a change in final demand(s) in a region. The change in economic activity is called the impact The impact is essentially the expected or predicted consequence of a change in final demand(s) within the region due to a single event or a group of events. A group of related events may be referred to as a project. A Type I multiplier measures the direct and indirect effects of a change in economic activity. It only captures interindustry effects within the region. In addition to the direct and indirect effects, a Type II multiplier captures the induced effects of changes in household income and expenditures. A Type III multiplier also captures direct, indirect, and induced effects. However, the Type III multiplier estimates the induced effects based upon changes in employment. It assumes the region is at full employment, then each job added or subtracted by the impact is associated with the regions average expenditures per person. A Type II multiplier is most commonly used in impact analyses. Personal consumption expenditures (PCE) are spending by households and are strongly related to total personal income. Total personal income is income from all sources, including employment income and transfer payments that are based on place of residence. Because of commuting patterns, PCE in a region may not be strongly related to employment income in that location. Hence, the income based induced effects of the Type II multiplier are normally adjusted so that a regional average amount of tran sfer payments is associated with a change in employment income. Such multiplier is called a Social Accounting Matrices (SAM) Income multiplier. However, suppose that an increase (decrease) in employment income is not anticipated to be associated with a corresponding change in regional transfer payments. For instance, it may be believed that an increase in final demand will only generate low paying jobs. Then, it is likely that the under-employed will be hired and transfer payments will not increase in the region. Accordingly, a Specific Disposable Income may be applied to the Type II multipliers. That is, the change in household consumption expenditures is estimated by disposable income, which is defined as a specified (by the analyst) percentage of employment income. A change in final demand may be applied to an industry or to a commodity. Industries are businesses producing goods and services; commodities are the goods and services being produced. An industry can make more than one commodity. An industry usually is named for the primary, by value, commodity it produces. Commodities produced by an industry, other than its primary commodity, are called secondary commodities or by-products. An industry applied change in final demand has a direct effect on the selected industry only. A commodity applied change in final demand directly affects all industries that produce the commodity, whether as a primary or secondary commodity. The analyst chooses between an industry or commodity applied change in final demand. The choice is appropriately based on the circumstance for the
9 change in final demand. The choice will affect the predicted impact. As an alternative to estimating the economic impact of a change in final demand (at the factory door), the analyst may estimate the impact of a change in sales and employee payroll for a particular institution, e.g. state/local government education, or business sector. Then, a typical expenditure pattern for the institution or industry is generated to assess the economic impact of the change in sales and payroll. (If the event under study is believed to have an atypical expenditure pattern, this alternative approach is inappropriate. Instead the analyst should specify the expenditure pattern of the institution or industry in detail.) Using this alternative approach, the direct effect on final demand, i.e. output, in the region will be less than the change in sales. This happens because the model includes the institutions or industrys production function and final demand is an estimate of the value, in producer prices, of the factor inputs needed to generate the specified change in level of sales. The difference between the estimated change in final demand and the change in sales is total value added. Also, with this approach, the induced effects are interpreted as resulting from a change in household spending by the suppliers of the institutions or industrys factor inputs (first round) as well as subsequent rounds of interindustry sales/purchases. Margins are used to convert purchaser prices to producer prices. Margins depend on the consumer. For example, households pay the full retail margins, but government may pay little or no retail margins because it has more buying power than individual households. Margins split a purchaser price into appropriate producer values, each value impacting a specific industry. For example, the purchaser price of a tire at an automotive retailer includes the producer price at the factory door plus transportation costs, the wholesalers markup, and the retailers markup. Unless edited by the analyst, margins used in impact analysis are national averages. A deflator may be used to convert expenditures to the base year (estimation period) used to calculate predictive multipliers and to inflate the reports of impact analysis to the current year. Deflators are associated with commodities, and are also used to adjust margin values. A predicted regional impact may be gauged in terms of output (a change in production measured in dollars), of employment (a change in employment measured by number of jobs), or of personal income (a change in income from all sources, including employment and transfer payments, for persons residing in the region). I-O Model Assumptions. The following are the fundamental assumptions of the I-O model. First, it is assumed that the proportions in which each sector purchases its inputs from all other sectors are invariant over the period of analysis. The implications of this assumption are unchanged technology, constant relative prices, no shift in the mix production activities within sectors, and no new significant firm has moved into or out of the region.
Second, the I-O model assumes linear production functions, that is a sectors inputs remain in proportion to its output. This implies that no industry enjoys economies of scale. Third, each sector of the regional economy is assumed to be homogeneous. An increase (decrease) in a sectors final demand will always have the same impact on the economy. And fourth, in the closed I-O model, in assumed that the household sectors marginal propensity to consume equals its average propensity to consume. Prepared by: Dennis G. Colie, Ph.D. Economist E-mail: DCOLIE@coba.usf.edu 10