The Small Balance Intersection Update - September 5, 2024

Migration Drive

Interstate Migration and Tax Impact: 2024 Update

Interstate migration in the U.S. continues to reveal significant insights into how state tax policies influence where Americans choose to live, work, and conduct business. From 2021 to 2022, states like Florida, Texas, and North Carolina saw substantial net gains in income tax filers, with Florida leading the pack by gaining over 125,000 new taxpayers. Conversely, high-tax states like California, New York, and Illinois experienced the largest outflows, with California losing more than 144,000 taxpayers. These migration patterns are closely tied to state tax structures, as states with lower or no income taxes tend to attract more residents, especially those with higher incomes. For instance, Florida gained nearly 30,000 taxpayers with an adjusted gross income (AGI) of $200,000 or more, resulting in a $28.7 billion boost to the state's combined AGI, while California lost a similar number of affluent taxpayers, decreasing its AGI by $16.1 billion.

The data also highlight that lower tax states not only attract more residents but also draw higher-income individuals who bring substantial economic benefits. Counties in Florida and Texas dominated the list of top gainers in terms of income tax filers, while major metropolitan counties in California, New York, and Illinois saw the largest losses. Interestingly, some states experienced gains in the number of tax filers but losses in AGI, indicating that wealthier residents were leaving, replaced by lower-income individuals. This trend is evident in states like Oregon and Washington, where higher earners moved out despite an overall gain in tax filers.

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Entrepreneur Drive

Small Business Drives Post-COVID Job Growth and Optimism

Small businesses have been critical to the post-COVID economic expansion, generating over 70% of net new jobs since 2019, up from 64% in the prior cycle. Entrepreneurship has surged, with an average of 430,000 new business applications per month in 2024, a 50% rise from pre-pandemic levels. Optimism is also rebounding, with more than 70% of small business leaders expecting revenue growth over the next year, the highest since the pandemic began. Diversity among entrepreneurs is increasing, with 43% of self-employed Americans now female, and minority participation reaching record highs.

However, small businesses still face challenges, particularly tight credit conditions and high operating costs. The Biden-Harris administration is addressing these issues with expanded SBA loan programs and pro-competition measures like banning noncompete agreements. Key legislation, such as the Inflation Reduction Act and CHIPS and Science Act, is channeling investment into disadvantaged communities, providing additional support. Small business loan charge-off rates remain low, encouraging lenders to extend credit more confidently. With rising optimism and supportive policies, small businesses are poised for continued growth, driving a significant portion of the U.S. economy forward.

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Suggested Street Name: Entrepreneur Drive Traffic Sign: Optimism Rising Ahead Header: Small Business Drives Post-COVID Job Growth and Optimism

Construction Slowdown Ahead

Construction Spending Declines Amid High Interest Rates

In July 2024, total construction spending fell by 0.3%, driven by declines in both residential and nonresidential outlays, reflecting ongoing challenges from elevated interest rates. Residential construction spending dropped 0.4%, marking its first decline in four months, primarily due to a slowdown in single-family building. This segment saw a significant 1.9% decrease, the sharpest since December 2022, as builders faced rising inventories and reduced demand. Nonresidential construction also weakened, with total spending slipping 0.2% for the month. Private nonresidential construction dropped 0.4%, with notable declines in commercial, warehouse, and lodging projects. However, public nonresidential construction provided a slight offset with a modest 0.2% increase, supported by gains in transportation and office projects. Despite the challenges, home improvement spending showed resilience, rising 15.0% over the past four months. The future outlook remains cautious, as the Architecture Billings Index (ABI) remains weak, suggesting that any recovery in construction activity may take time.

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Hospitality Ave

LARC Predicts Modest RevPAR Gains Amid Economic Uncertainty

The latest report from Lodging Analytics Research & Consulting (LARC) projects a modest 1.4% increase in U.S. RevPAR (Revenue Per Available Room) for 2024, reaching $99.56. This growth is fueled by a 1.8% rise in ADR (Average Daily Rate) to $158.65, though the overall hotel occupancy rate is forecasted to decline slightly by 0.3% to 62.8%. Despite the positive economic indicators and a lower likelihood of recession, U.S. hotel EBITDA is expected to decline by 0.3% in 2024 due to slight margin erosion, although hotel values are anticipated to increase by 3%. For 2025, the forecast is more optimistic, with RevPAR growing by 2.5% to $102.02, driven by a 3.1% rise in ADR and a 0.6% decline in occupancy, while hotel values are set to grow by another 2%. Over the next five years, LARC expects hotel values to increase by a total of 10%, with Las Vegas, Puerto Rico, and Seattle leading in value gains.

The report also highlights key market dynamics for RevPAR growth, identifying Houston, Minneapolis, and San Jose as the top performers in 2024, while Maui, Nashville, and Phoenix are forecasted to underperform. By 2025, markets like Maui, San Jose, and Honolulu are expected to lead, with Indianapolis, Omaha, and Austin falling behind. Over a five-year period from 2023 to 2028, the strongest RevPAR growth is projected in destinations such as Maui, Raleigh, and Orlando, while cities like Cincinnati, Austin, and Savannah are expected to experience lower growth rates.

Read the full report here.