September 24, 2014
Mid-year Export Trends
By Bill Testa
Recently released data on U.S. foreign trade for July from the U.S. Census Bureau and U.S. Bureau of Economic Analysis (BEA) show an improvement in exports of U.S. goods. On a month-over-month basis, exports increased $1.8 billion, to $138.6 billion. This rise in exports—which helps to narrow the trade deficit—points to a stronger pace of U.S. gross domestic product (GDP) growth for the third quarter of 2014 relative to earlier this year.
July’s improvement in trade performance also bodes well for the economy of the Seventh Federal Reserve District. As seen below, exported manufactured goods make up a greater percentage of District production than of national production. Moreover, each District state’s ratio of manufactured export value to annual state output meets or surpasses the nation’s ratio of manufactured export value to GDP (7.1%). Notably, by this measure, Indiana and Michigan significantly exceed the nation as a whole, owing to their strong industry concentrations in transportation equipment (cars and trucks).
Looking more closely at July’s performance, one can see that the composition of July’s U.S. export growth favored District industries. As the Census/BEA trade report states: “The June to July increase in exports of goods reflected increases in automotive vehicles, parts, and engines ($1.7 billion); industrial supplies and materials ($1.3 billion); and capital goods ($0.4 billion).” In addition to the District economy’s high concentration in the export of transportation equipment, several District states also export significant amounts of capital goods: machinery and equipment such as agriculture, construction, and mining equipment, as well as computers and electronic equipment (see below). Moreover, several District states export chemicals, including both industrial chemicals and pharmaceuticals.
According to measures of export growth in first half of the year as compared to a year ago, not all industry categories have been holding up in 2014 (see below). Of particular note, machinery exports from Illinois, Michigan, and Wisconsin have been lagging compared to last year’s first half. And while automotive sales and production have been generally growing, transportation equipment exports from Michigan, Wisconsin, and Illinois recorded declines in first six months of 2014 over last year.
And so, if continued export growth can be sustained for the rest of this year and beyond, it will be welcome news for the District economy. Following a surge in growth during 2010–11 (see below), District (and U.S.) manufactured exports slumped in tandem with slowing growth in eurozone countries, which are important buyers of District manufactured goods. District manufactured export growth has also faltered on account of slower economic growth in China and in other lesser developed countries. Since global economic growth slowed down, global demands for commodities such as minerals and energy have eased, depressing Midwest exports of mining and construction equipment.
Rising District manufactured exports in 2014 would be consistent with modestly stronger global economic growth as compared with 2013. As of its July forecast, the International Monetary Fund (IMF) expects global growth to be 3.4% this year, up from 3.2% in 2013 (see below). World economic growth is expected to further accelerate to 4.0% in 2015, according to the IMF. As our trading partners continue to experience faster economic growth, we can expect that their purchases of the District’s manufactured goods, such as machinery, transportation equipment, and industrial supplies, will begin to bolster the region’s manufacturing production.
Note: Thanks to Rebecca Friedman and Paul Traub for assistance.
 Year to date through June, the five District state total of manufactured exports has risen 1.4% from $91.2 billion to $92.6 billion, according to Chicago Fed Staff calculations using data from the US Census Bureau, the Bureau of Economic Analysis, and Haver Anlalytics. (Return to text)
September 15, 2014
New Survey-Based Activity Indexes
By Rebecca Friedman
In a recent Chicago Fed Letter, Scott Brave and Thomas Walstrum discuss a business conditions survey that the Chicago Fed has been conducting in conjunction with the Beige Book since March 2013. To measure economic activity in the Seventh District, they construct a set of diffusion indexes based on survey responses (which are explained in greater detail in the article itself). Brave and Walstrum then compare their diffusion indexes with the Institute for Supply Management’s (ISM) purchasing managers’ indexes (PMIs) and the Chicago Fed’s Midwest Economy Index (MEI), and demonstrate how the anecdotal evidence collected for the Beige Book can often be helpful in understanding pivotal or special economic events.
Survey respondents come from all of the major industries in the Seventh Federal Reserve District, with manufacturing contacts composing the largest subset. Respondents are asked to rate the performance of their respective businesses on a seven-point scale in a series of questions covering the demand for their products or services over the past four to six weeks relative to the previous four to six weeks. A series of diffusion indexes are then calculated from the survey responses that are intended to capture changes in the prevailing direction of regional business conditions.
The figure below compares Brave and Walstrum’s Beige Book indexes against similar measures produced by the ISM. The ISM’s indexes are also calculated using a survey-based methodology allowing the authors to compare their survey responses for manufacturers and nonmanufacturers with the ISM’s national manufacturing and nonmanufacturing PMIs, as well as with a Midwest PMI (taken by averaging the ISM’s PMIs for Chicago, Detroit, and Milwaukee). Brave and Walstrum cite the strong correlation observed between their Beige Book diffusion indexes and the ISM’s national PMIs in the figure, suggesting that their indexes are capturing very similar business conditions. They also note that there may be some evidence that their Beige Book index leads the Midwest PMI.
The authors next examine the ability of their main Beige Book index (covering both manufacturers and nonmanufacturers) to predict non-survey-based measures of economic activity by comparing them with with the MEI—a monthly weighted average of Midwest economic indicators measured relative to a trend rate of Midwest economic growth. To compare the Beige Book index with the MEI, the authors adjust their Beige Book index to be relative to survey respondents’ trend (or average) responses. Their analysis comparing the two indexes suggests that their Beige Book index may slightly lead the MEI in capturing changes in the direction of regional economic activity. Brave and Walstrum also describe two recent instances where anecdotal information collected for the Beige Book was useful in this regard: 1) discerning whether the slowdown in economic growth in the first quarter of 2014 was likely to be a temporary setback and 2) capturing the recent pickup in activity in regional labor markets.
A more detailed description of the survey and index methodologies can be found here. The authors note that they continue to study the potential applications of their survey and diffusion indexes, with the intention to make their results publicly available in the future.
September 3, 2014
Seventh District Update, September 2014
By Thom Walstrum and Scott Brave
A summary of economic conditions in the Seventh District from the latest release of the Beige Book and from other indicators of regional business activity:
• Overall conditions: Growth in economic activity remained moderate in July and August, and contacts maintained their optimistic outlook for the rest of the year.
• Consumer spending: Growth in consumer spending picked up to a moderate pace in July and August. Retailers reported noteworthy sales increases for apparel and lawn and garden items, but cited weaker growth at grocery stores. Promotional activity scaled back some, but remained high, as clearance sales have been effective at eliminating excess inventories. Light vehicle sales increased, particularly for mid-size sedans and crossover vehicles.
• Business Spending: Business spending continued to grow at a moderate pace in July and August. Capital expenditures and spending plans both increased, as more contacts reported capital expenditures to support capacity expansion, particularly in the auto and construction industries. The pace of hiring slowed slightly, though hiring plans ticked up.
• Construction and Real Estate: Construction and real estate activity increased over the reporting period. Residential construction, home sales, nonresidential construction, and commercial real estate activity all increased moderately.
• Manufacturing: Manufacturing continued to grow at a moderate pace in July and August. The auto industry remained a source of strength for the District and demand for steel increased further. Demand for heavy machinery picked up some on net, as higher demand for construction machinery overshadowed weakness for agricultural and mining machinery.
• Banking and finance: Credit conditions improved modestly in July and August. Business lending increased, with contacts noting continued growth in demand for the financing of equipment and commercial real estate from small and middle-market businesses. Consumer loan demand grew moderately, with an increase in credit card lending, continued growth in auto lending, and a slight uptick in new mortgage originations.
• Prices and Costs: Cost pressures increased, but remained modest. Energy prices remained elevated and steel prices were higher in spite of increased imports, as a large share of these imports remains at the docks due to customers’ unwillingness to pay elevated shipping surcharges. Retail prices were up slightly as contacts reported decreasing the generosity of sales promotions. Overall, wage pressures were modest, but a number of contacts again reported wage pressures for skilled workers.
• Agriculture: Corn and soybean production in the District should exceed last year’s levels. Corn, soybean, hog, and cattle prices were lower, while milk prices were higher.
Led by continued strength in the manufacturing sector, the Midwest Economy Index (MEI) increased to +0.62 in July from +0.56 in June. The relative MEI increased to +0.29 in July from –0.01 in the previous month, marking its first positive reading since February 2014. July’s value for the relative MEI indicates that Midwest economic growth was higher than would typically be suggested by the growth rate of the national economy.