Farm Income’s Impact on the Midwest — A Conference Preview

Agriculture is a vital building block for the economy of the Midwest, producing raw materials for food and biofuels manufacturing, as well as stimulating demand for farm equipment, trucks, and more. Income produced by agricultural operations is a key component of personal income in rural areas. This income from farm households supports businesses on the Main Streets of rural towns. However, there has been a decline in the number of farms over the decades,1 which raises concerns about the role of farm income in the future of the rural Midwest.

On November 17, 2014, the Federal Reserve Bank of Chicago will hold a conference to examine the role of farm income in the Midwest economy. (Check www.chicagofed.org/webpages/events/2014/agriculture-conference.cfm for more details on the conference, including the agenda, and to register.) The conference will explore both the decline in agriculture’s role over the longer term and the marked increase in the level of agricultural income over the past decade. This phenomenon contrasts sharply with the troubled fortunes of the broader economy of the Midwest during and after the Great Recession.

Net farm income is a standard way to measure the size of returns from agricultural operations. Basically, net farm income equals the value of agricultural production and net government transactions minus purchased inputs, capital consumption, and payments to stakeholders.2 The latest U.S. Department of Agriculture forecast of net farm income for 2013 was $131.3 billion for the U.S., an increase of 15% from 2012 and the highest result since 1973 (adjusted for inflation).3 In 2009 dollars, net farm income has averaged $115 billion over the past three years, a level that was previously exceeded only during the period from 1943 to 1948 (going back to 1929). Moreover, the latest decade has seen the highest levels of net farm income since the 1950s, even higher than during the 1970s farm boom. However, net farm income is projected to fall to $113.2 billion for 2014, as crop price decreases will more than offset increased yields from this fall’s harvest.

In addition, net farm income for each state is available through 2012. Using this data, one can estimate the net farm income for the five states of the Seventh Federal Reserve District.4 The District states accounted for 19.5% of U.S. net farm income in 2012 ($22.16 billion). Due to the relatively large role played by farmland rentals in the District, 43% of net rent received by non-operator landlords nationwide was in the District’s states ($6.7 billion). These payments boost the economic impact of agriculture on the District, although some landlords reside outside the region. Another $3.4 billion in 2012 was paid out to hired labor by farms in the District. Furthermore, District agricultural operations spent $26.9 billion on purchased inputs that did not originate on farms. So, the economic benefits of agriculture reach out into communities and the businesses of the District.

Net cash farm income is a somewhat different measure of agriculture’s cash flow.5 It provides helpful information to understand the financial positions of farm operations. Moreover, the 2012 Census of Agriculture provided data on net cash farm income by county.6 Combining this data with personal income by county7 allows computation of the share of personal income generated by net cash farm income. Using these sources to compute a total for just counties in the District, I find the District generated $23.9 billion of net cash farm income in 2012. This represented 1.5% of the District’s total personal income.

Also, one can categorize counties by how rural they are.8 For the nonmetropolitan counties of the District, $15.96 billion in net cash farm income represented 5.8% of total personal income. For the metropolitan counties of the District, $7.95 billion in net cash farm income represented 0.6% of total personal income. These numbers reinforce the greater dependence of nonmetropolitan counties on agriculture, as one would expect, yet they also demonstrate that even metropolitan counties have significant farm operations. The map below provides the spatial distribution of District counties in terms of the shares of net cash farm income relative to total personal income. Notice that counties in northwest Iowa tend to have the greatest dependence on farming operations, with four having over 30% of personal income from agriculture in 2012.

While such trends and patterns are illuminating, there are many channels between agriculture and the Midwest economy. Please join us on November 17 as experts from academia, government, and business take a deeper dive into Midwest agriculture and its impacts.

 

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  1. See www.ers.usda.gov/data-products/chart-gallery/detail.aspx?chartId=45012 for a chart and details.
  2. See www.ers.usda.gov/topics/farm-economy/farm-sector-income-finances.aspx for details.
  3. See www.ers.usda.gov/data-products/farm-income-and-wealth-statistics/us-and-state-level-farm-income-and-wealth-statistics-(includes-the-us-farm-income-forecast-for-2014).aspx for data.
  4. The Seventh Federal Reserve District comprises all of Iowa and most of Illinois, Indiana, Michigan, and Wisconsin.
  5. Net cash farm income “represents the amount of cash available to service debt, pay family living expenses, and make investments. It is not a comprehensive measure of profitability, however, since it does not account for changes in inventory, accounts payable, accounts receivable, and depreciation.” See www.ers.usda.gov/topics/farm-economy/farm-sector-income-finances/farm-business-income.aspx for details.
  6. Census of Agriculture data are available via www.nass.usda.gov/Quick_Stats/index.php for 2012 and earlier.
  7. See bea.gov/regional/index.htm for data under “Local Area Personal Income & Employment.”
  8. See www.ers.usda.gov/topics/rural-economy-population/rural-classifications.aspx for details.

Seventh District Update, October 2014

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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 in the Seventh District remained moderate in September, and contacts maintained their optimistic outlook for the rest of the year.
  • Consumer spending: Consumer spending was led by continued strength in auto sales. Non-auto spending increased slightly, as growth picked up for discretionary spending categories. Retail contacts generally expected that holiday sales would be up slightly relative to a year ago.
  • Business Spending: Capital expenditures and spending plans increased, as a number of manufacturing contacts reported plans for expansion in the near future. Both actual hiring and hiring plans increased at a moderate pace, and many contacts reported slightly higher turnover.
  • Construction and Real Estate: Residential and nonresidential construction increased. Growth in home sales and prices slowed somewhat, while vacancies ticked down and leasing of industrial buildings, office space, and retail space all increased.
  • Manufacturing: The auto, aerospace, and energy industries remained a source of strength. Demand for steel increased and demand for heavy machinery picked up some on net, as higher demand for construction machinery overshadowed weakness for ag and mining machinery.
  • Banking and finance: Credit conditions were mixed. Equity market volatility increased and corporate bond spreads widened, even as business and consumer lending increased.
  • Prices and Costs: Energy costs declined, while steel and aluminum prices increased. Retail prices were down slightly as contacts reported more generous sales promotions. Overall, wage pressures were modest, and non-wage labor costs changed little.
  • Agriculture: Overall crop conditions were very good and the District should see record corn and soybean harvests. The huge anticipated harvests pushed down corn and soybean prices.

The Midwest Economy Index (MEI) decreased to +0.55 in August from +0.63 in July, but remained above average for the fifth straight month. The relative MEI edged down to +0.26 in August from +0.31 in the previous month. August’s value for the relative MEI indicates that Midwest economic growth was somewhat higher than would typically be suggested by the growth rate of the national economy.

Infrastructure and Economic Growth — A Conference Preview for November 3

A common trait among economists is that they rarely agree on anything. However, the latest survey of economic experts by the Initiative on Global Markets of the University of Chicago’s Booth School of Business found unanimity on the value of infrastructure to the economy. When the 44 participants were presented with the proposition, “Because the U.S. has underspent on new projects, maintenance, or both, the federal government has an opportunity to increase average incomes by spending more on roads, railways, bridges and airports,” exactly zero disagreed. When further asked whether the U.S. has underspent on infrastructure, 36 agreed, 3 were uncertain and 5 did not respond. While such overwhelming agreement among economists might scare some people, it does suggest that the best economic researchers clearly have identified a relationship between infrastructure investments and economic growth. However, this same group of economists was skeptical about the efficiency of infrastructure programs. Nearly half agreed that past experience suggests that many infrastructure projects would have low or negative returns. As Austin Goolsbee put it, “hard to argue with the reality that some money will end up in powerful [Congressional] districts without much need for it.”

Given the perceived value, why has the U.S. apparently fallen behind in the infrastructure race? One theory is that fiscal pressure at all levels of government during and after the Great Recession caused governments to put off infrastructure investments in order to balance operating spending. Evidence for this shows up in data on the average age of government fixed assets, which have risen from 21.6 years to 22.4 years since 2007 (see figure).

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Further complicating this has been a cloudy picture for funding sources directly related to infrastructure spending. The most prominent federal source, The Highway Trust Fund, has seen growth in gas excise tax revenue steadily erode as the 18.4 cents per gallon rate has been unchanged since 1993 while vehicle travel has declined. This year, Congress acted to prevent a deficit in the trust fund through a short-term fund transfer and by allowing companies to smooth pension returns, which would boost tax revenues in the short run. This clearly will not be a long-term fix. At the same time, state and local governments have faced very difficult fiscal conditions emerging from the Great Recession. For most states, revenues are only now returning to pre-recession levels. States that rely on excise taxes on fuel to fund infrastructure have seen the same erosion in revenues as the federal government, while states with sales taxes have suffered from declining gas purchases. In Illinois, gas tax receipts fell from $1.59 billion in 2007 to $1.21 billion in 2013 adjusted for inflation. Similarly, vehicle miles traveled per capita in the state have fallen by 6.5% since 2004. This inability of fuel tax revenues to keep pace with inflation has left dedicated infrastructure spending squeezed.

On November 3, the Chicago Fed will host a half-day program looking at key issues related to infrastructure. The first panel will start with a presentation from Therese McGuire of Northwestern University’s Kellogg School, who chaired a Transportation Research Board study that examined the role of the infrastructure component of the American Recovery and Reinvestment Act of 2009 on economic outcomes. Joining McGuire will be Dan Wilson from the San Francisco Fed, who has written extensively on infrastructure and will present his work on measuring the economic impacts of highway infrastructure. (For an example, see http://www.frbsf.org/economic-research/publications/economic-letter/2012/november/highway-grants/.) Rounding out the panel will be Tracy Gordon, who recently joined the Urban Institute after a stint at the Council of Economic Advisors and will discuss how to incentivize state and local governments to do more to fund infrastructure.

The second panel will examine methods for paying for infrastructure. Ben Husch from the National Conference of State Legislatures will discuss the current status of federal infrastructure funding, including prospects for the Highway Trust Fund. Michigan state budget director, John Roberts, will discuss a comprehensive infrastructure funding proposal that was introduced by Governor Rick Snyder this year. This proposal would have boosted infrastructure funding for the state and allowed for future fuel taxes to be indexed to inflation. Joining us from Oregon will be James Whitty, who has been responsible for administering the state’s pilot effort for a vehicle mile tax. States are considering this type of tax as a possible replacement for traditional fuel taxes. Finally, public–private partnerships are frequently seen as key to expanding infrastructure funding. Stephen Beitler, CEO of the Chicago Infrastructure Trust, will discuss how this new approach is working.

The program will be held at the Chicago Fed on November 3, 2014, starting at 8:30 a.m. There is no charge to attend. To register, follow this link.

Gross State Product Growth and the Midwest Economy Index

In August 2014, the U.S. Bureau of Economic Analysis (BEA) published prototype quarterly estimates of gross state product (GSP). In releasing this quarterly supplement to its existing semiannual releases of annual GSP, the BEA noted that the availability of higher-frequency information on state output should help researchers to better understand national and regional business cycles.

In this blog entry, we take another look at the GSP data for the five states of the Seventh Federal Reserve District to see how they compare with the Midwest Economy Index (MEI) produced by the Chicago Fed.1 We find that the MEI is highly correlated with the new quarterly GSP data; moreover, the MEI remains timelier as an indicator of the Midwest business cycle because it is released on a monthly basis.

In 2011, the Chicago Fed began providing four times a year estimates of annual gross state product growth for each of the five states in the Seventh Federal Reserve District2 as an accompaniment to its MEI release.3 Using the forecasting model underlying these estimates and the BEA’s new quarterly GSP data, we extend our annual projections to include quarterly GSP growth. Below, we present what we’ve forecasted for each District state through the first half of 2014.

The MEI and GSP growth

The MEI is a weighted average of 129 state and regional indicators that measure growth in nonfarm business activity. Two separate index values are constructed, the MEI (providing an absolute value), which captures both national and regional factors driving Midwest economic growth, and the relative MEI (providing a relative value), which presents a picture of the Midwest’s economic conditions relative to the nation’s.

Both indexes are business cycle indicators capturing deviations in growth around a historical trend. MEI values above zero indicate growth above a Midwest historical trend, and values below zero indicate growth below trend. For the relative MEI, a positive value indicates that Midwest growth is further above its trend than would typically be suggested based on the current deviation of national growth from its trend, while a negative value indicates the opposite.

Together, the MEI and relative MEI provide a picture of the Seventh District’s state economies that is closer to being in real time than does the BEA’s GSP data. To see this, consider figure 1, which plots the MEI and the year-over-year gross domestic product (GDP) growth for all five District states combined using the BEA’s annual and quarterly data. The correlation here is quite striking, with the major difference being that the MEI is often released six months to a year (or more) in advance of the quarterly or annual GSP data.4

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Forecasting annual and quarterly GSP growth

By exploiting the historical correlation between annual GSP growth in each of the five District states and the MEI, we have been producing quarterly estimates of annual GSP growth since 2011. The statistical model we use to explain the annual growth in GSP for each Seventh District state is shown below.

The model succinctly summarizes the historical relationships between national (real GDP growth), regional (MEI and relative MEI), and state-specific (lagged GSP and state real personal income growth) factors driving each Seventh District state’s annual GSP growth since 1979.

We use a similar model applied to quarterly data to assess how well we can predict growth in the BEA’s new quarterly estimates of GSP. Before we do so, we review the annual GSP growth model. The regression coefficients estimated for our annual model using data through 2013 are listed in table 1. Each coefficient represents the “effect” of an input on GSP growth. For example, a 1% increase in real U.S. GDP growth leads to about a 0.5% increase in GSP growth on average across the     Seventh District states (first row of the table).

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The historical fit of our annual model varies across the five District states, as seen in their root mean-squared errors (RSME) (next to last row of the table). To put these deviations in perspective, we generated figure 2, which plots the actual annual GSP growth for each state, as well as GDP growth for the United States (blue bars), against the fitted values from the regression (red lines). The model does quite well at predicting Illinois’s and Wisconsin’s GSP growth rates, which tend to be less volatile and more closely resemble U.S. GDP growth. Its worst fit is for Iowa’s GSP growth rate, largely because it does a poor job of capturing fluctuations in agricultural conditions.

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We now extend our analysis using the BEA’s quarterly GSP data. To predict GSP growth for the first and second quarters of 2014, we estimate a “bridge equation” for each District state linking current and previous values of the monthly MEI and relative MEI to its quarterly annualized GSP growth, where the number of monthly lags spans both the current and previous quarters.5 We also include the current and previous quarters’ state real personal income growth and the previous quarter’s annualized GSP growth. We estimate the model on data from 2005 through 2013 and then project forward two quarters.

Figure 3 displays the quarterly regressions’ fitted values (red lines) against actual quarterly annualized GSP growth (blue bars). As our model did with the annual GSP data, it fits quite well for the majority of District states’ GSP growth rates. The green lines in the figure denote the forecasts for the first and second quarters of 2014. We project declines in GSP growth for District states in the first quarter that are largely offset by second quarter growth—consistent with U.S. data. The green lines in figure 2 depict similar annual forecasts for the entirety of 2014.

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Our 2014 forecasts

Table 2 shows our complete projections for District states’ 2014 GSP growth rates. Our annual growth projections suggest that Illinois’s growth rate will be closer to the District average in 2014, at around 2%. We project Michigan and Wisconsin to grow at above-average annual rates, while we project below-average growth for Indiana and Iowa. However, our quarterly model projections through the first half of 2014 suggest some downside risk to our annual Michigan and Wisconsin forecasts and upside risk for our annual Indiana and Iowa forecasts.

blog_table2

As we’ve seen from tables 1 and 2, each state’s forecast is affected differently by the five inputs to our model. To further illustrate this point, we break down each state’s projected GSP growth rates into the expected contributions from national, regional, and state factors in table 3. National factors represent the effect of national GDP growth on our state GSP growth forecasts. Regional factors capture the roles played by the MEI and relative MEI, while state factors incorporate the effects of state real personal income growth, as well as the idiosyncratic dynamics of each state’s GSP growth.

blog_table3

State and national factors have played a dominant role so far in 2014, but not every District state is projected to share equally in the national second quarter rebound from the slow start to the year. Regional factors have increased in importance over the course of the year; and with both the MEI and relative MEI showing above-trend growth so far in the third quarter, they are likely to continue to do so in the second half of 2014.

As we work to merge our annual and quarterly forecasting models, we will be reporting both annual and quarterly annualized estimates of District states’ GSP growth in conjunction with the MEI. These projections following the third release of national GDP data are available at www.chicagofed.org/webpages/region/midwest_economy/index_data.cfm.

 

 

  1. This blog entry serves as an update to a previous Chicago Fed Letter examining GSP growth and the MEI, available at www.chicagofed.org/digital_assets/publications/chicago_fed_letter/2011/cfldecember2011_293.pdf.
  2. The Seventh District comprises all of Iowa and most of Illinois, Indiana, Michigan, and Wisconsin. The MEI and our GSP forecasts are for the entirety of each state that lies within the District.
  3. Our estimates of annual GSP growth are made available following the third release of national gross domestic product (GDP) data for each quarter at www.chicagofed.org/webpages/region/midwest_economy/index_data.cfm.
  4. The 2014 release schedule for the MEI and the quarterly GSP growth forecasts can be found at www.chicagofed.org/mei.
  5. A similar model linking quarterly annualized U.S. GDP growth and the Chicago Fed National Activity Index is described in an article available at www.chicagofed.org/webpages/publications/chicago_fed_letter/2010/april_273.cfm.

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.[1] 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.
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[1] 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)

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.

Are Seventh District Labor Markets Still Slack?

By Bill Testa and Jacob Berman

There is no question that the U.S. labor market has been gradually but steadily healing after the Great Recession. The national unemployment rate peaked at 10% in October 2009, but it has since fallen to 6.2% (as of July 2014). The nation experienced a net loss of 8.7 million jobs during the downturn, and finally finished making up for those job losses just this past May. So, undeniably, progress has been made in the labor market, but now the questions facing policymakers and other government officials are how much slack capacity in the employable population remains and whether further tightening of labor market conditions will push up wages and prices.

Recently, short-term unemployment—defined as the share of the labor force that has been unemployed for 26 weeks or less (see below)—has fallen to levels that have been historically associated with robust economic conditions. In contrast, despite post-recessionary declines in long-term unemployment (i.e., the share of the labor force that has been unemployed for greater than 26 weeks), its recent levels remain well above the historical norm. Though high long-term unemployment may be a sign of considerable labor market slack, some argue that the vast majority of the long-term unemployed lack the specific skills and other characteristics to be hired or trained. If this proves to be correct, it would imply that the U.S. labor market is nearing its full capacity.


Source: U.S. Bureau of Labor Statistics, Current Population Survey, from Haver Analytics

In order to provide more useful guideposts for macroeconomic policymaking, economists Dan Aaronson and Andrew Jordan recently investigated the relationships between rising wages and indicators of labor market tightness. In their recent Chicago Fed Letter, the authors find a strong correlation between real wage growth and two prominent measures of labor market slack—medium-term unemployment (i.e., the share of labor force unemployed for five to 26 weeks) and the percentage of the labor force reporting they are working part-time involuntarily for economic reasons (such as unfavorable business conditions or seasonal decreases in demand). Partly because both of these measures of labor slack remain elevated today, the authors conclude that real wage growth in June 2014 would have been one-half of a percentage point to one full percentage point higher under the labor market conditions of the 2005-07 U.S. economy.

While we often speak of the labor market as one monolithic term, labor market conditions vary widely by occupation, industry, and location. In their analyses, Aaronson and Jordan identify statistical relationships between real wage growth and labor market conditions by observing individual states. In the chart below, we see the general pace of employee compensation for both the United States and for the East North Central Region, which includes four of the five states of the Seventh Federal Reserve District.[1] In both the nation and the region, recent growth in labor compensation continues to fall short of that in the pre-recessionary period.[2]


Source: U.S. Bureau of Labor Statistics, Current Population Survey, from Haver Analytics

Also, as seen in the next three charts, Seventh District states generally exhibited signs of greater labor market slack in 2013 relative to the pre-recession year of 2007.[3] Long-term unemployment—both in the Seventh District states and in the nation—has stayed high during the economic recovery. In 2013, the long-term unemployment rate in Illinois was the highest among the District states (followed by Michigan). Notably, Michigan’s long-term unemployment rate had been at a high rate already in 2007 as a result of the severe restructuring of the automotive industry in the past decade.


Source: U.S. Bureau of Labor Statistics, Current Population Survey, from Haver Analytics

Medium-term measures also remained elevated among Seventh District states in 2013. However, they suggested that the District’s state labor markets may be less slack than the national one; in particular, Iowa and Wisconsin, where 2013 medium-term unemployment rates had almost returned to their 2007 levels, showed their labor markets may be improving faster than the nation’s.


Source: U.S. Bureau of Labor Statistics, Current Population Survey, from Haver Analytics

According to the measures of the percentage of the labor force who are involuntary part-time workers, there also appeared to be additional work force supply available in both the Seventh District states and the nation in 2013 as compared with 2007. This was the case for all five District states. Moreover, it should be noted that Michigan, Indiana, and Illinois displayed a higher percentage of involuntary part-timers than the nation did in 2013. Involuntary part-time workers are those who would choose to work more hours if it were possible. Typically, such workers have had their hours cut back in their current job, or they are part-time workers who cannot find a full-time job due to poor economic conditions in their occupation.[4]


Source: U.S. Bureau of Labor Statistics, Current Population Survey, from Haver Analytics

As these measures indicate, even while labor markets continue to tighten in the economic recovery, there is significant variation across states. According to the charts above, state labor markets in the Seventh District continue to be somewhat slack. Further, the observed pace of wage and employee compensation increases are still below those of the pre-recessionary period.
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[1]The Federal Reserve’s Seventh District comprises major parts of Indiana, Illinois, Michigan, and Wisconsin, as well as the entirety of Iowa. The U.S. Census Bureau’s East North Central Region comprises Ohio and the entirety of the Seventh District states excepting any part of Iowa.(Return to text)

[2]Labor compensation includes both employee wages and benefits.(Return to text)

[3]State averages are reported here, though we acknowledge that local conditions and markets for specific skills and occupations differ. The Chicago Fed’s regional research staff keeps abreast of such conditions and markets through local meetings with labor market participants and businesses, as well as through formal surveys.(Return to text)

[4]For a full discussion see Rob Valletta and Leila Bengalli, “What’s Behind the Increase in Part-time Work?(Return to text)

Economic Development in Chicago

By Rick Mattoon

This last blog in our series on the largest cities in the Chicago Fed’s District focuses on Chicago. (For a complete profile of all five cities, see Industrial clusters and economic development in the Seventh District’s largest cities.) Chicago holds a different place in the urban hierarchy than the other large cities in the District. More than just a large midwestern city, Chicago has obtained global city status and competes with other global cities in the U.S. (New York, Los Angeles, Washington and San Francisco) and abroad (London, Paris, Tokyo, and Hong Kong to name a few) for investment and reputation. Chicago is the home to world-class museums, cultural institutions and universities, as well as corporate headquarters and one of the busiest airports in the world. Importantly, one of Chicago’s primary advantages is its ability to attract human capital. Recent work by Bill Testa and Bill Sander highlighted the ability of Chicago’s downtown core to attract educated young adults.[1] As this survey of city economic strategies has shown, human capital accumulation is a primary strategy for growth, and Chicago appears to have advantages in attracting and retaining skilled workers.

Chicago’s economy underwent a profound shift in the 1990s. As manufacturing jobs began to decline, the Chicago-area economy shifted toward business and professional services. These sectors provided the city with high-paying jobs and helped lift its economy relative to other manufacturing-dependent Midwest cities. As we can see in the data (table 1), Chicago has a highly diversified economy, which closely mirrors the structure of the U.S. economy. Chicago does have challenges. The fiscal condition of the city (and the state) is precarious, highlighted by large underfunded public pension obligations. Also, the city has struggled to emerge from the Great Recession, as highlighted by slow job growth (figure 1).

Chicago’s Industry Structure

As figure 1 shows, Chicago has eight industries with higher employment and location quotients (LQs than the U.S. average.)[2] They are: manufacturing (LQ 1.04), wholesale trade (1.14), professional and technical services (1.13), management of companies (1.28), administrative and waste services (1.20), educational services (1.44), transportation and warehousing (1.24), and finance and insurance (1.16). This provides a highly diverse mix of high-end professional services (accounting, consulting, and advertising) with retained strength in manufacturing and logistics and warehousing.

Economic Development Strategy in Chicago

In 2012, Chicago unveiled a new economic development strategy that was based on a study conducted by World Business Chicago (WBC), which is the city’s public–private economic development agency. The study was based on a series of reports by subcommittees that focused on the recent strengths and weaknesses of Chicago’s economy. In the end, the report identified ten strategies, which included a focus on specific industry clusters—advanced manufacturing, professional services, and headquarters operations—as well as infrastructure improvements. The strategies are as follows:

• Support advanced manufacturing—high-value-added manufacturing.

• Increase the region’s attractiveness for business services and headquarters.

• Enhance the city’s competitive position as a transportation and logistics hub.

• Make Chicago a premier destination for tourism and entertainment.

• Make the city a leading exporter—support export activities, particularly for small and mid-sized businesses.

• Develop a work force in a demand-driven and targeted manner.

• Support entrepreneurship and innovation in both mature and emerging sectors (with an emphasis on product commercialization).

• Develop next-generation infrastructure and new models of public–private funding.

• Support neighborhood vitality that supports regional growth (small and medium-sized enterprises).

• Develop a good business climate. This includes streamlining regulation and providing businesses with a supportive infrastructure.

To implement the plan, WBC has created a series of task forces to develop specific metrics to measure progress toward each goal. As figure 2 shows, part of the desire to articulate a new development plan for the city came from the sluggish job growth that occurred coming out of the Great Recession. While Chicago had grown faster than the District as a whole leading up to the recession, its performance from 2010 to 2012 was lackluster and is still somewhat sluggish.

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[1]William A. Testa and William Sander, “Household Location and Economic Development in the Chicago Metropolitan Area,” mimeo. (Return to text)

[2]The U.S. Bureau of Labor Statistics (BLS) defines LQs as “ratios that allow an area’s distribution of employment by industry to be compared to a reference or base area’s distribution”. (Return to text)

Economic Development in Detroit

By Rick Mattoon

Detroit is the focus of this blog examining economic development issues in the five largest cities in the Chicago Fed’s District. (For a complete profile of all five cities. see “Industrial clusters and economic development in the Seventh District’s largest cities”). Relative to the other large cities, Detroit faces some special challenges. Home to the domestic auto industry, Detroit grew and flourished until increased foreign auto competition began to erode the dominant position of Detroit-based auto producers. With a challenged industrial base and increasing racial strife culminating in the 1967 riots, Detroit began a long process of population out-migration. The city’s population fell from a high of 1.8 million in 1950[1] to the most recent estimate of just under 700,000.[2] This combination of industrial and population decline severely challenged the fiscal condition of the city. The city’s large geographic footprint (140 square miles) and declining tax base made it increasingly difficult to provide city services, culminating in a 2013 Chapter 9 bankruptcy filing, which is still being resolved. Not surprisingly, the city’s immediate economic development plans aim to stabilize its population, restore government services, and attract new businesses that should find its relatively low property prices attractive.

Detroit’s Industry Structure

Figure 1 shows Detroit’s employment structure and industry concentrations (location quotients or LQs) relative to the U.S. Detroit has five industries with above U.S. average employment shares and location quotients above 1. These industries are manufacturing (LQ of 1.29 or 29% above the U.S. average), professional and technical services (LQ 1.45), management of companies (LQ of 1.34), administrative and waste services (1.15), and health care and social assistance (1.09). This reflects recent efforts by the city to develop business and professional services in the downtown business district, which has led to investments by Quicken Loans and Compuware.

Economic Development Strategy in Detroit

In December 2012, the Detroit Strategic Framework Plan was released.[3] The long-term planning aspect of the report was produced by a mayor-appointed, 12-member steering committee drawn from the business, community, faith-based, government, and philanthropic communities. The Detroit Economic Growth Corporation managed the project. The plan is designed to recognize core assets that the city has and to examine ways to leverage those assets to restore and stabilize the Detroit economy. The plan creates four benchmark goals for the city to achieve by 2030.

• Stabilize the residential population at between 600,000 and 800,000.

• Increase the number of jobs available per city resident from the current level of 27 per 100 people to 50 per 100 people.

• Enhance the regional transportation network to better integrate Detroit and the rest of the MSA and develop land-reuse plans that will repurpose existing vacant tracks for new types of development.

• Establish an ongoing framework for civic involvement.

The plan also has specific economic development elements that are captured by five implementation strategies.

• Emphasize support for four key sectors with highest potential growth—education and medical, industrial, digital/creative, and local entrepreneurship. To support growth in these sectors, the plan calls for aligning private and civic investments. This includes having work force development strategies specific to these four industry clusters.

• Use a place-based strategy for growth. In practice, this would target “employment districts” where resources would be channeled to promote growth. The plan establishes seven of these districts and assumes these geographic areas have the greatest ability to bring job growth to scale. This would be complimented by growth in industrial business improvement districts and developing capacity for green business.

• Encourage local entrepreneurship and minority business participation. The strategy here is to develop local business clusters that serve the Detroit market—for example, using local suppliers to feed existing businesses as well as seeking to diversify the economic base of the city. This strategy assumes the provision of low-cost shared space and improvements in other local services that are currently being underprovided in Detroit.

• Improve skills and support education reform. Much of this focuses on improving existing work force training by linking it more closely to the private sector and aligning training to local industry needs. It also calls for better integrating work force development with transportation, encourages hiring of Detroit natives, and calls for a study designed to improve city-wide graduation rates.

• Review land regulations, transactions, and environmental actions. This is a broad land-reuse program that focuses on land banking for industrial and commercial property as well as improving development outcomes by speeding permitting in employment districts and identifying alternative sources of capital for development.

It is clear that much of Detroit’s plan emphasizes stabilizing the current economic base as a necessary step to attract new investment. The plan also emphasizes the creation of home-grown businesses, which is likely necessary to fill in declines in retail and other services found in many Detroit neighborhoods.

If we look at Detroit’s recent history of employment growth over the recent business cycle (figure 2), we see that for almost the entire 2000s, Detroit had negative year-over-year employment growth and performed significantly below the average for the Seventh District. However, emerging from the Great Recession, Detroit’s employment growth is above the Seventh District average up until late 2013 and early 2014, which happens to coincide with the bankruptcy filing. The rise coming out of the recession likely reflects the rebound in the domestic auto industry, which still exerts a heavy influence on Detroit’s economy.

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[1] http://www.freep.com/interactive/article/20130723/NEWS01/130721003/detroit-city-population (Return to text)

[2] http://www.detroitnews.com/article/20140521/METRO08/305210136 (Return to text)

[3] http://detroitworksproject.com/the-framework/ (Return to text)

Economic Development in Milwaukee, WI

By Rick Mattoon

Milwaukee is the focus of this third blog examining the economic structure and development plans of the five largest cities in the Seventh Federal Reserve District. (For a complete profile of all five cities see, Industrial clusters and economic development in the Seventh District’s largest cities.) Milwaukee grew up as a manufacturing city and was famed for its beer industry. Today manufacturing still plays an important role, but the city has added an array of financial and professional services firms and is targeting niche industries, such as freshwater management and industrial controls, to help drive future growth. Milwaukee also has an important difference from other large cities in the District in the sense that it is geographically close to Chicago. Chicago’s considerable economic shadow presents both advantages and disadvantages for Milwaukee. On the one hand, Chicago provides a huge market for Milwaukee’s products. On the other hand, Chicago’s size and influence pulls regional assets, including skilled workers, away from Milwaukee. However, as we will see from the economic development plan, Milwaukee is focused on industries that are either absent in Chicago or might compliment the greater bi-state regional economy.

Milwaukee’s Industry Structure

Table 1 shows the Milwaukee MSA’s employment and industry concentration levels (also known as location quotients or LQs) relative to the US. Milwaukee has a diverse economic base, with above-average shares of employment and industry concentrations across an array of industries.

Economic Development Strategy in Milwaukee

The Milwaukee 7 Regional Economic Development Partnership released a strategy plan in November 2013.[1] The plan was developed over 18 months and was based on the work of five cross-sector working groups. The plan recognizes that Milwaukee’s economy has been lagging that of the nation for the past decade and is in a state of transition, with growth favoring knowledge-intensive products, services, and processes over traditional manufacturing.

The plan identifies nine specific strategies aimed at improving regional productivity. These strategies are:

• become a leading innovator, producer, and exporter of products and services related to energy, power, and controls

• become a global hub for activity in water technology

• grow the food cluster by leveraging geographic, supply chain, and human capital advantages

• increase export capacity, particularly for small- and medium-sized firms

• align work force development with growth in high-potential clusters

• foster an innovation and entrepreneurship ecosystem

• catalyze economic place-making (e.g., recast the economy from an image of traditional manufacturing to more technology-oriented manufacturing and services)

• modernize regional infrastructure

• enhance inter-jurisdictional cooperation and collaboration

Milwaukee’s strategy appears to be more targeted than most other cities’. The Milwaukee MSA has a diverse economic base, with LQs above 1.05 in five industries. Rather than focusing on broader categories, the plan looks at subsectors within large groups, such as energy and energy controls, water science and management, and food production. The other elements of the policy are designed to create economic conditions (through productivity policies) that would benefit almost any industry. These infrastructure and workforce policies seem designed to create a platform for growth for many types of firms.

Finally, as Figure 1 illustrates, Milwaukee’s job growth generally exceeded the region’s average heading into the Great Recession but underperformed the region during the early years of the recovery. Over the past two years, however, Milwaukee’s job growth has been on par with the region’s average.

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[1]See http://mke7.com/~/media/Documents/M7RegionalPlanExecSummary.ashx. (Return to text)



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