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.

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September 3, 2014

Seventh District Update, September 2014

By Thom Walstrum and Scott Brave

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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 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.

Posted by Testa at 3:21 PM | Comments (0)

August 25, 2014

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)

Posted by Testa at 8:46 AM | Comments (0)