All posts by Thomas Walstrum

Seventh District Update, November 2016

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First, a different special announcement: The Federal Reserve announced on November 30, 2016, changes that will be incorporated into its Beige Book report starting in 2017. For more information, see the press release.

And now, 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 slowed to a modest pace in October and early November, but contacts expect growth to return to a moderate pace over the next six to twelve months.
  • Consumer spending: Consumer spending increased slightly over the reporting period, primarily reflecting gains at middle-market retailers. Sales of new light vehicles remained strong in the District.
  • Business Spending: Growth in business spending continued at a moderate pace. Retail and manufacturing inventories were generally at desired levels. Current capital expenditures and employment both grew at a moderate pace.
  • Construction and Real Estate: Activity increased slightly overall. Demand for residential construction, residential real estate, nonresidential construction, and commercial real estate all edged up.
  • Manufacturing: Growth in manufacturing production continued at a moderate pace in October and early November, with strong increases in autos and aerospace (though slowing a bit again in autos) and modest gains overall among other industries.
  • Banking and finance: Conditions were little changed. While U.S. Treasury bond yields were up after the U.S. elections, corporate bond spreads declined. Loan demand from small and middle market businesses was little changed, as was consumer loan demand.
  • Prices and Costs: Cost pressures increased modestly, but remained mild. Energy prices remained low, but industrial metals prices rallied. Retail prices changed little, wage pressures were steady overall, and non-wage labor costs picked up some.
  • Agriculture: Record corn and soybean yields, combined with stable corn prices and rising soybean prices, implied that more crop operations than previously expected would at least break even this year.

The Midwest Economy Index (MEI) rose to −0.01 in October from −0.11 in September. The relative MEI increased to +0.25 in October from +0.16 in September. October’s value for the relative MEI indicates that Midwest economic growth was somewhat higher than what would typically be suggested by the growth rate of the national economy.

The Chicago Fed Survey of Business Conditions (CFSBC) Activity Index decreased to −20 from +9, suggesting that growth in economic activity slowed to a modest pace in October and early November. The CFSBC Manufacturing Activity Index remained at +3, and the CFSBC Nonmanufacturing Activity Index decreased to −33 from +12.

Seventh District Update, October 2016

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First, our ongoing special announcement: As a Midwest Economy blog reader, you may also want to sign up to follow our new Chicago Fed Survey of Business Conditions (CFSBC), which is a survey of business contacts conducted to support the Seventh Federal Reserve District’s contribution to the Beige Book. The Chicago Fed produces diffusion indexes based on the quantitative questions in the survey. Click here to sign up for email alerts and click here to view the latest release.

If you are a Seventh District business leader and would like to share your perspective on current economic conditions with us, you are welcome to participate in the CFSBC. Please send an email with your contact information to thomas.walstrum@chi.frb.org.

And now, 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 continued at a moderate pace in late August and September, and contacts expect growth to remain moderate over the next six to twelve months.
  • Consumer spending: Growth in consumer spending increased only slightly and store traffic remained low. The sales pace of autos in the District remained strong, but slowed slightly.
  • Business Spending: Growth in business spending remained at a moderate pace. Retail and manufacturing inventories were generally at desired levels. Current capital expenditures and employment both grew at a moderate pace.
  • Construction and Real Estate: Activity increased modestly overall. Residential construction was little changed, while nonresidential construction, residential real estate, and commercial real estate activity all increased slightly.
  • Manufacturing: Growth in manufacturing production picked up to a moderate pace. Activity continued to be strong in autos and aerospace, while gains remained modest overall among other industries.
  • Banking and finance: Conditions were little changed. Equity prices declined slightly and volatility was low. Loan demand from small and middle market businesses continued to rise. Consumer loan demand increased modestly.
  • Prices and Costs: Cost pressures were unchanged and remained mild. Most energy and metals prices were flat and remained low, though steel prices fell some. Retail prices changed little and wage pressures were steady.
  • Agriculture: Low expectations for farm incomes continued, with contacts expecting that a profitable soybean harvest would not be enough to offset an unprofitable corn harvest.

The Midwest Economy Index (MEI) increased to –0.04 in August from –0.16 in July. The relative MEI moved up to +0.11 in August from +0.01 in July. August’s value for the relative MEI indicates that Midwest economic growth was slightly higher than what would typically be suggested by the growth rate of the national economy.

The Chicago Fed Survey of Business Conditions (CFSBC) Activity Index increased to +7 from −16, suggesting that growth in economic activity picked up to a moderate pace in late August and September. The CFSBC Manufacturing Activity Index increased to +6 from +3, and the CFSBC Nonmanufacturing Activity Index increased to +8 from −27.

Poor fiscal performance a problem for both state and local governments in Illinois

For a recent Chicago Fed Letter article, I looked back at the fiscal performance of Illinois’s state and local governments and found that, taken together, Illinois governments had been consistently spending more than they had brought in since at least the late 1980s. I also found that while the typical U.S. state often spent more than its revenues over this period, the extent of Illinois’s overspending (or under-taxing) was significantly greater. Finally, I found that the biggest difference in spending between Illinois and the typical state was that Illinois governments spent more on pensions.[1]

As I discussed in the article, in order to compare Illinois’s fiscal performance with other states’, I had to combine the data for state and local governments together. This was necessary because each state divides responsibilities for its activities differently between state and local governments (for example, some states fund K–12 schools primarily through state revenues, while others fund them primarily through local revenues).

That said, one question that naturally arises from my analysis is this: Was it Illinois’s state government, its local governments, or both that engaged in overspending (or under-taxing)? While it is not feasible to use the U.S. Census Bureau data I used for the Chicago Fed Letter to compare the performance of Illinois’s state or local governments with those of other states and their localities, it is possible to compare the performance of Illinois’s state government with that of its local governments.

There is one important caveat to the comparison that follows. During fiscal years (FY) 1988–2013, an average of 25.2% of local government revenues in Illinois came from the State of Illinois. This means that local governments in Illinois depend quite heavily on revenues from the state government to balance their books, and that some amount of overspending (or under-taxing) at the local level could be the result of unpredictable declines in revenues from the state government. However, at least for FY1988–2013, this does not appear to be the case, because the percentage of local revenues coming from the state was relatively stable (the standard deviation was 1.9 percentage points). Any overspending at the local level, then, was largely the result of locally made decisions.

Figure 1 plots expenditures as a share of revenues for the State of Illinois and for the sum of local governments in Illinois since FY1988.[2] Over these years, local governments (summed together) have never spent less than they brought in. Perhaps surprisingly, the State of Illinois often performed better than local governments, though it did much worse in the years following the 2001 and 2008 recessions. The state spent less than it brought in in seven out of the 26 years the data cover—which is not a good performance, but better than the performance of local governments.

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Because the Census Bureau data lump all 6,963 local governments in Illinois[3] together, it is impossible to know from the data which of these governments are responsible for the overall overspending (or under-taxing). Poor fiscal performance could be concentrated in a few large governments or be widespread. While it is well beyond the scope of this blog post to gather data on the overall fiscal performance of thousands of local governments, I am able to look at the performance of local governments’ pension systems, which is insightful because as I noted earlier, pension spending was one of the biggest contributors to overspending (or under-taxing) by Illinois governments.

Perhaps the best summary measure of the condition of a pension system is its unfunded liability. This is the difference between the discounted present value of all the future payouts the pension has promised to make and the value of the pension’s assets. The unfunded liability, then, is the amount that taxpayers will have to contribute to the pension system in order for it to be able to cover all of its promised future payouts.

Table 1 shows a breakdown by locale of the total unfunded pension liability facing Illinois state and local governments at the end of FY2014.[4] Of the $158.2 billion total, $104.6 billion (66%) was the responsibility of the state government and the remaining $53.6 billion (34%) was the responsibility of local governments. Beyond the state versus local government comparison, things get complicated because some pension systems cover overlapping geographies. The City of Chicago has six separate pension funds covering its workers, and there are three for Cook County employees (Cook County holds almost the entirety of Chicago and a number of its suburbs[5]). On top of that, most municipalities have their own police and firefighters pensions, and there is a single pension system for all other non-Chicago municipality workers called the Illinois Municipal Retirement Fund.

Even though the system of local government pensions in Illinois is somewhat complicated, it is clear from table 1 that the City of Chicago is disproportionally responsible for the accumulation of local unfunded pension liabilities. A little over one-fifth of Illinois’s population is in Chicago, but Chicago is responsible for more than half of local government unfunded pension liabilities in Illinois. Chicago residents owe $10,492 per person to their city’s pension systems, on top of the $8,130 per person they owe to the state pension systems.

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To make the comparison of the unfunded liabilities of Illinois’s local governments clearer, I show in table 2 the total per capita state and local unfunded liability by place of residence. There is one wrinkle acknowledged within the table, however, which is that Chicago residents are responsible for the pensions of all Illinois teachers, while Illinois residents outside of Chicago are not responsible for the pensions of Chicago teachers. Thus, perhaps a fairer comparison is to count the unfunded liability of the Chicago teachers’ pension fund as a state-level liability. While this change reduces the unfunded pension liability faced by Chicago residents by 13%, they still would owe a total of $17,506 per person to various Illinois pension systems. Those living outside Chicago would face a smaller, but still quite large, liability per person ($11,954 in suburban Cook County and $10,553 outside Cook County).

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While suburban and downstate police and fire pension systems make up a relatively small part of the total unfunded pension liability of Illinois’s state and local governments (5.6%), pension systems for some municipalities may be in much worse shape than others, so that these liabilities can still matter quite a bit. Table 3 shows the unfunded liabilities for police and firefighters pensions for the 25 most populous cities in Illinois. Chicago is in the worst shape, but residents of Moline, Rock Island, Evanston, and Peoria all owe more than $2,000 per resident to their police and firefighters pension systems. Some cities are in much better shape. For example, residents of Urbana owe fewer than $500 per resident to their systems.

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This blog post shows that overspending (or under-taxing) has long been a problem for both the State of Illinois and the local governments in Illinois, with the accumulation of unfunded pension liabilities playing an important role at both levels of government. And while the City of Chicago has built up a larger unfunded pension liability than that of suburban Chicago and downstate Illinois, every region of Illinois bears some blame for overspending (or, once again, under-taxing).

[1] See the Chicago Fed Letter for a detailed explanation of how I calculate pension spending.

[2]See Chicago Fed Letter for details about how these figures are calculated. Expenditures include the change in pension liabilities.

[3] 2012 Census of Governments (https://www.census.gov/govs/cog/).

[4] All unfunded liability data come from the 2015 Biennial Report of the Illinois Department of Insurance Public Pension Division, http://insurance.illinois.gov/Reports/Pension/pension_biennial_report_2015.pdf.

[5] Technically, a portion of O’Hare Airport—and therefore Chicago—is in DuPage County.

Seventh District Update, September 2016

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First, a (repeat) repeat special announcement: As a Midwest Economy blog reader, you may also want to sign up to follow our new Chicago Fed Survey of Business Conditions (CFSBC), which is a survey of business contacts conducted to support the Seventh Federal Reserve District’s contribution to the Beige Book. The Chicago Fed produces diffusion indexes based on the quantitative questions in the survey. Click here to sign up for email alerts and click here to view the latest release.

If you are a Seventh District business leader and would like to share your perspective on current economic conditions with us, you are welcome to participate in the CFSBC. Please send an email with your contact information to thomas.walstrum@chi.frb.org.

And now, 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 picked up to a moderate pace in July and early August, and contacts expect growth to remain moderate over the next six to twelve months.
  • Consumer spending: Growth in consumer spending slowed notably with most segments reporting little change in sales. Auto sales slowed some, but remained strong.
  • Business Spending: Growth in business spending picked up to a moderate pace. Retail inventories were somewhat higher than desired because of softer sales. Current capital expenditures picked up to a moderate pace, while hiring continued at a modest rate.
  • Construction and Real Estate: Activity increased slightly overall. Residential construction and home sales increased slightly. Demand for nonresidential construction picked up some, and commercial real estate activity increased slightly.
  • Manufacturing: Growth in manufacturing production picked up to a moderate pace. Activity continued to be strong in autos and aerospace, and increased in most other industries.
  • Banking and finance: Conditions improved modestly. Equity prices were higher, volatility was low, and loan demand from small and middle market businesses grew modestly. Consumer loan demand increased slightly.
  • Prices and Costs: Cost pressures were unchanged and remained mild. Most energy and metals prices were flat and remained low. Retail prices changed little and labor cost pressures were steady.
  • Agriculture: Already low expectations for farm incomes deteriorated over the reporting period as the potential for a record national harvest pushed prices down further.

The Midwest Economy Index (MEI) decreased to −0.14 in July from −0.04 in June. The relative MEI moved down to +0.03 in July from +0.38 in June. July’s value for the relative MEI indicates that Midwest economic growth was quite close to what would typically be suggested by the growth rate of the national economy.

The Chicago Fed Survey of Business Conditions (CFSBC) Activity Index increased to −18 from −23, suggesting that growth in economic activity remained at a modest pace in July and early August. The CFSBC Manufacturing Activity Index increased to a neutral value from −31, while the CFSBC Nonmanufacturing Activity Index declined to −27 from −18.

Seventh District Update, July 2016

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First, a (repeat) repeat special announcement: As a Midwest Economy blog reader, you may also want to sign up to follow our new Chicago Fed Survey of Business Conditions (CFSBC), which is a survey of business contacts conducted to support the Seventh Federal Reserve District’s contribution to the Beige Book. The Chicago Fed produces diffusion indexes based on the quantitative questions in the survey. Click here to sign up for email alerts and click here to view the latest release.

If you are a Seventh District business leader and would like to share your perspective on current economic conditions with us, you are welcome to participate in the CFSBC. Please send an email with your contact information to thomas.walstrum@chi.frb.org.

And now, 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 continued at a modest pace in late May and June, and contacts expect growth to remain modest over the next 6 to 12 months.
  • Consumer spending: Growth continued at a moderate pace. Auto sales remained robust.
  • Business Spending: Growth remained modest. Most retailers and manufacturers reported comfortable inventory levels. Current capital outlays remained modest and plans for future outlays declined. Hiring continued at a modest rate, and there was an uptick in expectations for future hiring.
  • Construction and Real Estate: Activity increased slightly overall. Residential construction was little changed, while home sales increased in most locations. Demand for nonresidential construction increased slightly and commercial real estate activity rose modestly.
  • Manufacturing: Growth remained modest. Activity continued to be strong in autos and aerospace, but remained weaker in most other industries.
  • Banking and finance: Developments were mixed. Financial market volatility increased significantly, driven primarily by the United Kingdom’s vote to exit the European Union. Business and consumer loan demand grew slightly.
  • Prices and Costs: Cost pressures were unchanged and remained mild. Most energy and metals prices were flat and remained low. Retail prices were flat and labor cost pressures were steady.
  • Agriculture: Corn and soybean price gains led more farmers to lock in prices for the fall harvest, though the increases were not enough to change contacts’ expectations that farm incomes will be weak this year.

The Midwest Economy Index (MEI) decreased to +0.12 in May from +0.28 in April. The relative MEI declined to +0.53 in May from +0.71 in April. May’s value for the relative MEI indicates that Midwest economic growth was somewhat higher than what would typically be suggested by the growth rate of the national economy.

The Chicago Fed Survey of Business Conditions (CFSBC) Activity Index decreased to −24 from −21, suggesting that growth in economic activity remained modest in late May and June. The CFSBC Manufacturing Activity Index declined to −28 from −17, while the CFSBC Nonmanufacturing Activity Index ticked up to −22 from −23.

Seventh District Update, June 2016

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First, a (repeat) special announcement: As a Midwest Economy blog reader, you may also want to sign up to follow our new Chicago Fed Survey of Business Conditions (CFSBC), which is a survey of business contacts conducted to support the Seventh Federal Reserve District’s contribution to the Beige Book. The Chicago Fed produces diffusion indexes based on the quantitative questions in the survey. Click here to sign up for email alerts and click here to view the latest release.

And now, 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 slowed to a modest pace in April and early May, tempering contacts’ optimism about growth over the next 6 to 12 months.
  • Consumer spending: Growth in consumer spending picked up to a moderate pace. Retailers in Michigan indicated that sales were the best they had seen in over a year. Auto sales remained robust.
  • Business Spending: Most retailers and manufacturers reported comfortable inventory levels. Current capital outlays and plans for future outlays slowed to a modest pace. Hiring also slowed to a more modest rate, as did expectations for future hiring.
  • Construction and Real Estate: Residential construction rose slightly, and residential rents and home prices rose moderately. Demand for nonresidential construction was little changed and commercial real estate activity rose modestly.
  • Manufacturing: Manufacturing production grew at a modest pace. Activity remained strong in autos and aerospace, but was slower in most other industries.
  • Banking and finance: On balance, financial conditions improved marginally. Market volatility decreased, high yield debt issuance rebounded, and upgrades outpaced downgrades for credit ratings of U.S. public financial firms. Business and consumer loan demand was little changed on balance.
  • Prices and Costs: Cost pressures again tightened some, but remained mild overall. Most energy and metals prices increased (steel in particular), but the level remained low. Retail prices increased slightly, as did wage costs. Growth in non-wage labor costs was steady.
  • Agriculture: Corn and soybean prices rose, improving farmers’ earnings prospects.

The Midwest Economy Index (MEI) was unchanged at +0.25 in April. The relative MEI increased to +0.71 in April from +0.67 in March. April’s value for the relative MEI indicates that Midwest economic growth was moderately higher than what would typically be suggested by the growth rate of the national economy.

The Chicago Fed Survey of Business Conditions (CFSBC) Activity Index decreased to –23 from zero, suggesting that growth in economic activity slowed to a modest pace in April and early May. The CFSBC Manufacturing Activity Index declined to –23 from +27, while the CFSBC Nonmanufacturing Activity Index decreased to –24 from –15.

Seventh District Update, April 2016

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First, a (repeat) special announcement: As a Midwest Economy blog reader, you may also want to sign up to follow our new Chicago Fed Survey of Business Conditions (CFSBC), which is a survey of business contacts conducted to support the Seventh Federal Reserve District’s contribution to the Beige Book. The Chicago Fed produces diffusion indexes based on the quantitative questions in the survey. Click here to sign up for email alerts and click here to view the latest release.

And now, 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 picked up to a moderate pace in late February and March, and contacts expressed renewed optimism about the outlook for growth over the next 6 to 12 months.
  • Consumer spending: Growth in consumer spending maintained a modest pace, though, in contrast to the national data, reports of new and used vehicle sales continued to be strong.
  • Business Spending: Most retailers and manufacturers reported comfortable inventory levels. Current capital outlays and plans for future outlays picked up to a moderate pace. Hiring also picked up to a moderate pace, as did the number of contacts saying they planned to increase their workforces in the future.
  • Construction and Real Estate: Residential construction edged up and residential rents and home prices rose slightly. Demand for nonresidential construction was little changed and commercial real estate activity rose moderately.
  • Manufacturing: While manufacturing production rose at a modest rate early in the reporting period, growth increased to a moderate pace by the end March. Activity remained strong in the auto and aerospace industries and picked up in most other industries.
  • Banking and finance: Overall, financial conditions improved some. Equity markets regained much of their losses from the previous reporting period and volatility subsided. Business loan demand improved marginally and consumer loan demand was little changed, on balance.
  • Prices and Costs: Cost pressures increased some in late February and early March, but remained mild overall. Most energy and metals prices increased, but remained low. Retail prices changed little on balance, and wage and nonwage cost pressures remained mild.
  • Agriculture: Corn, soybean, and wheat prices moved up, and fertilizer prices and land rents moved down, but these changes were not large enough to appreciably improve crop farmers’ earnings prospects.

The Midwest Economy Index (MEI) moved up to +0.07 in February from −0.09 in January. The relative MEI fell to +0.54 in February from +0.73 in January. February’s value for the relative MEI indicates that Midwest economic growth was somewhat higher than what would typically be suggested by the growth rate of the national economy.

The Chicago Fed Survey of Business Conditions (CFSBC) Activity Index increased to –4 from –20, suggesting that growth in economic activity picked up to a moderate pace in late February and March. The CFSBC Manufacturing Activity Index rose to +23 from –19, while the CFSBC Nonmanufacturing Activity Index increased to –19 from –21.

Early Benchmarking the State Payroll Employment Survey—Update

In June of 2015, I wrote a blog post detailing a method called early benchmarking, which predicts how the U.S. Bureau of Labor Statistics (BLS) will revise the state payroll employment survey data when it updates its benchmarks each March (the method was first introduced by our colleagues at the Dallas Fed). The primary source of the revisions for state payroll employment (also known as the Current Employment Statistics, or CES) is the Quarterly Census of Employment and Wages (QCEW). While the BLS only rebenchmarks the CES using new QCEW data yearly, QCEW data are released quarterly, so it’s possible to use new QCEW data to predict how the BLS will revise the CES (this process is explained in detail in my earlier post). Benchmark revisions to the CES can be quite large, and we have found that our early benchmarking procedure typically reduces their size.

The BLS recently released the March 2016 benchmarked data, so we can see how the early benchmarking method performed for the Seventh Federal Reserve District and the District states for 2015. Table 1 summarizes how much employment grew in the Seventh District and District states in 2015 based on when the data were benchmarked using the QCEW. At the District level, the early benchmarking procedure performed marginally better: It underestimated job growth by 32,000, while data benchmarked in March 2015 underestimated job growth by 38,000. Both datasets estimated a 1.1 percent growth rate for 2015.

Early benchmarking is more useful at the state level, because CES sample sizes are smaller. For 2015, the largest error was for Illinois, where the March 2015 benchmarked data estimated that employment declined by 3,000, while the March 2016 benchmarked data indicate that employment actually increased by 51,000. The January 2016 benchmarked data roughly split the difference, estimating job growth of 29,000.

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The figures that follow show graphically the differences between the three series summarized in table 1 for the District and District states. The dashed portion of the lines for each series represents data that are not benchmarked using the QCEW. For example, the early benchmarked data are benchmarked using QCEW data through June 2015, while the March 2016 benchmarked data use QCEW data through September 2015. In some figures it is clear that the BLS also revises already-benchmarked data, though these revisions are typically small (Wisconsin is an exception for 2014).

Later this year, we will begin publishing early benchmarked estimates of District and District state employment growth on our website on a monthly basis (coinciding with the release of the Midwest Economy Index). We will be sure to notify our Midwest Economy blog readers when we make the estimates available.

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Seventh District Update, March 2016

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First, a (repeat) special announcement: As a Midwest Economy blog reader, you may also want to sign up to follow our new Chicago Fed Survey of Business Conditions (CFSBC), which is a survey of business contacts conducted to support the Seventh Federal Reserve District’s contribution to the Beige Book. The Chicago Fed produces diffusion indexes based on the quantitative questions in the survey. Click here to sign up for email alerts and click here to view the latest release.

And now, 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: Economic activity continued to increase at a modest pace, but turmoil in financial markets led contacts to express greater uncertainty and more pessimism about the pace of growth over the next 6 to 12 months.
  • Consumer spending: Growth in consumer spending continued at a modest pace, though new and used vehicle sales continued to be strong.
  • Business Spending: Most retailers reported comfortable inventory levels. Current capital spending and plans for future outlays both picked up some, but growth remained modest. The pace of hiring also picked up some, but growth remained slow. More contacts noted plans to increase their workforces over the next 6 to 12 months than in the previous reporting period.
  • Construction and Real Estate: Residential construction expanded modestly, and residential rents, home sales, and home prices all inched up. Nonresidential construction activity was little changed. Commercial real estate activity remained strong, fueled by demand from institutional investors.
  • Manufacturing: Gains in manufacturing production continued at a moderate pace. Growth remained strong in the auto and aerospace industries, but was slower in most other industries.
  • Banking and finance: Financial conditions tightened slightly on balance. Contacts reported that concerns about slower global economic growth led to declines in equity markets. Business and consumer loan demand grew slightly.
  • Prices and Costs: Cost pressures continued to be subdued. Commodity prices remained low, retail prices were little changed, and wage and nonwage cost pressures remained mild.
  • Agriculture: Crop farmers continued to cut capacity following another year of low incomes coupled with unexpectedly small declines in input costs.

The Midwest Economy Index (MEI) moved up to –0.15 in December from –0.20 in November. The relative MEI rose to +0.28 in December from +0.08 in November. December’s value for the relative MEI indicates that Midwest economic growth was somewhat higher than what would typically be suggested by the growth rate of the national economy.

The Chicago Fed Survey of Business Conditions (CFSBC) Activity Index edged down to –19 from –17, suggesting that growth in economic activity continued at a modest pace in January and early February. The CFSBC Manufacturing Activity Index rose to –7 from –18, while the CFSBC Nonmanufacturing Activity Index declined to –25 from –16.

Introducing the Chicago Fed Survey of Business Conditions (CFSBC)

On January 13, 2016, the Chicago Fed published the inaugural release of its Survey of Business Conditions (CFSBC). This new data product offers a series of diffusion indexes that track a broad set of topics related to the business conditions of firms in the Seventh District: overall activity (or product/service demand), outlook for the U.S. economy, current and planned hiring, current and planned capital spending, and wage and nonwage cost pressures.

The indexes are derived from questions included in a survey of Seventh District business leaders (started in March 2013) that was originally designed to support the Chicago Fed’s contribution to the Beige Book. Table 1 shows that CFSBC respondents come from a variety of industries, with the largest representation coming from the nonfinancial services sector and the manufacturing sector. The survey has averaged about 75 respondents over its history, though more recent surveys have averaged about 100 respondents.

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While the Beige Book is explicitly an anecdotal (or qualitative) account of current economic conditions, we decided to also include quantitative questions in our survey so that we can calculate indexes. These questions follow a seven-point scale. For example, here is our question about product/service demand:[1]

In the past four to six weeks, demand for my firm’s product or service has

  • increased substantially.
  • increased moderately.
  • increased slightly.
  • not changed.
  • decreased slightly.
  • decreased moderately.
  • decreased substantially.

The diffusion indexes we calculate from questions such as the one above are designed to be leading indicators, capturing changes in the prevailing direction of economic activity. The formula for the indexes is:

CFSBC - 4 - Formula 2

In many ways, this is a very traditional formula for a diffusion index, but we make an important adjustment that we would argue improves it: we measure individuals’ responses relative to their respective average responses. To calculate a respondent’s average response to a question, we assign numerical values ranging from +3 to –3 along the seven-point scale, and take the average across all responses. We then count a response as positive if it is above a respondent’s average response and negative if it is below a respondent’s average response. For example, if a respondent’s average response is +1.5, substantial and moderate increases are counted as positive responses and all other answers are counted as negative responses. Given our formula, the index ranges from +100 to –100 and will be +100 if every respondent in a given survey has an above-average response to a question and –100 if every respondent has a below-average response.

Calculating the indexes using a survey participant’s average response as a baseline—also known as detrending—allows us to correct for two types of potential biases. First, individuals may interpret phrases such as “substantially increased” differently, so that our numerical scores have different meanings for different people. Second, the industries and firms represented in our data may have different growth trends than the overall economy, which could bias the indexes because we do not have a random sample of respondents. For example, because manufacturers represent a sizable share of our respondents, our index could overrepresent trends in the manufacturing sector. The share of manufacturing output and employment in the U.S. economy has been declining for decades, so that in general, trends in the manufacturing sector are becoming less and less representative of trends in the overall economy.

Respondents’ respective average answers to a question can be interpreted as representing their historical trends or long-run averages. Thus, when we summarize respondents’ detrended responses by calculating diffusion indexes, we interpret zero index values to indicate that, on balance, the activity indicators are growing at their trend rates (or that outlooks are neutral). Likewise, positive index values indicate above-average growth (or optimistic outlooks) on balance, and negative values indicate below-average growth (or pessimistic outlooks) on balance.

For a concrete example of how we interpret the diffusion indexes, consider figure 1, which shows the CFSBC Activity Index (which is based on the question about product/service demand). It shows that 2013 was a bumpy year, with growth in activity about at trend on average. According to the index, 2014 started slowly (as you may recall, there was a lot of bad weather in the winter of 2014–15), but growth was consistently above trend for the rest of the year. Activity then slowed throughout 2015 to the point that growth was below trend by year’s end.

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We’ve found that the CFSBC Activity Index seems to do a good job of tracking U.S. real gross domestic product (GDP) growth, so that the index may be a good early indicator of the current state of the economy. Figure 2 shows this relationship, where I’ve aligned a zero value of the CFSBC Activity Index with the average of real GDP growth over the comparison date range. In general, the CFSBC Activity Index is positive when real GDP growth is above average and negative when real GDP growth is below average.

CFSBC - 3 - ActGDP

Because we use the results of the CFSBC to write our contribution to the Beige Book report, we will be releasing the CFSBC index data in conjunction with the Beige Book schedule. The Beige Book is released at 1:00 p.m. ET on the Wednesday two weeks before FOMC meetings, which take place eight times per year. The CFSBC index data are released two hours later.

For a more detailed description of the diffusion indexes and their properties, see the Chicago Fed Economic Perspectives article titled “The Chicago Fed Survey of Business Conditions: Quantifying the Seventh District’s Beige Book Report.”

[1] The full set of questions used for the CFSBC indexes is available here.