Category Archives: Seventh District

2017 Mid-Year Review—A Solid First Half for the Seventh District, Thanks to Revivals in Global Growth and U.S. Oil Production

With the recent release of the Chicago Fed’s June Midwest Economy Index (MEI), we now have a good picture of how the Seventh District’s economy has done in the first half of this year. Overall, things went pretty well, and it appears that revivals in global growth and U.S. oil production are behind the good results. These revivals have lifted some long-struggling manufacturing industries in the District, including steel and heavy machinery. One cautionary note, though, is that the first half of the year has been disappointing for the auto industry, with signs that sales are slowing down to their long-run pace sooner than expected. Continue reading

Seventh District Update, July 2017

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A summary of economic conditions in the Seventh District from the latest release of the Beige Book and other indicators of regional business activity:

  • Overall conditions: Growth in economic activity in the Seventh District picked up to a moderate pace in late May and June and respondents’ outlooks for growth over the next 6 to 12 months also improved some.
  • Employment and Wages: Employment growth continued at a moderate rate. While contacts indicated that the labor market was tight, wage growth was only modest.
  • Prices: Prices again rose modestly. Retail and freight prices increased slightly and materials prices were little changed.
  • Consumer spending: Consumer spending increased modestly. Non-auto retail sales were up modestly, but auto sales changed little on net.
  • Business Spending: Growth in capital spending continued at a moderate pace and inventories were generally at comfortable levels.
  • Construction and Real Estate: Residential construction, home sales, and commercial real estate activity increased slightly, while nonresidential construction was little changed.
  • Manufacturing: Manufacturing production continued to grow at a moderate rate. Growth was widespread across industries, though auto production declined some.
  • Banking and finance: Financial participants noted that volatility continues to be low. Business loan demand ticked up and consumer loan demand was little changed.
  • Agriculture: The sector continued to operate under financial stress. The crop harvest is expected to be about average. Hog prices moved up, but cattle and milk prices were lower.

The Chicago Fed Survey of Business Conditions (CFSBC) Activity Index increased to +1 from –8, suggesting that growth in economic activity picked up to a moderate pace in late May and June. The CFSBC Manufacturing Activity Index declined to +3 from +20, while the CFSBC Nonmanufacturing Activity Index rose to a neutral value from –24.

The Midwest Economy Index (MEI) decreased to +0.51 in May from +0.72 in April. Three of the four broad sectors of nonfarm business activity and four of the five Seventh Federal Reserve District states made positive contributions to the MEI in May. The relative MEI moved down to +0.09 in May from +0.65 in April. Three of the four sectors and three of the five states made positive contributions to the relative MEI in May.

Seventh District Update, May 2017

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A summary of economic conditions in the Seventh District from the latest release of the Beige Book and 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. Respondents’ outlooks for growth over the next 6 to 12 months also pulled back some, but remained positive on balance.
  • Employment and Wages: Employment growth remained at a moderate rate. While contacts indicated that the labor market was tight, wage growth was only modest.
  • Prices: Prices again rose modestly. That said, retail and materials prices changed little.
  • Consumer spending: Consumer spending decreased slightly overall. Non-auto retail sales levels were flat and sales of light vehicles slowed some.
  • Business Spending: Growth in capital expenditures picked up to a moderate pace. Retail and manufacturing inventories were generally at desired levels, though auto dealers thought inventories were too high.
  • Construction and Real Estate: Residential construction rose moderately, though the pace of home sales was little changed. Nonresidential construction and commercial real estate activity were up slightly.
  • Manufacturing: Manufacturing production again grew at a moderate pace. Growth was widespread across industries, helped by greater demand from the energy sector.
  • Banking and finance: Market participants reported stable market conditions and low volatility. Business loan demand increased slightly and consumer loan demand was unchanged.
  • Agriculture: The outlook for crop income was unchanged, incomes for hog and cattle operations improved, and incomes for dairy farmers deteriorated a bit.

The Chicago Fed Survey of Business Conditions (CFSBC) Activity Index decreased to –9 from +14, suggesting that growth in economic activity slowed to a modest pace in April and early May. The CFSBC Manufacturing Activity Index declined to +19 from +45, while the CFSBC Nonmanufacturing Activity Index moved down to –25 from –5.

The Midwest Economy Index (MEI) increased to +0.70 in April from +0.61 in March, reaching its highest value since June 2014. All four broad sectors of nonfarm business activity and all five Seventh Federal Reserve District states made positive contributions to the MEI in April. The relative MEI rose to +0.64 in April from +0.44 in March. All four sectors and four of the five states made positive contributions to the relative MEI in April.

Seventh District Update, April 2017

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A summary of economic conditions in the Seventh District from the latest release of the Beige Book and other indicators of regional business activity:

  • Overall conditions: Growth in economic activity in the Seventh District continued at a moderate pace in late February and March, and contacts expected activity to continue rising at a moderate pace over the next six to twelve months.
  • Employment and Wages: Employment growth continued at a moderate pace. Wage growth was also moderate, and contacts indicated that the labor market is tight.
  • Prices: Retail prices rose modestly. Input costs were up slightly on balance. Metals prices were little changed, while freight costs increased.
  • Consumer spending: Consumer spending was flat overall, though e-commerce activity grew strongly. District auto sales were slightly higher.
  • Business Spending: Growth in business spending slowed to a modest pace. Retail and manufacturing inventories were generally at desired levels. Current capital expenditures grew at a modest pace.
  • Construction and Real Estate: Residential construction rose moderately, though home sales increased only slightly. Nonresidential construction and commercial real estate activity were up slightly.
  • Manufacturing: Manufacturing production again grew at a moderate pace. Growth was widespread across sectors, and conditions in some long-struggling sectors improved again.
  • Banking and finance: Conditions were little changed. Market participants reported high equity prices and low volatility. Business and consumer loan demand increased slightly.
  • Agriculture: Lower crop prices put further stress on the agricultural sector. Milk and hog prices were lower, while egg and cattle prices moved up.

The Chicago Fed Survey of Business Conditions (CFSBC) Activity Index increased to +13 from +6, suggesting that growth in economic activity stayed at a moderate pace in late February and March. The CFSBC Manufacturing Activity Index rose to +50 from +30 (its highest level since late 2014), while the CFSBC Nonmanufacturing Activity Index remained at –8.

The Midwest Economy Index (MEI) increased to +0.27 in February from +0.01 in January. The relative MEI increased to +0.08 in February from –0.09 in January. February’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.

Updated forecasts of Seventh District GSP growth

Updated forecasts of Seventh District GSP growth

Each year, the Chicago Fed provides estimates of annual gross state product (GSP) growth for the five states in the Seventh Federal Reserve District.[1] While presenting last year’s projections, we proposed a new forecasting model incorporating the U.S. Bureau of Economic Analysis’s (BEA) quarterly GSP data. In this post, we again use our quarterly model to generate GSP growth forecasts for 2016 (whose actual values will become available next month) and compare our estimates to those produced by our previous (annual) model described in Brave and Wang.[2]

GSP growth and the MEI

The BEA releases annual GSP data for the prior year each May. However, in an effort to provide a more frequent reading on regional economic growth, the BEA has also been releasing preliminary quarterly estimates of GSP since 2014. While the lag time in the production of these estimates is not as substantial as it is for annual GSP, it can still be rather long. For example, through April 2017, the 2016:Q4 GSP data have not yet been released, and will not be released until May 11, 2017.

The Chicago Fed’s Midwest Economy Index (MEI) provides an even higher frequency reading on economic growth for the five states of the Seventh District.[3] A weighted average of 129 state and regional indicators measuring growth in nonfarm business activity, the monthly MEI (like GSP) is a broad-based measure of economic conditions. After aggregating its monthly values to obtain a quarterly reading, the MEI also correlates quite well historically with Seventh District GSP growth.[4] Figure 1 illustrates this relationship, featuring a sample correlation coefficient of 0.57. [5] For this reason, the MEI forms the basis of our forecasting model for Seventh District GSP growth described in the next section.figure-1

2016:Q4 projections

To project the 2016:Q4 annualized GSP growth rate for each of the Seventh District states, we use the following linear regression model:

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This model relates each state’s current quarter GSP growth rate to national (the current quarter’s annualized growth rate of national gross domestic product, or GDP), regional (the current quarter’s MEI and relative MEI, or RMEI, index values), and state factors (the current quarter’s annualized growth rate of real personal income, or PI, and the previous quarter’s annualized GSP growth rate).

National and regional economic conditions play an important role in capturing state-level growth for all five Seventh District states. However, some states respond differently to regional economic conditions depending on the health of the national economy. The relative MEI reflects Midwest economic conditions relative to those of the nation, such that its inclusion in our model is designed to capture the interaction of national and regional factors on state-level growth. The inclusion of lagged GSP and state PI is then intended to capture state-specific factors that our regional and national indicators fail to. This is particularly important for states such as Iowa, where a larger share of economic activity is in agriculture, as the MEI only considers nonfarm business activity.

The extent to which each of these factors contributes to explaining GSP growth in our forecasting model varies across the five states. National growth seems to be the most important factor for Iowa, Illinois, and Wisconsin; but state and regional factors dominate for Indiana and Michigan, respectively.

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Figure 2 shows our projections for 2016:Q4 for the five Seventh District states and the Seventh District states combined.[6] All five states featured fairly strong growth readings for 2016:Q3. As a result, the model predicts some mean reversion in Q4 for each state. Compared with the other four states, Iowa has a somewhat weaker GSP growth projection of 1.0%. This is explained in part by Iowa’s negative PI growth in Q4, whereas the other Seventh District states featured positive PI growth. On the other end of the spectrum, Indiana has a somewhat stronger projection of 2.3%.

2016 projections

Based on the quarterly GSP data for the first three quarters of 2016 and our projection for the fourth quarter, we can also project 2016 annual GSP growth for the Seventh District states. These estimates are shown in the first column of table 1. Our projection of 1.6% for annual GSP growth for the Seventh District states combined is identical to the national GDP growth rate. There is variation, however, in our annual forecasts across individual states, which can be largely explained by differences in observed growth in the first three quarters of the year (see figure 2). Michigan’s annual forecast is consistent with its strong growth readings in Q2 and Q3. Conversely, Iowa’s large negative growth rate in Q1 led to a negative annual growth rate forecast. Finally, Illinois’s and Indiana’s similar growth rates throughout the year yield similar annual forecasts; and Wisconsin’s weak first quarter weighs down its annual forecast despite relatively strong growth in Q2 and Q3.

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We also present in the second column of table 1 projections from the annual GSP growth forecasting model described here. These projections are quite similar across the Seventh District states; but as we saw last year, the annual model tends to forecast higher growth than predicted by our quarterly model (the only exception being Michigan). In general, we believe the added information provided by considering GSP quarterly data should make our forecasts from the quarterly model more accurate than those from the annual model. However, some caution should be exercised while reviewing even these projections from the quarterly model. For instance, the readings shown in figure 2 may in fact be revised. At this time last year, Iowa had a similarly poor Q1 growth rate that was later revised up to a slightly positive value.

Conclusion

We will release our GSP growth forecasts for 2017:Q1 in June when state personal income data for the first quarter becomes available. These projections can be found in the MEI background slides.

[1] The Seventh District comprises all of Iowa and most of Illinois, Indiana, Michigan, and Wisconsin. Further details are available at https://www.chicagofed.org/utilities/about-us/seventh-district-economy and https://www.federalreserve.gov/aboutthefed/federal-reserve-system-chicago.htm.

[2] Scott Brave and Norman Wang, 2011, “Predicting gross state product growth with the Chicago Fed’s Midwest Economy Index,” Chicago Fed Letter, Federal Reserve Bank of Chicago, No. 293, December, https://chicagofed.org/publications/chicago-fed-letter/2011/december-293.

[3] The entirety of the five states that are part of the Seventh District is considered for the MEI.

[4] The MEI is constructed as a three-month moving average. Hence, to obtain the quarterly average values shown in figure 1, we use the MEI readings corresponding to the last month of each quarter.

[5] We aggregate the five state values to one value for all Seventh District states using their nominal GSP shares. The horizontal solid black line in figure 1 corresponds to the average GSP growth rate over the sample period.

[6] We arrive at the Seventh District forecasted value for 2016:Q4 by aggregating the state forecasts using nominal GSP shares from 2016:Q3.

Job growth in the Seventh District in 2016—A post-benchmarking update

Here at the Chicago Fed, we closely track one of the most important regional economic indicators, the U.S. Bureau of Labor Statistics’ (BLS) payroll employment survey (also known as the Current Employment Statistics, or CES). The survey is important because it provides a good picture of the overall state of an economy and its initial results are released quickly (unlike some other regional data that are released with a lag of a month or more). Unfortunately, the relatively quick turnaround also means we must exercise caution. While we get an initial estimate only three weeks after the end of the reference month, the estimate can sometimes be revised substantially later on. The BLS makes minor revisions to the data one month after the initial release and major revisions once a year, when the survey is benchmarked to the unemployment insurance census (released as the Quarterly Census of Employment and Wages, or QCEW).[1]

The BLS recently released newly benchmarked data, so we now have an update on how well the Seventh Federal Reserve District[2] did in 2016. Table 1 shows that, for the most part, the job growth numbers that the BLS had been reporting before the most recent benchmarking held true. Overall, Seventh District employment grew at a pace of about 1 percent in 2016, with the BLS reporting a 0.9% increase before benchmarking and a 1.1% increase after. In addition, the most recent benchmarking further affirmed the division in performance between the eastern and western parts of the District over the past few years. Job growth for Indiana and Michigan in 2016 was revised up, whereas job growth for Illinois, Iowa, and Wisconsin was revised down. So now, the job growth numbers for Michigan and Indiana in 2016 easily exceeded the numbers for Illinois, Iowa, and to a lesser extent, Wisconsin.

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The most recent benchmarking by the BLS also gives us the opportunity to see how well we did at predicting the benchmark revisions using a method known as “early benchmarking.”[3] The main idea behind early benchmarking is that it’s possible to use the QCEW data, which are released quarterly, to predict the major annual revisions to the job growth numbers.

This year we found that, unlike last year, the early benchmarked estimates (which we produced in January 2017) were further from the newly released job growth numbers than the March 2016 benchmarked CES estimates were. Our only consolation is that the early benchmarked estimates did get closer to the newly released numbers for the first half of 2016. I’ll explain what happened a little later.

Let’s look first at how the early benchmarking procedure did for the District as a whole. Figure 1 shows three versions of the Seventh District’s CES data, where the solid portion of a line represents data that have been benchmarked using the QCEW and the dashed portion represents data that have not.[4] The black line is the version released in March 2017 (with benchmarked data through September 2016), the red line is the early benchmarked version that we calculated in January 2017 (with benchmarked data through June 2016), and the blue line is the version released in March 2016 (with benchmarked data through September 2015). Surprisingly, in spite of nine months of additional benchmarked data, the March 2016 benchmarked CES appears to track the newly released data better than the early benchmarked CES.

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The first row of table 2 summarizes figure 1 in terms of December-to-December job growth for 2016. For this period, the early benchmarking method performed notably worse: It underestimated District job growth by 83,000, while the March 2016 benchmarked data underestimated job growth by only 25,000. The remaining rows of table 2 summarize 2016 job growth for District states (figures plotting the data for District states are at the end of the post). This year, Indiana was the only state for which the early benchmarked growth estimates had a smaller error than the March 2016 benchmarked data, though the errors for Michigan were very close. The early benchmarking method did particularly poorly for Illinois, estimating that employment fell by 13,000 for the year when it actually grew by 19,000.

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The poor performance of the early benchmarking method was surprising. We expected the early benchmarking method to do better for the first half of 2016 because it could take full advantage of the available QCEW data. And for the second half of the year, we knew by definition that the method would perform the same as the March 2016 benchmarked data because it used that version’s growth numbers. So, given these half-year results, how could the early benchmarking method do worse for the full year? Table 3 shows how. The early benchmarking method’s errors were negative in both halves of the year, while the errors of the March 2016 benchmarked CES were positive in the first half and negative in the second half. So the early benchmarking method’s errors built on each other, whereas the errors in the March 2016 benchmarked data cancelled each other out.

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Even though the early benchmarking method did not do well this year, we still think it is a useful tool for predicting benchmark revisions because it can take full advantage of the available QCEW data. We will see what happens in 2018.

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[1] For more information on the BLS’s benchmarking process, go here.

[2] The Seventh District, which is served by the Chicago Fed, comprises all of Iowa and most of Illinois, Indiana, Michigan, and Wisconsin.

[3] An earlier post discussing the method in detail is here.

[4] As is clear in figure 1, the BLS also revises already benchmarked data, though the revisions are typically small.

Seventh District Update, March 2017

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 January and early February, and contacts expected activity to continue rising at a moderate pace over the next six to twelve months.
  • Employment and Wages: Employment growth picked up to a moderate pace, and contacts continued to indicate that the labor market is tight. Wage growth was also moderate.
  • Prices: Prices again rose modestly. Retail prices increased slightly, and contacts reported moderate increases in materials prices.
  • Consumer spending: Growth in consumer spending remained modest. Light vehicle sales slowed somewhat, but the pace was still strong.
  • Business Spending: Growth in business spending remained moderate. Retail and manufacturing inventories were generally at desired levels. Current capital expenditures grew at a moderate pace.
  • Construction and Real Estate: Construction and real estate activity increased slightly. Residential and nonresidential building increased slightly, and homes sales increased modestly. The pace of commercial real estate activity picked up some and remained robust.
  • Manufacturing: Manufacturing production again grew at a moderate pace. Growth was widespread across sectors, and even picked up for some long-struggling sectors.
  • Banking and finance: Conditions were little changed. Market participants reported steady growth in equity prices and low volatility. Loan demand from middle-market businesses increased slightly and consumer loan demand was little changed.
  • Agriculture: Prospects for farm incomes improved slightly. Futures prices moved up enough so that – given expected costs – some corn and most soybean operations could lock in small profits for 2017.

The Chicago Fed Survey of Business Conditions (CFSBC) Activity Index increased to +4 from –13, suggesting that growth in economic activity picked up to a moderate pace in January and early February. The CFSBC Manufacturing Activity Index rose to +31 from +12, and the CFSBC Nonmanufacturing Activity Index moved up to –11 from –27.

The Fiscal Performance of Seventh District States in the 2000s

In a recent Chicago Fed Letter, Thom Walstrum examined the fiscal performance of Illinois’s state and local governments beginning in the late 1980s. His analysis showed that since at least the late 1980s, Illinois’s governments (as a whole) have consistently run a budget deficit. His analysis also revealed that the degree of overspending (or alternatively, undertaxing) by Illinois was greater than that of the average U.S. state and that growing pension liabilities have contributed significantly to Illinois’s budget deficit.

In this blog post, we expand the analysis to the other states in the Seventh Federal Reserve District.[1] Specifically, we document the expenditure and revenue patterns of District states since the early 2000s and compare them to those of the typical U.S. state.[2] We also examine the effect of the Great Recession on the fiscal performance of District states because it plays an outsized role in the overall fiscal performance of certain states over the period we examine.

As in the Fed Letter, we combine the expenditure and revenue data for state and local governments because states differ in which activities they fund at the state or local level. Also, as in the Fed Letter, to account for differences in the sizes of states’ economies, we report expenditure figures as percentages of gross state product (GSP) and revenues.[3]

Our analysis yields a number of interesting results. First, we find that the size of state and local governments (in terms of spending as a percentage of GSP) varies quite a bit among District states. Second, we find that the fiscal performance of state and local governments (in terms of spending as a percentage of revenues) also varies quite a bit. And finally, we find that though the Great Recession had a large negative impact on the fiscal performances of all District states, Illinois and Wisconsin were especially affected, primarily because the value of their pension systems’ assets declined sharply.

We first look at the size of state and local governments in District states in terms of spending as a percentage of GSP. Figure 1 shows total government expenditures as a percentage of GSP for the average U.S. state and for Seventh District states during fiscal years (FY) 2002–13. Indiana is consistently the lowest spender during this span, and it is well below the U.S. average. Iowa and Illinois are also below the national average for most of this period, though they catch up to it by FY2012. In contrast, Wisconsin’s spending is roughly the same as the typical U.S. state. Michigan tracked the national average closely until FY2007, but has been consistently above average since then. Figure 1 also shows a ramp-up in spending across all states in FY2010–11. This is the largely the result of states spending federal funds received through the American Recovery and Reinvestment Act.

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Table 1 summarizes figure 1 by taking the average of the percentages over FY2002–13. It also shows a breakdown of average spending by category. We now discuss the unique features of each state’s spending (as a percentage of GSP).

  • Illinois’s total spending was below the U.S. average largely because of lower expenditures on education services and social services (and income maintenance). That said, Illinois spent more than the typical U.S. state on its insurance trust and pension liability increases, both of which are compensation for government workers, including those providing education and social services.
  • Indiana’s total spending was below the U.S. average because of lower spending on most categories, though it spent a particularly low amount on pension liability increases compared with other states.
  • Iowa’s total spending was below the national average (in spite of above-average spending on education and social services) because of below-average spending on its insurance trust and pension liability growth.
  • Michigan’s spending was above the U.S. average largely because of higher spending on education services and its insurance trust.
  • Wisconsin’s spending was quite close to the U.S. average; compared with the typical state, Wisconsin spent more on education services and its insurance trust, but less on pension liability growth.

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Next we look at each District state’s fiscal performance, which we define as total expenditures as a percentage of total revenues. We interpret lower percentages as better performance. It is important to note here that fiscal performance is independent of the overall size of a state’s governments, because all that matters is that the governments have enough revenues to cover their expenses. While small governments generally do not require the level of revenues that large governments do, small governments could still perform worse than their large counterparts if their revenues are not high enough. Figure 2 shows the time trends for expenditures as a percentage of revenues for each District state and the typical U.S. state. Two features of the figure stick out: First, with the exception of Illinois, District states are quite close to the U.S. average in terms of spending as a percentage of revenues. Second, while most states’ governments were hurt by the Great Recession (FY2008–09), Illinois’s and Wisconsin’s were hit particularly hard, while Indiana’s was not hit that bad.

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The first row of table 2 summarizes figure 2 by taking the average of the percentages over FY2002–13. Illinois and Wisconsin spent more out of their revenues than the typical U.S. state during this period, while Indiana, Iowa, and Michigan spent less. Because FY2009 was such an anomaly on account of the Great Recession, we also calculate the averages excluding it (second row). This changes the story quite a bit for Wisconsin governments, which then perform better than the U.S. average. (With this adjustment, Michigan governments perform slightly worse than the U.S. average.)

Table 2 also shows the percentage of total revenues that each spending category represents (calculated excluding FY2009). Examining expenditures in terms of revenue, as opposed to GSP, tells a different story for several states.

  • Illinois’s total expenditures percentage is well above the U.S. average. Spending out of revenues on education is above that of the typical U.S. state, though it remains below that of the other District states. Illinois also spends more than the national average on public safety, environment and housing, interest on general government debt, its insurance trust, and pension liability growth.
  • Indiana’s total expenditures percentage is below the U.S. average. It spends less than the national average on transportation, utilities, its insurance trust, and pension liability growth.
  • Iowa’s total expenditures percentage is not only below the U.S. average but also the lowest among District states. Notably, its spending on public safety, utilities, its insurance trust, and pension liability growth is lower relative to the national average.
  • Michigan’s total expenditures percentage is slightly above the U.S. average. Its education spending is the highest among District states and markedly higher than that of the typical U.S. state. But its spending on transportation, utilities, and pension liability growth is lower than the national average.
  • Wisconsin’s total expenditures percentage is below the U.S. average. While its expenditures for education, public safety, and its insurance trust are above average, its expenditures for pension liability growth are below average.

fiscalperformance_table2

Table 2 shows that Illinois and Wisconsin were hit hardest by the Great Recession. After excluding FY2009, Illinois’s spending as a percentage of revenue decreases 6 percentage points and Wisconsin’s decreases 11 percentage points. These decreases are much larger than those for other District states and the typical U.S. state, which range from 1 to 4 percentage points. What is behind the substantial differences in fiscal performances in FY2009? We found that the source was not changes in expenditures, but changes in revenues. Table 3 shows revenues as a percentage of GSP for the typical U.S. state and states in the Seventh District. The first row is the average value during FY2002–13 excluding FY2009, the second row is the value for only FY2009, and the third row is the difference between the two. All states had lower-than-normal revenues in FY2009, but Illinois and Wisconsin fared particularly poorly. To understand why, we calculated the difference between FY2009 values and the average values of the other fiscal years for all revenue categories. General revenues were actually higher in FY2009 for the typical U.S. state and all District states. The source of the revenue declines was states’ insurance trusts. Most states saw the value of the assets in their insurance trusts fall during the Great Recession, and such declines are treated as negative revenues in the U.S. Census’s accounting framework. The insurance trust funds for Illinois and Wisconsin fared particularly badly in FY2009, which is why their expenditures-to-revenues ratios were so high over the period FY2002–13 (see the first row of table 2). That one bad year made a huge difference in Wisconsin’s overall fiscal performance over the period FY2002–13.

fiscalperformance_table3

Our exploration of the size and performance of District state governments reveals a surprising number of differences among them. There are states with relatively small governments that perform poorly (Illinois) and well (Indiana) and states with relatively large governments that perform poorly (Wisconsin) and well (Michigan). Some states were hit much harder than others during the Great Recession (compare Wisconsin and Indiana), and Wisconsin’s terrible performance in FY2009 shifted the state from being a good fiscal performer to being a bad one over our study period (FY2002–13). The most important reason for the differences in fiscal performance across states is differences in pension system management. Illinois would be closer in performance to the national average if its pension spending matched the national average, and Wisconsin would be better than average if its pension system’s assets hadn’t lost so much value during the Great Recession.

[1] The Seventh Federal Reserve District (which is served by the Chicago Fed) comprises all of Iowa and most of Illinois, Indiana, Michigan, and Wisconsin. In this blog post, we analyze the entirety of each state that falls within the District.

[2] Unlike for the analysis of just Illinois, we are limited to the period after 1999 because we do not have pension system data for other states before 2000.

[3] For more details on the methodology, see the Fed Letter. Note that data on pension liabilities for the Seventh District states, excluding those for Illinois, come from the Board of Governors of the Federal Reserve System.

Our First Look at Job Growth in the Seventh District in 2016—New Estimates Using Early Benchmarking

Last week we received the December 2016 report from the U.S. Bureau of Labor Statistics’ (BLS) state payroll employment survey (also known as the Current Employment Statistics, or CES), so it’s our first opportunity to look at how well the Seventh Federal Reserve District[1] did in 2016. The recent report is not the final word on job growth in 2016 because the data will eventually be benchmarked against more complete data, primarily those from the Quarterly Census of Employment and Wages (QCEW).[2] Data for January through September 2016 will be benchmarked by the BLS in the middle of March of this year, while data for October through December 2016 will not be benchmarked by the BLS until March of next year.

In June 2015, I wrote a blog post detailing a method called early benchmarking, which predicts how the BLS will revise the CES data (the method was first introduced by our colleagues at the Dallas Fed). The BLS rebenchmarks the CES using QCEW data only once a year. However, QCEW data are released quarterly, so it’s possible to use the QCEW data to predict how the BLS will revise the CES (this process is explained in detail in my earlier post). The benchmark revisions to the CES can be quite large, and last year, I found that for the District and most District states, the early benchmarked jobs numbers were closer to the final benchmarked numbers than the non-benchmarked numbers were.

Table 1 shows that for 2016, the early benchmark procedure is predicting employment in the District grew by 106,000 rather than the 164,000 that the BLS’s current estimates indicate. This difference is largely the result of lower job growth numbers for Illinois and Wisconsin, though Iowa’s job growth number is also lower. The early benchmark procedure also suggests that Indiana’s job growth will be revised up, and Michigan’s will be unchanged.

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Figures 1 through 6 show the employment series as currently published by the BLS (in blue) and the early benchmarked series (in red) for the District and District states. The dashed portions of the series represent data that have not yet been benchmarked using the QCEW. The lines are identical through September 2015, but then the lines follow different paths because the early benchmarked series use growth rates from the QCEW until June 2016. While their levels differ, both series have the same growth rates starting in July 2016 (again, for more details on the early benchmarking procedure, see my earlier post).

After the BLS releases newly benchmarked data in March, I will review how well the early benchmarking procedure performed at predicting job growth in the District.

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[1] The Seventh District comprises all of Iowa and most of Illinois, Indiana, Michigan, and Wisconsin.

[2] For more information on the BLS’s benchmarking process, go here.

Seventh District Update, January 2017

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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 continued at a modest pace in late November and December, though contacts expected it to move up to a moderate pace over the next six to twelve months.
  • Employment and Wages: Employment growth slowed to a modest rate, though contacts continued to indicate that the labor market is tight. Wage growth picked up to a moderate pace.
  • Prices: Prices again rose modestly. Retail prices increased only slightly, but contacts reported rallies in energy and metals prices.
  • Consumer spending: Growth in consumer spending picked up to a modest pace. Sales of new light vehicles strengthened further and many dealers reported record sales for 2016.
  • Business Spending: Growth in business spending remained at a moderate pace overall. Retail and manufacturing inventories were generally at desired levels. Current capital expenditures grew at a moderate pace.
  • Construction and Real Estate: Construction and real estate activity edged up. Demand for residential construction, residential real estate, nonresidential construction, and commercial real estate all increased slightly.
  • Manufacturing: Growth in manufacturing production picked up to a robust pace. Growth continued to be strong in autos and aerospace (though it slowed a bit in autos) and was moderate overall among other industries.
  • Banking and finance: Conditions improved on balance. Financial market participants reported broad-based growth in equity prices and low volatility. Loan demand from middle-market businesses increased slightly and consumer loan demand was little changed.
  • Agriculture: Farm incomes were little changed. Corn sales picked up some, but inventories remained high. Soybean sales were up moderately, and exports remained strong.

The Chicago Fed Survey of Business Conditions (CFSBC) Activity Index increased to –8 from –19, suggesting that growth in economic activity remained at a modest pace in late November and December. The CFSBC Manufacturing Activity Index rose to +20 from a neutral reading, and the CFSBC Nonmanufacturing Activity Index moved up to –23 from –30.

The Midwest Economy Index (MEI) decreased slightly to –0.01 in November from a neutral reading in October. The relative MEI decreased to +0.20 in November from +0.22 in October. November’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.