Category Archives: Seventh District

Midwest in Recession: Then and Now

By Bill Testa and Vanessa Haleco-Meyer

Longtime Midwest residents may be befuddled by ongoing comparisons of the current national recession with those of 1974-75 and 1981-82. While the headlines suggest this recession compares, so far, with the deepest recessions of the past 50 years[1], we in the Midwest have a somewhat different perspective. For us, the recessions of 1974-75 and 1981-82 were far worse, at least so far. An exception may be made here for Michigan, which has been experiencing a recession of sorts all decade long.

Statistical comparisons of regional recessions with the nation are difficult for a number of reasons. Arguably, the best basis of comparison can be made using payroll employment data which are available monthly from the Bureau of Labor Statistics.[2] In the charts that follow, we index job levels in states, the Seventh District (Illinois, Iowa, Indiana, Michigan, and Wisconsin), and the U.S. to a beginning value of 1.0. We begin the time series at the quarter in which employment levels peaked in the state, region, or nation. Since employment peaks may differ between a state or region and the U.S., we sometimes begin comparative series at slightly different dates. For example, employment in the Seventh District last peaked in the second quarter of 2007, but the U.S. peaked in the fourth quarter of 2007. (On the charts, the indexed lines will appear to begin in the same quarter). We use seasonal adjustment to iron out variations in employment that typically occur every year.

The chart below compares payroll job growth for the Seventh District versus the U.S. during the 1974-75 downturn, the 1980s downturn(s), and the 2008 downturn. The U.S. economy officially recorded two back-to-back recessionary periods in the early 1980s. Since the episodes took place so close together, and since the Midwest experienced virtually no pause between downturns, we index jobs beginning from the previous peak (1980-Q1 for the U.S. and 1979-Q2 for the Seventh District) through to the final trough.

In examining payroll job performance during these recessionary periods, the first thing to note is that payroll employment dropped more rapidly in the 1974-75 recession (blue lines) than in subsequent recessions. Seventh District payroll job levels fell by 4% in the four quarters following their peak in the third quarter of 1974 (before turning upwards). In comparison, and despite the dramatic declines over the past few months, the current recession has experienced a shallower and slower decline from the previous employment peak (green lines).

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Recent job declines have also been shallower so far than the fairly dramatic declines the Midwest experienced in the 1980s (red lines). After reaching a peak in 1979, payroll jobs in the District fell for four years, reaching bottom in the first quarter of 1983 at 10% below the peak. The U.S. experience of that time was quite different. Following a slight decline in 1980, national employment growth resumed briefly before falling 3% during the 1981-82 recession. Over the entire length of both recessions, the pace of job decline in the Seventh District was more than five times that of the nation.

The dismal experience of having no post-recession recovery is one that the state of Michigan is now experiencing. The chart below indexes payroll job decline and growth circa the 2001 recessionary period. From its second quarter peak in year 2000, Michigan’s employment has fallen by over 10% (green line). The remaining states of the Seventh District—Indiana, Illinois, Wisconsin, and Iowa—have fared somewhat better, but in the aggregate the four-state region only recently regained its previous peak. In contrast, national employment had regained its previous peak by the end of 2004.

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The final charts (below) display the employment experiences of each Seventh District state for the three aforementioned periods. In each state, the 1980s look worse than the current recession. This is even true for Michigan, which underwent a 15% job decline from its peak in the second quarter of 1979 to the fourth quarter of 1982. However, Michigan and its troubled automotive industry enjoyed a big bounce in 1982 when U.S. consumers returned to auto showrooms and began to buy cars at a rapid pace as gasoline prices eased. This time around, Michigan and much of the surrounding Midwest automotive belt hope for a repeat performance. However, Michigan’s current automotive challenges are surely more structural and deeply rooted. It will take more than an upturn in national automotive sales to pull along the state’s employment and income.

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[1]The nation also experienced less serious downturns, during 1969-70, 1990-91, and 2001. See http://www.nber.org/cycles.html. (Return to text)

[2]Payroll employment numbers are subject to revision in March of every year. See http://www.bls.gov/sae/790over.htm#employ. (Return to text)

Seventh District Labor Markets at Year-end

by Bill Testa and Vanessa Haleco-Meyer

Government agencies regularly report statistics that reflect state and local labor market conditions. These measures are far from perfect in their accuracy, and they often seem to conflict. Yet, these measures currently agree to a negative view of the labor markets in the Seventh Federal Reserve District.

State unemployment rates, using a household sample survey, measure those people of working age who are actively looking for work as a fraction of the work force (both employed and unemployed). Since it is sample based, the measure is imprecise, especially readings for a single given month. The chart below shows that the unemployment rates for the nation and the Seventh District began to move up moderately off of their cyclical lows throughout 2007. During 2008, the unemployment rates accelerated primarily because of net job destruction. The gap between the Seventh District’s higher unemployment rate and that of the nation remained fairly steady in recent years, even as unemployment rates were climbing in each of the District’s states and in the nation as a whole.

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Not all states of the District maintained a higher-than-average unemployment rate over the past few years. As measured in the fourth quarter of 2006 (chart below), Michigan’s high unemployment rate accounted for the bulk of the gap between the District’s rate and the nation’s. By the fourth quarter of 2008, Illinois’ unemployment rate had climbed above that of the nation, and Indiana’s unemployment rate also topped the national average. In contrast, Iowa’s and Wisconsin’s rates of unemployment in 2008 were seemingly lower than those of the overall District and the nation.

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Federal and state government agencies also track and report payroll employment. These data, released on a monthly basis, are drawn from a sample survey of firms that provide information on their employees; and so, unlike the unemployment figures, the data are not counting those in the work force who are self-employed. Since it is only sample-based, the payroll survey, too, contains measurement error. These errors tend to be more pronounced during times of sharp turns in economic direction (such as the present). During economic downturns, some firms may drop out of the sample as they cease operations. This has tended to understate net job declines, since the sampling methods cannot distinguish between a failed firm and one that is simply late or negligent in reporting. State payroll figures are adjusted for such biases during the first quarter, but even with such adjustments, revised figures do not cover the recent months, but are rather “re-benchmarked” up to a point early in the previous year.

The chart below displays the change in total payroll jobs in the fourth quarter of 2008 relative to fourth quarter in 2006. All states except Iowa lost jobs on net. Over much of this two-year period, Iowa continued to enjoy a boom in farm commodity prices and strong production and sales of related equipment. In the chart, job losses in Michigan and Indiana are especially prominent, reflecting their troubles with their automotive sectors. Using this measure, Wisconsin’s job losses seem to be more severe than what its unemployment rate may have suggested.

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Labor market indicators often conflict both because of inherent measurement error and because they measure different features of the labor market.[1] Accordingly, it is often best to gather an array of indicators in assessing labor market conditions. Reported figures from each state’s unemployment insurance (UI) system are also followed. Each state’s UI system records weekly data on new applications or claims for insurance by those who have recently lost their jobs. (Data also report the number of people who have lost jobs and continue to receive unemployment benefits.) These data do not comprehensively reflect labor market conditions. That is because layoffs or other job separation events are only part of the process of net job gain or loss. In particular, job hires or emerging self-employment may be taking place in a state at the same time that job separations are on the rise. The chart below displays changes in initial claims for UI in the fourth quarter of 2008 relative to the fourth quarter of 2006. As compared with the final quarter of 2006, layoffs and other involuntary unemployment events were emerging much more rapidly in late 2008. This is so in the nation and in each of the District’s states. Indiana’s job separations were running especially high late in 2008 as compared with the fourth quarter of 2006—well in excess of the increase experienced nationally. And separations in Iowa have also begun to rise sharply in the fourth quarter.

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The severity and speed with which labor markets deteriorated during the final three months of 2008 has been especially disconcerting. In the District, jobs declined at a 5.1% pace. Nationally, payroll jobs declined at a 3.7% annualized rate during the fourth quarter of 2008 (1.3 million). Since 1960, payroll job decline in the nation has exceeded this pace in only one quarter, that being the first quarter of 1975 (-6.1%). And currently, most forecasts predict economic output to bottom out no sooner than the second half of this year.

Such concerns are especially acute because job markets recovered slowly in the aftermath of the past two national recessions. Slowly recovering job markets often reflect structural imbalances that have preceded and accompanied recessionary periods. The 2001 recession partly reflected the fallout from overspending on technology-oriented enterprises, such as telecommunications, and other capital equipment. Workers displaced from these sectors might have found it difficult to find jobs in new industries, or the impacted sectors themselves were slow to recover and begin hiring anew. This time around, sharp structural imbalances in housing construction and financial services are underway.

Imbalances that can emerge among different multistate regions in the U.S. can also play a role in achieving “full employment.”[2] An industry shock to a particular sector that is highly concentrated in one region may displace workers whose job opportunities may be emerging in another region. Past Midwest experiences are a case in point. The region suffered inordinately through the double-dip national recessions of 1980 and 1981–82. The chart below compares the District’s unemployment rates with those of the nation from two periods: the 1980s and the current decade. By the end of 1982, the nation’s unemployment rate approached 11%, while the District’s unemployment exceeded 13%.

This wide gap of the early 1980s came about from underlying currents having distinct geographical accents. In particular, high oil and natural gas prices were buoying energy exploration activities in many parts of the West and Southwest; rapidly expanding federal spending to rebuild national defense stocks were lifting many regions of the South and West; and the rapidly rising value of the U.S. dollar contributed to moribund exports of farm products and manufactured goods from the Midwest (as well as to stiff import competition).

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In contrast, the recession of 2001 and its immediate economic aftermath had fewer inter-regional differences. As seen above, unemployment rates between the District and the nation were very similar. As the remainder of the decade unfolded, however, the profound structural changes going on in the automotive industry did begin to negatively affect District labor markets; the District’s unemployment rate began to rise higher relative to the national average. The Detroit Three automakers (Chrysler LLC, Ford Motor Co., and General Motors Corp.) and their suppliers experienced significant losses to foreign-domiciled auto plants located in other regions and to imported automotive products as well. While (post-2001) job levels largely recovered in the District, Michigan experienced continuous year-over-year job losses.

Now, amid a sharp regional downturn, employment statistics will be keenly watched to help guide our decisions regarding job search, education and training, local investment, home sales, and migration.

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[1]Note: Unemployment rates do not necessarily reflect job trends because working age people can drop out of the work force in response to a lack of job opportunities, thereby lowering the unemployment rate, even though payroll jobs and job vacancies are falling. A worker who drops out of the labor force no longer reports as being “unemployed” in the survey. The reverse can also take place by the same reasoning: Even with a rising number of jobs and employed persons, there can be rising unemployment. (Return to text)

[2]Note: Comparing levels of unemployment between periods can be somewhat difficult. The “natural rate of unemployment,” or normal benchmark for a “full employment economy,” is thought to have been higher in the 1980s than today—by about 1 to 1.5 percentage points. The natural rate depends on demographics of the population, such as age and education (affecting labor force participation rates by age). For a discussion, see study by David Brauer, among others. (Return to text)

Exports and the 2008 Economic Slowdown

Back in the 1930s, policy makers perhaps contributed to the economic downturn by sharply lifting tariffs on imports into the U.S.—the infamous Smoot-Hawley legislation passed on June 17, 1930 that raised import tariffs on over 20,000 goods. In response to these policy actions, our trading partners raised tariffs (and nontariff barriers) on U.S. exports. If the U.S. intention was to keep jobs at home, the effect was probably to aggravate unemployment here and abroad.

In recent years, trading activity with other nations has been a definite engine of growth for the U.S. Exports are contributing much to an otherwise faltering pace of economic growth. Though exports comprise only 12.4 percent of U.S. output, export growth accounted for one-half of the nation’s (2.0) percent GDP growth in 2007; exports accounted for one-third of GDP growth over 2006 and 2007. Indeed, in every year since 2002, the growth of exports has added at least one-half percentage point to national output growth.

Per the graph below, export growth has similarly lifted incomes and output in the Seventh District. Overall, nominal export value climbed by $54.7 billion, or 58.7 percent, from 2003 through 2007, with every District state joining in the expansion. Per the table below, our NAFTA partners, Canada and Mexico continue to be our largest export destinations, with China growing rapidly over the 1997-2007 period.

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The strong role of our NAFTA partners as an export destination reminds us that growth in trade often comes about from the hard policy work involved in negotiating trade agreements with other countries. The graph below illustrates the growing number of countries that now receive exports from producers in Seventh District states. Each District state has added a fair number of trading partners since 1997.

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Aside from avoiding the (past) mistake of squelching international trade, the U.S. also has the opportunity to expand its export opportunities in the years ahead. Awaiting enabling legislation from the U.S. Congress, bilateral or two-nation agreements have been negotiated with Panama, Columbia and South Korea. To learn more about these agreements and those that have preceded it, one source of information is TradeAgreements.gov (this web site is a joint effort between the Departments of Agriculture, Commerce, State, Treasury and the Office of the United States Trade Representative).

Note: Vanessa Haleco-Meyer contributed to this weblog.

Michigan—Brakes and Shocks

Few outside the state of Michigan are fully aware of its economic woes. Nationally, the U.S. economic slowdown, housing market decline, and rising gasoline prices have captured the headlines. Even within the Midwest, spring and early summer flooding have dominated our news. Somewhat lost in the shuffle, Michigan payroll jobs are down more than 10% from their peak in June, 2000, representing over 486,000 jobs. Recent developments are no more encouraging. The state’s (preliminary) unemployment rate rose by 1.6 percentage points in May, to a seasonally adjusted 8.5% percent—topping the U.S. rate of 5.5% by 3 full percentage points. Preliminary statistics estimate that payroll jobs in Michigan fell by 68,000 over the month (seasonally adjusted). Minus Michigan, reported U.S. employment would have grown by 19,000.

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Michigan’s economy currently suffers from unfortunate industry composition, with an added dose of structural shocks to several of its prominent lines of business. In particular, the automotive, tourism, and office furniture sectors are highly sensitive to national swings in economic activity. As the U.S. economy slows, such industries tend to decline even more. Moreover, in the case of automotive and tourism, structural changes are tending to further dampen economic production and hiring in Michigan.

Michigan’s economy remains far and away the nation’s most concentrated in motor vehicle manufacturing. Its overall employment concentration lies 8.5 times the national average in combined automotive parts and assembly, with many attendant jobs in manufacturing, distribution, and professional service companies that are customers or vendors to automotive producers.

While U.S. automotive sales remained robust until recently, the former Big Three automakers (now more appropriately called the Detroit Three) and their suppliers have been steadily losing market share to imports and to foreign nameplate producers located elsewhere in the U.S. As of May 2008, market share of the Detroit Three automakers had fallen from 67.8% in 2000 to 47.2%. Prominent parts supply companies, including Delphi, Dana, Tower, and Collins & Aikman, have folded, merged, or are currently trying to emerge from bankruptcy.

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With the recent economic slowdown, automotive sales are resuming their cyclical pattern of retrenchment. To some degree, the historical behavior of sales declines was allayed in the aftermath of September 11, 2001, when automakers offered generous sales and financing incentives to prospective buyers. However, today’s slowing economy appears to be leading consumers to avoid the purchase of new autos. As discussed recently at our annual Automotive Outlook Symposium, rising gasoline prices are curbing driving behavior while draining household income.

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The recent run-up in gasoline prices has magnified loss of market share and erosion of profitability of the Detroit Three automakers and their suppliers. Over the past year, the Detroit 3 share of domestic sales has fallen by 7.1 percentage points. To some degree, this repeats the pattern of the 1970s when U.S. consumers turned to (imported) foreign-domiciled automakers who offered vehicles with greater fuel efficiency. Domestic automakers are more reliant on trucks than on cars, and they tend to lag foreign manufacturers on fuel efficiency.

Not only the automotive sector has been impacted by rising energy prices. Michigan’s tourism, recreation, and hospitality industry has taken on added importance in the wake of the state’s waning automotive industry presence. Many parts of western and northern Michigan feature attractive scenic and semi-rural locales for retirement, recreational living, and seasonal tourism. In addition to its many inland lakes, the state is endowed with 3,126 miles of Great Lakes shoreline, which is attractive for boating, fishing, and other recreational activities like hiking, cycling, and golf. In particular, the state registers nearly as many boats as Florida or California. Such activities in Michigan are especially related to vacation and seasonal homes. As of the last Census, 5.6 percent of homes in Michigan were of this variety versus a national average of 3.1 percent.

The map below shows recreational counties as designated by demographers Calvin Beale and Kenneth Johnson. The northern tier counties of Michigan and Wisconsin have long been recreational destinations, especially for Michiganders and residents of the greater Midwest region.

Recreational spending is highly discretionary on the part of consumers. As household income falls, recreational spending can be easily curtailed by households in an effort to maintain spending on necessities.

Recent declines in Michigan recreational spending are reflected in data collected by the State of Michigan on sales tax collections imposed on overnight lodging. These accord with declining lodging occupancy rates collected by the industry. Both are down so far in 2008 on a year over year basis. A broader index of Michigan’s tourism activity is displaying a modest uptick for the first quarter of 2008 versus one year ago. However, with rising gasoline prices, the index (and activity) is expected to trend lower in coming months.

Two additional factors may be restraining recreation sector growth in Michigan. Michigan’s recreational counties are characterized by ownership of second homes. The run-up in housing prices and the subsequent rash of foreclosures and price declines have been especially severe in recreational/seasonal home locales. Seasonal home residents who have experienced asset price losses on their second homes may be especially aggressive in re-building their household balance sheets by restraining current spending in the second-home locales.

The second, more obvious, factor affecting recreation this year is rising gasoline prices which raise both travel costs to vacation locales and, in Michigan’s case, the cost of boating. However, some domestic vacation locales may benefit from a backwash effect as households choose nearby attractions rather than long distance adventures. Nonetheless, in most instances, the overall effect tends to be a dampening. For these reasons, tourism industry analysts in Michigan are forecasting declines in tourism activity for 2008.

In addition to automotive and recreation sectors, Michigan has a strong presence in the furniture sector. Indeed, Western Michigan hosts the nation’s largest concentration of makers of office furniture. This industry took shape in the late nineteenth century during rapid industrial growth, which was accompanied by rapid growth in office employment. Taking advantage of the region’s abundant hardwoods and skilled immigrant craftsmen, most furniture companies in the area had developed as manufacturers of high-end traditional style home furnishings. However, the labor-intensive wood furniture industry declined in Grand Rapids and other northern centers by the mid-1900s due to competition from Southern producers. In response, the Grand Rapids industry shifted its focus from household to office furniture, led by companies that would become industry giants: Steelcase, Haworth, and Herman Miller.

The U.S. Census reports that the state is the nation’s leading producer of office furniture and fixtures, with 17,000 direct employees in 2005. Broadly defined, the state’s industry share accounts for 24% of the nation’s shipments. (Michigan’s share is larger according to the way that the industry trade association defines the industry).

Michigan’s office furniture companies have been affected by competition from China and other low-cost locales. Despite competitive pressures, the companies have successfully responded in two ways. To some extent, producers have moved or offshored production of select product lines to low-cost locales while maintaining high value added and custom design services domestically. More importantly, these companies are characterized by great innovation in product and processes. They have succeeded and grown by offering custom and advanced products and services.

However, office furniture sales and production have been highly cyclical. The industry experienced sagging sales in the late 1980s and early 1990s when U.S. businesses downsized middle management positions and as the U.S. economy sagged. So too, the “technology bust” years that began the current decade saw a falloff in demand for office systems and furniture, especially in the IT sector.

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So far in the current environment, industry production has been holding up well. However, if industry observers are correct, office furniture may be “one more shoe about to drop” in Michigan. An opinion poll of office furniture executives has been flashing negative for the near term outlook, and the industry association has recently lowered its forecast of 2008 production.

If such expectations develop, this would further dampen economic activity and the labor market in Michigan. Cyclicality of certain businesses can be planned for and absorbed by states such as Michigan and its neighbors. However, cyclical episodes in the economy can be exceptionally severe when shocks such as rising energy prices are in play and when longer term structural changes are taking place, as they are in Michigan’s automotive sector.

Thanks to Graham McKee and Vanessa Haleco-Meyer for assistance.

2007 Economic Growth in the Seventh District

For nations, gross domestic product (GDP) is the most widely used yardstick to measure economic activity and growth. Conceptually, GDP measures the value of output produced by the market economy within a year or other period. In addition, GDP is defined as output produced within a designated geographic area such as a nation’s boundaries.

There is one more major wrinkle in this measure; GDP is typically reported as “real” GDP, meaning that the dollar values of goods and services are adjusted to reflect price changes. Such adjustments are made so that, for example, output growth reflects real gains in both the quantity and quality of what a nation produces, and not merely dollars transacted.

GDP matters to people, workers, and households because what is produced gives rise to what is earned in wages, salaries, and earnings on capital and savings. Accordingly, in many economics textbooks, the GDP concept is presented alongside its equivalent yardstick, gross national income.

In the U.S., the Bureau of Economic Analysis (BEA) produces data on GDP so that the pace of overall economic activity and its many components can be tracked on a timely basis. More recently, BEA has begun to provide timely GDP estimates for states and regions. On June 5, for example, the BEA released preliminary estimates for states and regions covering the calendar year 2007.

BEA data on GDP growth by individual states for 2007 shows a general economic slowdown that mirrors the national slowdown from 3.1 percent in 2006 to 2.0 percent in 2007. In all, 36 states experienced slowing GDP growth in 2007 versus 2006, with weakness centered in finance and in construction—especially housing.

The BEA’s map, reproduced below, shows several features of GDP growth in the Seventh District states—Illinois, Indiana, Iowa, Michigan, and Wisconsin.

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GDP growth in all five states of the Seventh District fell short of the national level in 2007. Michigan recorded a decline of 1.2 percent, marking the state’s second year in a row of economic output decline and its third such year over the past four.

In contrast to Michigan’s ongoing slow growth, many previously high-growth states in other regions experienced sharp declines in growth for 2007 versus their 2006 pace of growth. In particular, Arizona’s growth pace slowed from a 6.7 percent pace in 2006 to 1.8 percent in 2007; California went from 3.8 percent to 1.5 percent, Florida from 3.6 percent to flat, and Nevada from 5.4 percent to 0.6 percent.

The overall pace of growth in the Seventh District states slowed much less dramatically—from a pace of 0.9 percent in 2006 to 0.6 percent in 2007. This can be attributed to two major developments. First, the size of the highly impacted residential construction industry is much larger in high-growth states such as Arizona, Nevada, and Florida. While Midwestern states have experienced similarly sharp declines in housing activity, the impact has been proportionately larger outside of the region.

Another factor is that the U.S. manufacturing sector did not decline to the same extent in 2007 as it has in previous economic slowdowns. The falloff in new home sales and construction has exerted a drag on certain manufacturing industries, such as building materials and home appliances. However, other industries, such as machinery and computing equipment, continue to be buoyed by rapid growth in exports abroad, while others, such as mining and farm machinery, are being lifted by the global surge in commodity demand. For the manufacturing-intensive Midwest, then, the pace of overall economic growth has not slowed as much as it has in most previous episodes.

Another notable trend can be seen from the differing pace of growth within the Seventh District (see map above). Starting from the eastern states of the Seventh District, GDP growth in Indiana and Michigan significantly underperformed the western states of Illinois, Wisconsin, and Iowa. By way of explanation, the sagging domestically domiciled U.S. automotive industry exerts a heavier influence on Indiana and Michigan (and Ohio, too).

Tracking Seventh District Manufacturing

By Emily Engel, Associate Economist

There is a greater concentration in manufacturing among the five states of the Seventh Federal Reserve District than in the nation. For example, as measured by the share of payroll jobs in manufacturing, Indiana ranked first among the 50 states in 2007; Wisconsin, second; Iowa, fourth; Michigan, seventh; and Illinois, 19th. For this reason, we at the Federal Reserve Bank of Chicago tend to closely watch the manufacturing sector. In fact, our watchfulness often becomes close scrutiny during times like the present when the U.S. economy shows signs of slowing. (Manufacturing activity has tended to be highly sensitive to general business downturns.)

The Chicago Fed Midwest Manufacturing Index (CFMMI) is a public statistical release that the Federal Reserve Bank of Chicago has been producing since 1987. This monthly release tracks manufacturing output for the Seventh District states (Illinois, Indiana, Michigan, Iowa, and Wisconsin) and compares it to the manufacturing component of the Industrial Production Index (IPMFG) produced by the Federal Reserve Board of Governors. The chart below, taken directly from the March release of the CFMMI, shows historical data comparing the CFMMI to the IPMFG. Over the decade, Midwest output growth has lagged the nation. During the current slowdown in national economic activity, both the IPMFG and the CFMMI have slowed and declined at a very mild rate in comparison with past episodes.

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Industry concentration in specific industrial sectors influences economic performance among District states. In particular, transportation equipment and machinery are bellwethers of state economic performance in the District.

Since the beginning of this decade, the automotive-intensive states of Indiana and especially Michigan have experienced a softening of their labor markets relative to the national average.

Meanwhile, by the same measure, the machinery-intensive states of Illinois and Iowa have outperformed the nation. The remaining state, Wisconsin, deviates from this pattern, being a machinery-intensive state with an unemployment rate that has deteriorated relative to the national average.

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The charts below compare these states’ concentration in both machinery and transportation equipment, respectively. Manufacturing activity in these industries is compiled by the U.S. Census Bureau’s Annual Survey of Manufactures (ASM). Specifically, the Census data measure “value added” by manufacturing establishments within each state. Value added roughly corresponds to the value of shipments of manufactured establishments, net of intermediate inputs to production, such as fuel, materials, parts, and components that are purchased from other establishments. In this sense, value added is manufacturing output.

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It takes much time and effort for the U.S. Census Bureau to compile these data, so that detailed information on output by specific industry sector and location are issued with a one or two year lag. The data above, for example, refer to 2005 and 2006.

To keep more current than the Census statistics allow, our CFMMI constructs sector-specific estimates of manufacturing output for the overall Seventh District. These estimates are primarily based on data reported on payroll hours worked in manufacturing establishments across the District, and these data are usually available with only one month’s lag. When complete data on value added are issued by the U.S. Census Bureau, we adjust or benchmark our CFMMI data series to correspond to that data.

There are four major sectors of the CFMMI: auto, steel, machinery, and resource. The CFMMI is made up of 15 North American Industry Classification System (NAICS) codes of hours worked data. The breakdown of the NAICS codes is given under each graph (such as the one below) on the press release every month. The auto sector components are plastics & rubber products (326) and transportation equipment (336). Primary metal (331) and fabricated metal products (332) compose the steel sector. The machinery sector is made up of machinery (333), computer & electronic product (334), and electrical equipment, appliance, & components (335). There are five categories for the resource sector: food manufacturing (311), wood product (321), paper (322), chemical (325), and nonmetallic mineral product (327). The overall CFMMI is composed of the four sector components as well as these industries: printing & related support activities (323), furniture & related product (337), and miscellaneous manufacturing (339).

As seen by the two sector charts below, taken directly from the March CFMMI release, the District’s output growth paths in the machinery and auto sectors have diverged. While the machinery sector of the CFMMI is slowly outpacing the overall CFMMI, the auto sector of the CFMMI continues to fall below the overall CFMMI. Such developments can help us understand differences in economic performance around the Seventh District.

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To see more information about the CFMMI, please check the Federal Reserve Bank of Chicago’s website. Additionally, some of the other Federal Reserve Banks also have manufacturing indexes/surveys. Please see below for some of those links:

Federal Reserve Bank of Philadelphia Business Outlook Survey

Federal Reserve Bank of New York Empire State Manufacturing Survey

Federal Reserve Bank of Richmond Manufacturing Conditions Survey

Federal Reserve Bank of Kansas City Survey of Tenth District Manufactures

Federal Reserve Bank of Dallas Texas Manufacturing Outlook Survey

Foreign Direct Investment in the Midwest–Update

Americans sometimes harbor mixed feelings about investment in enterprises on U.S. soil that are owned and directed by companies domiciled abroad. Yet for the most part, investment from overseas represents a validation of the productive business climate in the domestic economy. Here, our system of law and contracts, along with productive workers and well-conceived public infrastructure, offer conditions that are conducive to value creation. In turn, foreign direct investment (FDI) activities can benefit our workers and households. New investment and ownership often bring new technology and ideas to American shores, thereby boosting our own growth, wages, and standards of living.

In recent decades, FDI has grown rapidly to comprise a larger share of the U.S. economy. As documented in our recent article, the share of employees working for all companies that are U.S. affiliates (those in which a foreign investor owns at least 10%) grew from 1.8% in 1979 to 4.7% in 2000. According to more recent data, this share has remained fairly constant through the middle of the current decade—now 3.9% by that estimate.

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Much of recent growth in inbound FDI has resulted from accelerated globalization and rapid world economic growth. Due to a greater ease of communication and lower cost of personal travel and goods shipment, global breadth of enterprises has expanded. General Electric employs 316,000 worldwide, 155,000 outside of the U.S. General Motors employs 335,000 worldwide, 193,000 abroad.

In addition, although the U.S. has maintained its economic prominence in the world economy, the U.S. economy now comprises a smaller share of global production (27% as of 2006). And so, without any countervailing forces, this simple arithmetic would suggest more inbound FDI as a share of the U.S. economy. By one estimate, the U.S. share of global outbound FDI outflows have in fact declined from its 1970 value of 54% of global FDI to 18% in 2006.

While global economic growth is the largest generator of inbound FDI to the U.S., the exchange value of the U.S. dollar versus other currencies can also be influential. The value of the dollar has fallen by 25% since 2002, measured against a basket of currencies weighted by our trade with other countries. For this reason, investment in productive capacity on U.S. soil may look increasingly attractive to foreign-domiciled companies. For one, for those foreign companies that hold their earnings and assets in foreign currencies, the purchase price of physical capital in the U.S. such as real estate, intellectual property, and factories will be cheaper. For companies that now sell into the U.S. market from production facilities abroad, the shifting of production to the U.S. may be advantageous in generating production costs in the same currency as their sales.

Further, for those companies that use their U.S. facilities as a platform from which to export to markets outside of the U.S., earnings on sales will likely be denominated in foreign currency rather than in U.S. dollars. Recent developments in FDI in the U.S. automotive sector may be reflective of these considerations. Several European carmakers are currently considering setting up production in North America, among them Volkswagen and Audi. And exports of U.S.-produced light vehicles have been rising, according to Chicago Fed economist Thomas Klier. From 2002 to 2007, the share of U.S. production that is exported to non-NAFTA countries alone has risen from 3.0% to 11.6%.

In recent years, the state of Indiana has done well by FDI in automotive and other (mostly manufacturing) investments from abroad. The Business Research Center at Indiana University (BRC) has recently issued an extensive report that reviews the global environment for FDI with an emphasis on Indiana and surrounding Midwest states. According to U.S. government data as of 2005, Indiana’s economy ranks 8th in the nation and first in the region as measured by the ratio of FDI to state economic output. (Michigan also exceeds the U.S. average.) As measured by jobs, the United Kingdom and Japan were virtually tied as the number one source of FDI into Indiana, each accounting for 32,000 jobs.

The U.S. government data on FDI for states does not necessarily reflect new investment or added jobs. Rather, most FDI transactions are mergers and acquisitions. For this reason, and because government data are not very timely, the BRC also gathered information from a private vendor on announcements of FDI expansions and new facilities. Since these are announcements rather than completed transactions, we cannot be certain these investments will actually take place. But according to BRC estimates, Indiana will gain nearly 5,000 jobs from 2007 announcements, mostly in the automotive industry. The implication is that Indiana will widen its lead among Midwestern states in the FDI category. An appendix to the BRC report proudly maps the specific FDI projects in which Indiana’s state development agency has completed or participated.

Competing state and local development agencies throughout the Midwest will surely take note.

The Stability of State Economies

By Guest Blogger Michael Munley

In recent years, Fed Chairman Bernanke and other economists have been analyzing the causes of the increased stability in the U.S. economy, a phenomenon known as “The Great Moderation.” Most of their analyses have focused on the national economy, noting that the fluctuations, or volatility, in GDP growth, employment growth and inflation have declined noticeably over the past 25 years or so. But a Philadelphia Fed economist, Jerry Carlino, recently wrote a paper that looks at the issue at the state level and finds that every state has shared in the decline in employment volatility.

Increased stability has numerous benefits for both households and businesses. When employment is growing at more stable rates, people can be more certain of their job prospects, which makes it easier to decide whether to buy a new car, for example. Similarly, businesses have an easier time deciding whether to invest in new machinery when they can be more certain about the state of the economy. In turn, better decision-making by people and businesses can minimize the potential waste in the economy created by bankruptcies and other problems that can arise when people make decisions that turn out poorly.

Comparing the average volatility (measured in Carlino’s paper as the standard deviation of quarterly changes in employment) before and after 1984, Carlino’s results show that the states of the Seventh District all had declines that ranked in the top half of all U.S. states. Michigan ranked 2nd with a 63.6% drop in volatility, Indiana 4th with 57.1%, Wisconsin 8th with 52.5%, Iowa 16th with 45.3%, and Illinois 20th with 42.7%.

The following graph illustrates how the volatility in total employment has changed over time in each of the District states, converging toward the national average.

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One reason for the relatively bigger declines in employment volatility in the Midwest is our concentration in manufacturing and, specifically, our concentration in durable goods manufacturing. Carlino reports that volatility in U.S. factory employment was cut in half after 1984, whereas the declines in employment volatility in services were much smaller. And by my estimates, the volatility reduction in durable goods manufacturing employment was much sharper than that in nondurable goods.

As a result, Seventh District states ranked in the top half of all states in terms of the magnitude of the decline in manufacturing employment volatility. Michigan ranked 1st with a 66.3% drop, Indiana 3rd with 63.1%, Wisconsin 7th with 56.9%, Illinois 12th with 55.7%, and Iowa 22nd with 48.8%.

I’ve also looked at other state-level data series to see if they too reveal evidence of the Great Moderation. The quarterly changes in unemployment rates show similar reductions in volatility to those seen in employment (though the state-level unemployment data only go back to 1976). Real per capita income also shows a reduction in volatility, but the relative reductions are smaller.

Click to enlarge.

Click to enlarge.

Interestingly, whereas the District’s concentration in durable goods manufacturing seemed to lead to larger reductions in volatility compared with other states, that is not the case with changes in unemployment rates and personal income. As shown in the following table, the Midwest states’ reductions in unemployment and income volatility were rather middling.

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Carlino notes that the economists who have been tracking the Great Moderation have proposed numerous reasons for the decline in volatility nationwide. Explanations include better monetary policy, structural changes (such as improved inventory management, the decline of unionization, the redistribution of jobs from manufacturing to services, banking deregulation), and plain good luck, in that the economy has not faced any significant crises like the oil embargo of the 1970s.

Regardless of the causes, it is clear that changes in employment and other variables are much more stable here in the Midwest than they were 25 years or so ago. Yet while lower volatility has its benefits, it does not uniformly deliver positive outcomes. Typically, volatility rises during a recession (as shown in the graphs above) then settles back down when the economy recovers and employment expands again.

However, that has not been the case in Michigan. Its volatility in all three variables increased during the 2001 recession and retreated since then, but the state economy has not recovered. Michigan’s employment has been stabilizing around an average decline in jobs (-0.2 percent per quarter over the past five years). Its unemployment is high; in April the unemployment rate in Michigan was 7.1%, the highest in the nation. And per capita incomes in Michigan are stabilizing around slow growth of 0.1% per quarter, which is below the national average and among the slowest in the nation.

If you buy the assumption that the observed volatility affects the confidence of business and household decision-making, this means that Michiganders could be getting more certain that the local economy is heading in the wrong direction.

Manufacturing exports continue to excel

Even as much of the Midwest’s automotive industry remains troubled, the region’s overall manufacturing exports continue to impress. In the Seventh District, manufactured exports make up around 7% of gross state product; this is on par with the nation’s economy (also discussed in a previous blog). While this share is not huge, the manufacturing sector’s rapid growth of exports in recent years translates into an outsized contribution to the region’s growth. Export growth of manufactured products will exceed 11% in 2006, which marks the third consecutive year of similar growth. By our reckoning, strong export growth from manufacturing made up roughly one-sixth of the Seventh District’s overall output growth in 2006.

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What’s propelling these exports? For the most part, it’s been due to continued strong global economic recovery and expansion. Following two years of weak growth in 2001 and 2002, the global economy began to recover. According to estimates gathered and reported by the IMF, the global economy grew by 5.1% in 2006. This followed three years of similarly strong expansion. As of early 2007, forecasts and expectations for this year are equally robust.

Among our major trading partners, Mainland China has exhibited the strongest growth; it has been reporting growth rates of 8% to10% over the past seven years. Accordingly, Seventh District manufacturing exports to China have been growing rapidly at an average annual pace of 9.3% per year since 1997.

The chart below illustrates that Midwestern exports to China have come to represent an increasing share of the region’s overall exports to Asia. In 1997, overall goods exports to China, including agriculuture, mining, and manufacturing, accounted for only 13.7% of the Seventh District’s exports to Asia. By last year, however, China’s share almost reached 20 percent. (See black line).

Manufactured goods exports accounted for most of this expansion. Moreover, expanding manufactured exports were widespread across broad industry sectors including transportation equipment, machinery and metals.

The second chart below ranks manufactured exports to destination nations in 1997 and 2006. While Canada remains far and away the region’s predominant export destination, China now ranks fifth, behind Canada, Mexico, the U.K., and Japan. The Seventh District states exported $4.9 billion of manufactured goods to China-Hong Kong last year.

Click to enlarge.

Click to enlarge.

The Seventh District’s manufacturing sector continues to be large and export oriented. This means that global economic growth will continue to figure prominently in the region’s growth. However, this assumes that U.S. policies of open world trade and investment will continue to be expanded. Agreements to open our trade across the globe help develop and stimulate the economies of our trading partners. In response, our trading partners turn to the industrial Midwest for many of their purchases.

Michigan Labor Market–Still Awaiting Recovery

Following the 2001 national recession, the labor market remained somewhat slack and slow-growing until mid-2003. Subsequently, the national economy accelerated, pulling along labor demand and employment growth. The year 2006 marks the third consecutive year of strong year-over-year employment growth (and falling unemployment) nationally.

Meanwhile, the Seventh District, which includes the state of Iowa and most of Michigan, Indiana, Illinois, and Wisconsin, also experienced an employment recovery. However, the pace of job growth in the Seventh District has fallen somewhat short of the nation over most of the post-recession period. From the fourth quarter of 2001 until the fourth quarter of 2006, payroll job growth is currently reported to have risen by 3.9 percent in the nation, versus 0.7 in the Seventh District states overall.

Much of the Seventh District weakness is confined to Michigan, and recent indications show little sign that the Michigan labor market performance is turning around. As illustrated below by a 3-month moving average of monthly unemployment rates, the U.S. and the rest of the Seventh District states (excluding Michigan) have reported a falling rate of unemployment over much of the past 3 years. Currently, the region’s unemployment rate lies very close to the nation at around 4.5 percent. In contrast, Michigan’s current unemployment rate, after improving in 2005, is now back where it was in 2004.

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Unemployment rates are not fool-proof indicators of labor market performance because they are conducted by household surveys which are subject to sampling bias. However, other independent indicators tend to corroborate these survey indicators. Among the other indicators, the survey of payroll employment at business establishments is reported for states by the Bureau of Labor Statistics. It too is based on a survey, and it is revised later as more information becomes available.

Below, year-over-year growth in payroll employment is shown for Michigan versus the District and the U.S. The payroll survey suggests that Seventh District job growth, though slower than the U.S., has shown steady growth over the past three years. Michigan’s year-over-year job growth has continued to decline—at an accelerating pace.

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So too, reported information on initial claims for unemployment insurance by laid off (or otherwise severed) workers exhibits the same pattern: deterioration at an accelerated pace over the past three years in Michigan, and improvement outside the state.

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In past decades, weak automotive-related performance in Michigan has sometimes been appraised as temporary or cyclical. However, this time around, as indicated by labor market performance in surrounding states, weak economic performance in Michigan appears to reflect structural problems for auto makers and automotive supply companies. Since early 2004, Michigan has lost 17.6 thousand net jobs at auto assembly establishments (a 24 percent decline) and 27.5 thousand jobs in motor vehicle parts production (a 15.8 percent decline).

Overall domestic automotive production is being eroded by imports and by enhanced production and sales of transplant automotive companies who largely produce outside the state of Michigan. Recent employee buyout programs at Ford, General Motors, and Delphi will result in a head count reduction of nearly 100,000 across the U.S. Approximately one-third of those jobs are situated in Michigan.

At least for the near future, the Michigan labor market situations does not yet look to be improving. The Michigan-domiciled auto assembly companies foresee or have announced continued employment reductions and facilities closings in both production and in administrative/R&D employees. Longer term, the Michigan economy’s sharp automotive concentration means that the labor market will continued to be driven by developments in the industry.