Category Archives: Seventh District

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.

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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.

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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.

Global Agriculture Conference

On average, rural America has not been faring as well as metropolitan America in terms of population and income growth. Is this trend yet another painful adjustment that can be attributed to globalization?

Globalization policies continue to be closely intertwined with agricultural markets, which have been the historic lifeblood of rural communities in the Midwest. Last month, the Chicago Fed held a conference on “Globally Competitive Agriculture in the Midwest.” The event included the Midwest release of a task force report by the Chicago Council on Global Affairs, Modernizing America’s Food and Farm Policy. Conference discussion concerned how current global trends and policy debates are affecting agriculture and rural communities, and how prospective policies such as the next Federal farm bill and the Doha round of the world trade talks might play out.

During the conference discussion, several presenters expressed the opinion, without challenges from the audience, that globalization was in some way responsible for the lagging economic performance and stark challenges facing the rural Midwest. However, I think that it is somewhat mistaken to confuse globalization with technological advances and associated structural changes now taking place in the production of agriculture.

First, to concede some ground to the opposition, several forces of globalization have hastened structural adjustments taking place in smaller towns and rural communities. In particular, an expansion of the world market for goods and services has sharpened the economic specializations of many countries and their subnational regions. For the U.S., as global markets in goods, services, and capital have been opened up, the domestic economy has shifted away from manufacturing production and less-skilled services such as back office processing, some software production, and call center activity in favor of advanced services such as finance, investment, and management. For such advanced services, the large urban form, rather than the smaller city or rural town, is the more productive and favorable locale. This preference of industries performing such advanced services has contributed to the growth of large metropolitan areas, such as New York, Chicago, Washington, D.C., Atlanta, and San Francisco.

Aside from that, there is little to argue about globalization as a detriment to rural economic growth. And even at that, I would argue that technological advancements, rather than globalization, account for most of the structural changes that are moving us toward an advanced services economy in the U.S. New technologies, particularly their adaptation in wireless communication and in advanced computing, are highly complementary to such service production, with or without globalization. This is evident the world over as wages, salaries, and employment opportunities have risen sharply for those workers who have the education and technical skills to work with advanced communication and technical tools.

While rural areas have not fared as well in advanced services, the net effects of globalization on commodity production and income in rural areas are mixed rather than one-sided. In much of rural America, the local economy is highly dependent on commodity agriculture or on commodity materials such as energy products, minerals, and timber. Here, relentless productivity advances, especially in agriculture, have obviated the need for as much labor as in the past. In turn, lessened labor demand has put pressure on rural growth.

Yet, such labor substitution is hardly related to globalization. It is true that global markets can introduce competition into commodity markets. Yet, on the flip side, falling transport costs and more open markets also increase possibilities for heightened exports and firmer prices for the commodities produced in rural areas. In the Midwest, for example, global exports in soybean and corn have helped to sustain jobs and income. More recently, as developing countries have improved their diets, U.S. exports of beef, pork, chicken, and poultry have grown. Here, the competitive advantage in grain production translates into local livestock production. The processing of grains and livestock (in order to shed weight and volume before exports) is kept close to the location of grain and livestock production, that is, rural communities.

Growing global growth has also boosted prices of carbon-based fuels. As a result, exploration, mining, and production of fuel sources are providing more jobs and lifting income in many rural communities. In corn-producing states, federal subsidies have combined with rising prices of fossil fuels to spur rapid expansion of corn-based ethanol capacity as a viable energy source. As a result, prices for corn have been raised and are expected to remain so. Moreover, ethanol plants are being built near corn production in rural communities, thereby boosting associated manufacturing jobs.

But ethanol production has not been the only source of manufacturing jobs in rural communities. In the Midwest, as shown below, rural and nonmetropolitan counties have been gaining share of manufacturing jobs at the expense of metropolitan counties for several decades. There are several reasons for this shift, but the dominant factor points to technological changes in production. In particular, areas with lower population density are favored for many types of production due to easier transportation access and lower land costs. And if these forces have been accelerated by global competition, rural areas are the beneficiaries. Income from manufacturing is replacing income earned on farms as the dominant economic base across the Midwest.

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Of course, rural communities in the Midwest face many challenges in the years ahead. For one, manufacturing production centers sited in rural communities are highly vulnerable to global competition. So, too, commodity prices have historically been volatile such that commodity-based economies have often been whipsawed by downward price swings. Global markets show no promise of easing the variability of commodity price swings.

For these reasons, rural communities are striving to avail themselves of development opportunities as they present themselves. On October 24–25, 2006, the Chicago Fed will be partnering with Iowa groups on an informational conference in Ames, Iowa, called “Expanding the Rural Economy through Alternative Energy, Sustainable Agriculture, and Entrepreneurship.”

The question of whether globalization has been a net plus or a net negative for rural areas is not an easy one. Yet, more than ever, rural communities will want to stay closely attuned to trends and policies related to global affairs.

Midwest housing market update

Following unprecedented home price appreciation nationwide in recent years, homeowners are much concerned about price reversal. In their current Economic Perspectives article, Chicago Fed economists Jonas Fisher and Saad Quayyum find that, on average, much of the recent surge in housing can be attributed to fundamentals such as rising income and favorable demographics, as well as innovations in home lending markets that have allowed renters to become homeowners. (Many of these innovations—such as interest-only loans and adjustable rate mortgages—were discussed in detail at the Chicago Fed’s Bank Structure Conference this spring. The proceedings of the conference were summarized in the September issue of the Chicago Fed Letter.)

While such arguments may provide some comfort to those who worry about the possibility of a bubble in average U.S. home prices, experiences and current conditions differ widely from place to place. Should Midwestern homeowners be more or less concerned about the cooling of residential real estate markets?

Senior Business Economist Mike Munley has been tracking home price developments in the Midwest. Mike reports that, on September 5, the Office of Federal Housing Enterprise Oversight (OFHEO) released its estimates for home price appreciation in the second quarter of 2006. The report included data on the national average of home price changes as well as state averages.

Home prices for the U.S. increased at a 4.8% annual rate between the first and second quarters, the slowest quarterly appreciation since the end of 1999 and just below the average since 1980. As measured year over year, U.S. home prices were up 10% from the second quarter of 2005, which was also slower than the rate of appreciation has been—it topped out at 14% in the middle of 2005.

Recent home price appreciation here in the Midwest has also slowed noticeably, and the long term back drop has been much less robust. For the most part, home prices in the Seventh District states have been increasing more slowly than the national average of home prices (see figure 1). On a year-over-year basis, price appreciation in every District state lagged behind the national average in the second quarter of 2006, and Michigan had the lowest appreciation of any state in the nation. In comparison to the first quarter, home values in Indiana and Michigan actually declined. (Maine, Massachusetts, and Ohio were the only other states with declines.) However, home values in Iowa managed to rise slightly faster than the national average.

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The city-level data told a similar story. Of the District MSAs (Metropolitan Statistical Areas) covered by OFHEO, only Michigan City-La Porte, IN, showed year-over-year appreciation (10.6%) faster than the national average. Of the bottom 20 MSAs in the U.S., 14 were in the Seventh District, and Ann Arbor, MI, was at the bottom with home prices, down 1.3% from a year ago.

The OFHEO home price data is only one of several sources of information about home prices for the U.S. and some cities. The National Association of Realtors (NAR) releases data on the median sale price of existing single-family homes. In general, the two data series tend to tell the same story—that is, the trends in both data series are similar over time. But, their results are often different in a given month (for regional and national data) or quarter (for city data). The NAR data tends to be more volatile. The NAR data set measures exactly what it sounds like: it is the price of the typical home sold during that quarter. Still, the median price depends on the mix of homes sold during that quarter. If, for example, a large number of inexpensive, starter homes were sold in the second quarter, this would lower the median sale price. By contrast, the OFHEO index is designed to track how the value of an individual home changes over time. OFHEO looks at the appraised value of homes each time a new mortgage is taken out—it is updated when a home gets sold or when the homeowner decides to refinance. OFHEO looks at the value of a large number of homes and is able to estimate the index quarterly. One drawback to the OFHEO index is that it only looks at home mortgages serviced by Fannie Mae and Freddie Mac, and those agencies only service mortgages that are less than $417,000—so the OFHEO index excludes most luxury housing.

The NAR publishes price breakdowns for regions and select metropolitan areas (but not states). In the second quarter of 2006, median home prices nationally were up 3.7% from a year earlier, while median sales prices in the Midwest (which includes the Seventh District, Ohio, and some plains states) were down 2.0%. Of the 24 District MSAs covered by the NAR, five (Chicago, Champaign, Milwaukee, Peoria, and Waterloo, IA) beat the national average, and 14 saw home sale prices down from a year ago. Although the NAR data are more volatile, this data series does confirm that home prices in the Midwest have been increasing more slowly than prices nationally.

There are a couple of reasons why home values have been rising more slowly in the Midwest than the rest of the country. Looking over the long term, the Midwest has generally seen slower home price appreciation since the early 1980s. As shown in figure 1, home values nationally have increased an average of 5.4% per year since then, whereas average appreciation in the District states has ranged from 3.5% in Iowa to 5.1% in Illinois. In part this difference reflects the slower population growth in the Midwest than in the rest of the nation. Since 1980, the U.S. population has increased an average of 1.1% per year, while population growth in Seventh District states has averaged only 0.4%. It follows that demand for housing in the District is not growing as rapidly, which in turn puts relatively less pressure on prices.

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Where is automotive employment in the Seventh District?

Perhaps the most notable economic development taking place in the Seventh District is the market shift away from the traditional “Big 3” domestic auto makers–General Motors, Ford, and (Daimler)-Chrysler–and their parts suppliers. Lost sales are shifting toward the “new domestics” such as Toyota and Nissan and their parts suppliers. The sales gainers tend to be located outside of the Midwest to a greater degree than the Big 3. This shift is documented and analyzed in a recent Economic Perspectives article by Thomas Klier and Dan McMillen. This market upheaval is tending to idle and displace workers in many Midwest communities. Per Klier and McMillen, Michigan automotive employment is down almost one-third since 1979 while southern states such as Kentucky, Tennessee, Alabama, and the Carolinas have experienced a tripling of jobs.

But despite these shifts, Detroit and much of the Midwest continues to be the center of the production. Which particular communities remain most sensitive to future swings in automotive fortunes? The data below attribute automotive employment to particular metropolitan areas in the Seventh District. Those metropolitan areas with green shading had an employment concentration in automotive that exceeded the nation; those shaded in red had a lesser concentration. Looking across metropolitan areas in the entire Seventh District region, an east-west split in auto employment concentration becomes very apparent. The Michigan-Indiana corridor contains most of the metropolitan areas having an above-average concentration. Darkly-shaded metropolitan areas in southeast Michigan are exceptionally concentrated in automotive. So too, an east-west band of metropolitan areas across north central Indiana is steeped in automotive employment.

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A numerical listing of automotive employment below shows just how concentrated some communities can be. Metropolitan areas including Detroit/Livonia/Deaborn, Flint, Holland, Saginaw, Battle Creek, and Lansing/East Lansing in Michigan all reported concentrations over 5 times the national average, as did the Kokomo and Lafayette metro areas in Indiana.

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The final table below further illustrates the sharp geographic rift in employment fortunes over the 1990-2005 period. As a whole, the state of Michigan lost over 64,000 jobs in automotive, on net accounting for all job losses nationally. Largely due to the Michigan experience, the Seventh District states experienced an 18 percent decline in automotive jobs since 1990 while the remainder of the U.S. experienced a 3 percent gain in similar employment.

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What industries are key to Midwest economic performance?

Urban economist Wilbur Thompson once said, “Tell me your industries, and I’ll tell you your future.” A region’s industries do tell us a lot about its economy. In the Midwest, manufacturing industries often drive fluctuations and trends in the region’s overall economic growth because manufacturing is a much larger part of its economy, on average, than the rest of the nation’s. So, too, manufactured goods are traded far and wide—that is, they are exported and imported across national boundaries as well as across regions that make up the U.S. economy. Accordingly, shifts in demand for manufactured goods can have an outsized impact on states and communities in the Midwest. For example, a national shift in buying behavior toward foreign nameplate autos, or toward smaller and more energy efficient autos, may well impact automotive production, investment, and employment in some parts of the Midwest region.

On a short-term basis, fluctuations in aggregate economic activity, such as recessions, diminish demands for durable goods such as capital equipment, thereby making the Midwest economy more sensitive to national “business cycle” fluctuations.

So, too, many Midwest manufacturing industries are impacted by global competitive shifts. Production operations of some home appliance manufacturers have shifted to Mexico, for instance.

But how can we identify which particular industries to observe and follow in the Seventh District? First, we must ascertain how concentrated is an industry in a local economy as compared with the national economy. Analysts often construct a “location quotient” to do so. In one such application, each industry’s employment share of total employment in the region is compared with its national counterpart. The comparison is constructed as a ratio with the local share on top. For example, if a locality’s labor force had 20 percent of its workers in manufacturing as compared with 10 percent nationally, the index (ratio) takes on a value of 2.0, i.e., 20/10. Parity with the nation would take on a value of 1.0.

While such an index is useful by way of comparison, it says little about the actual size of a particular industry in a state or region. For this reason, the chart below identifies manufacturing industries in the Seventh District states by relative concentration and by employment size. The horizontal scale depicts the concentration, and it is centered at the index value of one, or parity with the nation. The vertical scale is centered at the value of the median-sized manufacturing industry in the District (as measured by payroll employment).

By construction then, we may quickly characterize the most prominent industries in the District as they are located in the upper right hand quadrant of the graph. For the District, it is clear that transportation, food processing, and machinery are the most prominent industries, with transportation (representing automotive) winning hands down. The fabricated metal products sector also looms large; however, these industries represent many diverse intermediate products that are eventually used to produce more final goods such as autos or machinery. Primary metals, principally steel foundries as designated by the industry code 331 on the chart, is the most concentrated industry (as measured by employment) in the District. Yet, its employment is relatively small in comparison.

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Charts for each individual state will soon be available on our Midwest Regional Website. Iowa is reproduced below. As the chart suggests, employment in food processing stands out as the largest and the most concentrated in the state. In large part, this activity represents Iowa’s further processing of corn and soybeans into meals and oils, as well as its meat packing industry, chiefly pork. Iowa’s large and highly concentrated machinery industry reflects its focus on its manufacturing of farm machinery and equipment.

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Analysis of the District’s lesser industries can also be informative. In the overall U.S., the computing and electronic products industries have grown rapidly into a large component of overall U.S. manufacturing. In virtually every Seventh District state, for example, employment in this sector exceeds the median manufacturing sector. But at the same time, the states’ concentration of this sector is universally below the national average. In this instance, the sector’s lower concentration and lesser expansion here have contributed to a slower pace of overall economic growth.

Of course, these glimpses are only a superficial beginning to understanding the structure and behavior the region’s economy. For one, individually identified sectors often have important linkages to others that merit further consideration. Such industries as machinery and autos, for example, purchase great volumes of intermediate materials and parts locally, including those found in rubber and plastics, fabricated metals, and machinery (e.g., tool and die and metal cutting machinery). Also, in varying degrees, sectors may purchase local services as diverse as management consulting and transportation. Specific industry linkages can be found in the input–output tables of the U.S., which are produced by the U.S. Bureau of Economic Analysis (BEA).

However, the U.S. input–output tables may often be misleading for regional analysis. That is because specific inter-sector buying and selling relationships will differ greatly and vary widely from region to region. For one, local firms will purchase intermediate goods and services from many possible places. For the most part, we know little about the varying geography of such relationships. In response, the BEA has adapted and estimated the national relationships for individual regions of the U.S. in its RIMS II modeling system. This system and others like it, which are available commercially, are often used to estimate the broader economic impacts of small changes to a community or local industry.

Are U.S. and Seventh District business cycles alike?

This question is posed by Michael Kouparitsas and Daisuke Nakajima (K-N) in a current Economic Perspectives article. The answer, in general, is “yes,” and, in their analysis, many additional insights are gained about the structure and behavior of the Seventh District regional economy and its five component states of Illinois, Indiana, Michigan, Iowa and Wisconsin.

The so-called business cycle refers to the way that cyclical fluctuations of aggregate income relate to cyclical fluctuations of individual economic components, such as consumer spending, business investment, and job creation, and the ways that these components relate to each other. In this regard, academic economists have found that national economies around the world behave similarly, and a lesser body of evidence now suggests that sub-national or regional economies do, too.

The K-N article gathers some long time series of data on the overall Seventh District economy along with component parts that are analogs to U.S. economic series. The figure below from K-N juxtaposes the aggregate business cycle of the Seventh District and each state with the overall U.S. economic cycle.

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In their analyses, K-N show that the timing of swings in Seventh District state economies is very similar to the nation. Most likely, this is explained by the fact that the economies of the U.S. and the District are affected by common “shocks” such as energy price surges. One exception is a weak tendency for Michigan and Indiana economies to lead the direction of the overall Seventh District by one quarter of a year, perhaps because of those states’ sharp concentrations in durable goods production.

Behaviors of various components of the District economy also mimic their counterparts in the U.S. and world economies. Residential investment and consumption in general tend to lead business cycles. As a leading indicator, average weekly hours of workers in the manufacturing sector also tend to precede swings in aggregate income, as does initial claims for unemployment insurance. Total employment often is a coincident or lagging indicator.

Such information can be further used to construct economic indexes that lead, lag or are coincident with a region’s business cycle. These indexes can be useful for short-term planning and forecasting, especially because there is no timely measure of aggregate economic activity for states and regions that is akin to GDP for the nation.

While the timing of the swings in District state economies are similar to those of the nation’s, there are some differences in the behavior of the states. Iowa’s overall economy is less synchronous with the nation than other District states. Presumably, Iowa’s much larger economic concentration in agriculture means that its economy fluctuates with commodity prices to a greater extent. For Indiana and Michigan, the amplitude of their economic swings are more profound—something that Michiganders, for example, have long tried to consider in their mechanisms to fund state government.

Michael Kouparitsas has previously researched the relative coincidence of business cycles among regions of the U.S (EP article). From a policy perspective, such studies reveal those instances, such as in the U.S., where adjacent regional economies are closely aligned. This alignment indicates that there are gains to having a common currency for our national economy (which we do, the U.S. dollar) as well as gains to conducting a common monetary policy for the overall economy (which we do through the Federal Reserve System). In addition to these policy implications, such research is helpful in understanding particular regional economies such as the Seventh District.