Category Archives: Economic Survey

Chicago — Regional capital or global business center?

The Chicago economy is expanding, but the pace of growth is disappointing compared with that experienced during the 1990s. This lagging performance raises some questions about the future. Will Chicago merely serve a supporting role as a services center for the surrounding Midwest, or can Chicago’s businesses expand their reach to more rapidly growing national and global markets?

Robust growth of jobs, income, and population during the 1990s left intact Chicago’s role as capital city of commerce for the broader Midwest, and then some. Some observers of the Chicago economy, including me (Global Chicago book), argued that Chicago was outgrowing its regional character. It was becoming a global city, with market ties and cultural recognition above and beyond the Midwest. This view boded well for the region’s long-term prospects, as the shrinkage in surrounding Midwest manufacturing and agriculture income would not hold Chicago back from a favorable performance among global cities.

However, those rosy predictions are somewhat at odds with the reality of Chicago’s performance over the past 4-5 years. The Chicago area is undoubtedly participating in the U.S. economy’s expansion. The airports are at capacity once again, hotel occupancy rates are climbing, some of the risk exchanges are swaggering a bit with profitability and outreach to foreign markets, and commercial office vacancy rates have leveled off. But the Chicago area economy continues to lag the U.S. economy. This follows a recession that hit the Chicago metropolitan area more severely than it hit the nation overall. Year over year (as of August), the Chicago area’s payroll employment grew just 0.8 percent, compared with 1.7 percent for the nation. The unemployment rate for August stood at 5.9 percent versus the nation’s 4.9 percent (figure 1). This extends a weak performance from year 2000. Annual data show that payroll employment declined -4.1 from 2000 to 2004, versus a -0.2 decline for the nation.

Figure 1

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Midwest Economy

Hello midwesterners and those interested in the Midwest’s economic growth and development. My name is Bill Testa, and this is an introduction to my Midwest Economy Blog.

In this blog, I will offer some current information on the Midwest economy, as well as analysis of important public policy issues and even an occasional prediction or two. In this effort, I will be looking for those of you who share my keen interest in the Midwest economy to contribute not only your attention and readership, but also your thoughts and information. Those of you who do respond, as well as those who only listen, will help us all to enrich our understanding and knowledge of this region. And as time passes, we will also have an extensive compilation of information and experts to draw on as the Midwest encounters new issues and economic challenges.

Unlike some economists who sponsor blogs, I am neither a Nobel prize winner nor a renowned media personality. However, I have been following and analyzing the Midwest economy for over 25 years, most recently as the director of Regional Programs in the Chicago Fed’s Economic Research Department. The most burning questions that keep me up at night include: Why do some regions grow faster than others? What are the prospects for the Midwest and other regions? What can we do to influence our economic destiny? What roles, if any, do state-local governments and public-private partnerships play, or should they play, in the growth and development process?

At the Chicago Fed, my interest in the Midwest economy is shared by a talented and varied group of economists. Some of them—such as Rick Mattoon, Thomas Klier, Yukako Ono, and Mike Munley—are part of my Regional Team, while some are in other areas of our Research Department, including our Chief Business Economist, Bill Strauss, and our agricultural/rural specialist, Dave Oppedahl.

And if you are a true Midwest economy buff—as I am—you will find your way here—to our newly launched Midwest Economy web page. This new page features content galore, including our own vast archive of published analysis organized by subject area. You can also access regional data to create your own analysis; or link to other related web sites. Also, the site features our many past conferences, along with the presentations of renowned experts on the Midwest economy, state-local finance, economic growth, and a host of special topics concerning economic growth and development.

“Ag Bio” Conference at the Chicago Fed

Last week, Dave Oppedahl, our agriculture and rural specialist, held a conference at the Bank addressing agricultural biotechnology and rural development prospects in the Midwest. The best-known of these technologies are so-called bio-fuels, such as ethanol (which is largely refined from corn in the U.S., but it is largely refined from sugar cane in other countries like Brazil), and GMOs or genetically modified organisms, such as pest-resistant and herbicide resistent grains. Dave’s chief interest in these technologies and their prospects are how they will affect the well being of Midwest agriculture and rural communities.

New biotech products linked to agriculture are but one of several avenues by which rural counties hope to revive their fortunes and sustain their populations. Historically, family incomes in rural counties were supported by agriculture, mining, and forestry—especially agriculture. The U.S. Bureau of Economic Analysis compiles figures on the shares of personal income that derive from various industry sectors, and they estimate that as recently as 1969, 935 “rural” or nonmetropolitan counties counted on agriculture for 20% or more of personal income. By 1999, the number had fallen to only 235.

The problem has not been so much a failure of sagging production, or vulnerability to foreign producers, as it has been rising productivity itself. Improved strains of agriculture and better/more mechanized farming methods have increased yields astronomically. Since 1947, U.S. real farm product is up over 3.5 times. But despite rising real product, prices for farm products have fallen steeply, because the demand for raw agricultural products has not kept pace with rising production and productivity. In 1950, corn in the U.S. cost five times its price today as measured by inflation-adjusted dollars. Falling prices (along with labor-saving productivity) have come to mean meager farm earnings and jobs in most nonmetropolitan counties. In 1870, over 50% of the U.S. work force could be found in agriculture, but this had dwindled to 13% by 1947, and to 2% today.

In our Seventh Federal Reserve District states of Iowa, Illinois, Michigan, Wisconsin, and Indiana, farm earnings comprised 13% of personal income in 1969, but had fallen to only 2.8% by 2002. Of course, such productivity gains, along with urbanization of population, have also created the world’s highest standard of living for the average American.

But in generating income and jobs, many rural communities have not found a sufficient replacement for agriculture. (Though some, of course, have become suburbanized by nearby metropolitan area expansion, while others have redeveloped toward service industries and manufacturing). Consequently, the decline of agriculture-related income in nonmetropolitan areas has often been accompanied by lagging population growth or even outright declines. In the U.S., nonmetropolitan population grew at around one-half the pace of metropolitan counties from 1969. With falling population, many rural towns have been challenged to sustain essential services such as health care, schools, and retail. And in relation to metropolitan standards of living, rural personal incomes have fallen. Per capita income in nonmetropolitan counties in the Seventh District, for example, declined from 85% of the nation’s average in 1969 to 80% in 2002.

What’s a rural area to do? In our part of the Midwest, two distinct avenues to re-development are most prominent—manufacturing/distribution and retirement/recreation.

What other development paths are you seeing around the Midwest? Please share your thoughts and observations with us.

Bright prospects as a haven for retirees and recreational visitors can be most commonly observed in our northern states of Michigan and Wisconsin. Places such as Walworth and Door Counties in Wisconsin, and the northwest coastline of Michigan are perhaps the best-known in this regard. The map below illustrates those nonmetropolitan counties that have experienced hikes in population since 1969 (shown in blue, declines shown in green), and the “north woods” pattern in Wisconsin and Michigan is quite evident. (A map of second homes from the 2000 Census would show much the same effect). In many such places, the choice to develop tourist or retirement centers is not without its downsides. Recreational and retirement homes, and attendant commercial activities, often change the very character of rural towns, sometimes to the consternation of its original residents. Many towns on the periphery of large and sprawling metropolitan areas also face many of the same difficult choices: How much to grow, and in what directions?

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