Category Archives: Employment

Midwest payroll job growth—Turning but weak

Sample-based estimates of payroll employment are among the most prominent and timely indicators of regional economic performance. Recent trends in reported payroll data indicate lagging economic performance in the Seventh Federal Reserve District, which comprises all of Iowa and major parts of Illinois, Indiana, Michigan , and Wisconsin . Payroll job growth over the past year varies among these states, with losses in Michigan pulling down the District’s job growth average.

The District’s payroll job performance during the period following the 1990 national recession compared much more favorably to that of recent times. Have the region’s fortunes temporarily turned for the worse? Or is this lagging performance an indication of a structural worsening in the region’s growth path?

Payroll job estimates for December 2005 were released by the Bureau of Labor Statistics on January 24, 2006. While these figures seemingly complete the calendar year 2005, they have not been finalized yet. When the January figures are released (every March), monthly data are revised back for the previous 18 months. Because current data are based on reports from a sample of establishments, the data are later revised or benchmarked to a so-called universe of establishments that report their employment covered by the Unemployment Insurance tax system. The revisions can sometimes be significant and we will examine them during the week of March 6.

Over the past year, this preliminary data suggest that payroll job growth is trending up in all District states except Michigan. However, job growth continues to lag the nation in all District states except Iowa.

Looking back over the past five years to one quarter prior to the onset of the last national recession, there have also been steep job losses. The table below indicates that Michigan’s monthly average payroll jobs declined 6.7% from the fourth quarter of 2000 (prior to the onset of the national recession) to the fourth quarter of 2005. Reviewing payroll jobs data over this same five-year period for other Distict states and the rest of the nation, we can see that there was a 2.8% loss in jobs for the average of all five District states and a 2.2% gain for the remainder of the U.S.

Click to enlarge images.

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Bullish on the Chicago Metropolitan Economy

So far this decade, the Chicago metropolitan area’s economic performance has been disappointing. As in the surrounding Midwest, job declines during the recent recession were worse here than in the nation as a whole, and this area’s job growth during the expansion has since been lagging. With this lackluster performance, there has been a special disappointment for Chicagoans; the metropolitan region’s economy led the nation and most of the surrounding Midwest during the 1990s. During that time, there was a sense that Chicago’s economy had evolved beyond its role as regional business capital into one as national and global business center.

What is Chicago’s outlook for 2006? I am optimistic, although there are some defensible reasons for caution. For one, goods producing industries in the surrounding region may continue to pull down Chicago’s service sectors. Chicago’s outsized business and professional service sector continues to serve the Midwest, as do its travel, distribution, and business meeting services. But looking ahead, the Midwest economic outlook is clouded by the prospects for its automotive industry. Nationally, automotive sales growth is not expected to be robust this coming year, especially for the Big Three automakers and their suppliers that populate the eastern part of the Midwest region as well as northern Illinois and southern Wisconsin. Accordingly, this segment of the Midwest cannot be expected to propel Chicago’s service economy in 2006.

There is a second reason to be cautious: National economic growth is expected to moderate modestly in 2006 (link). Since Chicago and the Midwest generally follow national trends—perhaps even follow them in a magnified fashion—there is some doubt that the metropolitan economy’s performance will gain momentum as the national economy moderates.

Still, despite these trends, and with a great deal of uncertainty, I offer some reasons for optimism for those of us who are inclined to be bullish about Chicago.

Not all of the surrounding Midwest manufacturing activity is moribund. The region’s capital goods industries, such as the machinery and equipment industry, are expanding. Looking forward, as national and global economic growth continues, U.S. and world demand for “new tools” and added production capacity tend to lift capital goods sectors. In turn, employment in manufacturing sectors, along with physical expansion of factories, tend to take place with a lag as excess capacity becomes squeezed.

More generally, recently reported data indicate that improvement in Chicago’s labor markets is already underway. During the autumn, Chicago’s year-over-year payroll job growth exceeded 1 percent for the first time since the year 2000, while the unemployment rates were down in the fourth quarter (according to preliminary reports).

Chicago’s vaunted business and professional services industry is once more reporting strong employment growth. Though it has much catching up to do from its poor performance in recent years, Chicago’s year-over-year job growth in this sector is exceeding the nation’s.

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Great Lakes: Economy and water

The Council of Great Lakes Governors convenes December 13, 2005, in Milwaukee. At that time, the governors will discuss progress on region-wide procedures to regulate, protect, and control diversions of the waters of the Great Lakes basin, the largest single body of surface water in the world. Such actions are laudable for their foresight in sustaining the health of the Lakes ecosystem. Interstate cooperation in fashioning public policy is difficult and rare. Inspired by such achievements in the environmental arena, should the region’s leaders aspire to broader cooperation to spur economic growth and development?

The Council of Great Lakes Governors, formed in 1983, is a non-partisan partnership of the eight states that border the Lakes—Illinois, Indiana, Michigan, Minnesota, New York, Ohio, Pennsylvania, and Wisconsin—along with the Premiers of Ontario and Quebec. The council’s goals are both environmental and economic.

Next week’s agreements to address water diversions are but one of several initiatives that the governors are engaged in to improve the health of the Great Lakes ecosystem. Through the Great Lakes Governors’ Priorities Initiative, the council has established a list of nine priorities to guide the restoration and protection of the largest single source of freshwater in the world, the Great Lakes. Most of these priorities are being addressed more broadly in the U.S. by the Great Lakes Regional Collaboration, which was created by executive order in 2004. The collaboration includes the EPA-led federal agency task force, the Great Lakes states, local communities, Native American tribes, non-governmental organizations and other interests in the Great Lakes region. The first goal of the Collaboration is to create a workable strategy to restore and protect the Great Lakes ecosystem. Past abuses of the Lakes include the introduction of invasive species, destruction of sensitive shoreline habitat, and the introduction of persistent toxins and pollutants. Today’s threats include increased demands for consumptive uses of Great Lakes water; pollutants from land, sea, and air; erosion of coastal habitat through onshore development; and imminent introduction of invasive species such as the Asian carp.

Should similar interstate cooperative efforts be marshalled for economic growth and development? Some limited efforts are being taken already. Through the Council of Great Lakes Governors, a group of five of the Great Lakes states maintain a non-competitive partnership in international trade initiatives. Five states share overseas trade offices that offer responsive and comprehensive services to small and medium sized companies seeking to expand product and service sales.

In addition, one might argue that proper stewardship of the watershed itself is highly important to the economy. Regionwide organizations such as the Great Lakes Commission address the use of the waters for maritime transportation and tourism-related activities. A Council of Great Lakes Industries tries to preserve the region’s industrial activity and balance the needs of industry with those of the environment.

The Lakes ecosystem is also important to what the region’s economy is becoming. Quality of life, especially human health and outdoor recreational amenities, are increasingly important in attracting the highly skilled and highly mobile knowledge workers of “the information economy.” As family income and educational attainment grow in the U.S., demands for environmental quality grow more than proportionately. Primary residences adjacent to scenery and open waters are in ever greater demand. More people are buying second and even third homes for vacation and retirement. A small but growing subset of households follows the seasons residence by residence suggesting that, over time, the Great Lakes attractiveness as a site of seasonal homes is likely to expand.

Still, as we stand at mid-decade, the Great Lakes economy appears to have lost some steam from ten years ago (chart and table below). At that time, the region was celebrating a return to prosperity from the tougher times of the 1980s (see Assessing the Midwest Economy project of Fed). Labor markets in the mid-1990s were tighter in the region than the nation, with concerns of work force shortages about to emerge.

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Driving Indiana’s and Michigan’s Economic Performance

The Midwest economy is lagging the U.S., but some states are doing better than others. These differences may help us understand the reasons for the region’s lagging economy.

Last week in Indiana, I presented some evidence that the entire region is growing more slowly than the nation. Payroll job growth in our Seventh Federal Reserve District is up only 0.6% for September from one year earlier, versus 1.6% in the nation. In some respects, this performance is not surprising since, nationally, manufacturing jobs are still declining (down 1% year over year through September), and the Midwest’s economy is steeped in manufacturing. In addition, the region’s economy is bogged down by the structural change taking place in the automotive industry. Foreign nameplates continue to gain market share from the domestic automakers (previous blog). Since the foreign nameplate companies and their parts suppliers tend to locate in the South, jobs and income are seeping away from the Midwest.

In this regard, comparing the performance between Indiana and Michigan is telling. Though both states rank among the top 3 nationally in manufacturing concentration, the unemployment rate in Michigan stands at 6.1% in Michigan (Oct.) versus 5.4% in Indiana. Year over year, manufacturing payroll job growth is virtually flat in Indiana, but down over 3% in Michigan.

Click to enlarge.

The economies of both states are automotive intensive, but Michigan to an even greater degree. Indiana’s automotive share dominates manufacturing inside the state, at 16%. But Michigan’s automotive sector accounts for 35% of its manufacturing employment. A weakening automotive sector, then, would be felt more sharply in Michigan.

On top this, the auto sector’s performance in Michigan has been worse. From 2001 to date, automotive jobs have fallen 24% in Michigan, compared to 8% in Indiana.

Indiana’s automotive performance is buffered by having a larger share of foreign auto parts and auto assembly plants than Michigan. According to senior economist Thomas Klier, 29% of automotive parts plants in Indiana are foreign owned, as are 2 of its 3 auto assembly plants.

Auto parts makers tend to locate close to their customers. In Indiana, the foreign-owned parts plants are more likely to supply parts to those automakers who are gaining market share—the foreign nameplates.

Michigan’s automakers are only 17% foreign owned; its only foreign owned assembly plant is the Mazda plant, versus its 15 domestic auto assembly plants.

If the current shifts in market share among automakers continue, it will be imperative for Michigan’s economy to attract investments from the successful auto suppliers and auto assembly companies.

Other performance differences between Indiana and Michigan are intriguing, though one cannot draw any hard conclusions. The chart below illustrates the population growth of the largest metropolitan areas in each state—Indianapolis and the Detroit MSA. Indianapolis’ population growth has exceeded the surrounding areas, and far exceeded that of the Detroit metro area.

Click to enlarge.

In searching for explanations, manufacturing concentration again comes to mind. As recently as 1969, only 26% of Indianapolis’ overall employment was manufacturing, versus Detroit’s 35%. Generally speaking, “factory towns” have had the roughest road in restructuring. As manufacturing employment shrinks, such cities must re-employ larger shares of their work force in new industries and activities. Otherwise, workers move from the area and create a different set of challenges to the town governments. That is, how to efficiently use and maintain their current roads and buildings for a less populous (and sometimes less wealthy) population.

Governance structures may also explain some of the challenges. Central city Detroit has been buffeted by job, population, and income flight, with concentrated poverty left in the wake. Detroit city leaders have been unable or unwilling to climb above the city’s fiscal problems to re-build its economy. To what extent has this failure come about because the central city was isolated from the rest of the metropolitan area (and state), and left to solve profound problems with its own (meager) resources?

Indianapolis and other cities have taken some modest steps in consolidating local governance to a closer fit with their metropolitan-wide economies. In the late 1960s, Indianapolis moved toward a “Unigov” structure. As Rick Mattoon discusses (working paper), the city’s boundary was expanded from 82 square miles to 402 square miles, with a legislative body responsible for governing the city. Though there remain many independent governments, taxing authorities, and school districts within the city, the consolidated city has six administrative departments below the mayor’s office.

Other Midwest cities with elements of regional governance include Minneapolis–St. Paul, which has a metropolitan sharing of property tax base. Columbus, Ohio, has not consolidated, yet its central city government has been aggressive in annexing land outward toward its interstate beltway. Both metropolitan economies have outgrown the broader Midwest.

Driving Indiana’s and Michigan’s Economic Performance

The Midwest economy is lagging the U.S., but some states are doing better than others. These differences may help us understand the reasons for the region’s lagging economy.

Last week in Indiana, I presented some evidence that the entire region is growing more slowly than the nation. Payroll job growth in our Seventh Federal Reserve District is up only 0.6% for September from one year earlier, versus 1.6% in the nation. In some respects, this performance is not surprising since, nationally, manufacturing jobs are still declining (down 1% year over year through September), and the Midwest’s economy is steeped in manufacturing. In addition, the region’s economy is bogged down by the structural change taking place in the automotive industry. Foreign nameplates continue to gain market share from the domestic automakers (previous blog). Since the foreign nameplate companies and their parts suppliers tend to locate in the South, jobs and income are seeping away from the Midwest.

In this regard, comparing the performance between Indiana and Michigan is telling. Though both states rank among the top 3 nationally in manufacturing concentration, the unemployment rate in Michigan stands at 6.1% in Michigan (Oct.) versus 5.4% in Indiana. Year over year, manufacturing payroll job growth is virtually flat in Indiana, but down over 3% in Michigan.

Click to enlarge.

The economies of both states are automotive intensive, but Michigan to an even greater degree. Indiana’s automotive share dominates manufacturing inside the state, at 16%. But Michigan’s automotive sector accounts for 35% of its manufacturing employment. A weakening automotive sector, then, would be felt more sharply in Michigan.

On top this, the auto sector’s performance in Michigan has been worse. From 2001 to date, automotive jobs have fallen 24% in Michigan, compared to 8% in Indiana.

Indiana’s automotive performance is buffered by having a larger share of foreign auto parts and auto assembly plants than Michigan. According to senior economist Thomas Klier, 29% of automotive parts plants in Indiana are foreign owned, as are 2 of its 3 auto assembly plants.

Auto parts makers tend to locate close to their customers. In Indiana, the foreign-owned parts plants are more likely to supply parts to those automakers who are gaining market share—the foreign nameplates.

Michigan’s automakers are only 17% foreign owned; its only foreign owned assembly plant is the Mazda plant, versus its 15 domestic auto assembly plants.

If the current shifts in market share among automakers continue, it will be imperative for Michigan’s economy to attract investments from the successful auto suppliers and auto assembly companies.

Other performance differences between Indiana and Michigan are intriguing, though one cannot draw any hard conclusions. The chart below illustrates the population growth of the largest metropolitan areas in each state—Indianapolis and the Detroit MSA. Indianapolis’ population growth has exceeded the surrounding areas, and far exceeded that of the Detroit metro area.

Click to enlarge.

In searching for explanations, manufacturing concentration again comes to mind. As recently as 1969, only 26% of Indianapolis’ overall employment was manufacturing, versus Detroit’s 35%. Generally speaking, “factory towns” have had the roughest road in restructuring. As manufacturing employment shrinks, such cities must re-employ larger shares of their work force in new industries and activities. Otherwise, workers move from the area and create a different set of challenges to the town governments. That is, how to efficiently use and maintain their current roads and buildings for a less populous (and sometimes less wealthy) population.

Governance structures may also explain some of the challenges. Central city Detroit has been buffeted by job, population, and income flight, with concentrated poverty left in the wake. Detroit city leaders have been unable or unwilling to climb above the city’s fiscal problems to re-build its economy. To what extent has this failure come about because the central city was isolated from the rest of the metropolitan area (and state), and left to solve profound problems with its own (meager) resources?

Indianapolis and other cities have taken some modest steps in consolidating local governance to a closer fit with their metropolitan-wide economies. In the late 1960s, Indianapolis moved toward a “Unigov” structure. As Rick Mattoon discusses (working paper), the city’s boundary was expanded from 82 square miles to 402 square miles, with a legislative body responsible for governing the city. Though there remain many independent governments, taxing authorities, and school districts within the city, the consolidated city has six administrative departments below the mayor’s office.

Other Midwest cities with elements of regional governance include Minneapolis–St. Paul, which has a metropolitan sharing of property tax base. Columbus, Ohio, has not consolidated, yet its central city government has been aggressive in annexing land outward toward its interstate beltway. Both metropolitan economies have outgrown the broader Midwest.