Category Archives: Seventh District

Seventh District Update, March 2016

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First, a (repeat) special announcement: As a Midwest Economy blog reader, you may also want to sign up to follow our new Chicago Fed Survey of Business Conditions (CFSBC), which is a survey of business contacts conducted to support the Seventh Federal Reserve District’s contribution to the Beige Book. The Chicago Fed produces diffusion indexes based on the quantitative questions in the survey. Click here to sign up for email alerts and click here to view the latest release.

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

  • Overall conditions: Economic activity continued to increase at a modest pace, but turmoil in financial markets led contacts to express greater uncertainty and more pessimism about the pace of growth over the next 6 to 12 months.
  • Consumer spending: Growth in consumer spending continued at a modest pace, though new and used vehicle sales continued to be strong.
  • Business Spending: Most retailers reported comfortable inventory levels. Current capital spending and plans for future outlays both picked up some, but growth remained modest. The pace of hiring also picked up some, but growth remained slow. More contacts noted plans to increase their workforces over the next 6 to 12 months than in the previous reporting period.
  • Construction and Real Estate: Residential construction expanded modestly, and residential rents, home sales, and home prices all inched up. Nonresidential construction activity was little changed. Commercial real estate activity remained strong, fueled by demand from institutional investors.
  • Manufacturing: Gains in manufacturing production continued at a moderate pace. Growth remained strong in the auto and aerospace industries, but was slower in most other industries.
  • Banking and finance: Financial conditions tightened slightly on balance. Contacts reported that concerns about slower global economic growth led to declines in equity markets. Business and consumer loan demand grew slightly.
  • Prices and Costs: Cost pressures continued to be subdued. Commodity prices remained low, retail prices were little changed, and wage and nonwage cost pressures remained mild.
  • Agriculture: Crop farmers continued to cut capacity following another year of low incomes coupled with unexpectedly small declines in input costs.

The Midwest Economy Index (MEI) moved up to –0.15 in December from –0.20 in November. The relative MEI rose to +0.28 in December from +0.08 in November. December’s value for the relative MEI indicates that Midwest economic growth was somewhat higher than what would typically be suggested by the growth rate of the national economy.

The Chicago Fed Survey of Business Conditions (CFSBC) Activity Index edged down to –19 from –17, suggesting that growth in economic activity continued at a modest pace in January and early February. The CFSBC Manufacturing Activity Index rose to –7 from –18, while the CFSBC Nonmanufacturing Activity Index declined to –25 from –16.

Introducing the Chicago Fed Survey of Business Conditions (CFSBC)

On January 13, 2016, the Chicago Fed published the inaugural release of its Survey of Business Conditions (CFSBC). This new data product offers a series of diffusion indexes that track a broad set of topics related to the business conditions of firms in the Seventh District: overall activity (or product/service demand), outlook for the U.S. economy, current and planned hiring, current and planned capital spending, and wage and nonwage cost pressures.

The indexes are derived from questions included in a survey of Seventh District business leaders (started in March 2013) that was originally designed to support the Chicago Fed’s contribution to the Beige Book. Table 1 shows that CFSBC respondents come from a variety of industries, with the largest representation coming from the nonfinancial services sector and the manufacturing sector. The survey has averaged about 75 respondents over its history, though more recent surveys have averaged about 100 respondents.

CFSBC - 1 - Tab1

While the Beige Book is explicitly an anecdotal (or qualitative) account of current economic conditions, we decided to also include quantitative questions in our survey so that we can calculate indexes. These questions follow a seven-point scale. For example, here is our question about product/service demand:[1]

In the past four to six weeks, demand for my firm’s product or service has

  • increased substantially.
  • increased moderately.
  • increased slightly.
  • not changed.
  • decreased slightly.
  • decreased moderately.
  • decreased substantially.

The diffusion indexes we calculate from questions such as the one above are designed to be leading indicators, capturing changes in the prevailing direction of economic activity. The formula for the indexes is:

CFSBC - 4 - Formula 2

In many ways, this is a very traditional formula for a diffusion index, but we make an important adjustment that we would argue improves it: we measure individuals’ responses relative to their respective average responses. To calculate a respondent’s average response to a question, we assign numerical values ranging from +3 to –3 along the seven-point scale, and take the average across all responses. We then count a response as positive if it is above a respondent’s average response and negative if it is below a respondent’s average response. For example, if a respondent’s average response is +1.5, substantial and moderate increases are counted as positive responses and all other answers are counted as negative responses. Given our formula, the index ranges from +100 to –100 and will be +100 if every respondent in a given survey has an above-average response to a question and –100 if every respondent has a below-average response.

Calculating the indexes using a survey participant’s average response as a baseline—also known as detrending—allows us to correct for two types of potential biases. First, individuals may interpret phrases such as “substantially increased” differently, so that our numerical scores have different meanings for different people. Second, the industries and firms represented in our data may have different growth trends than the overall economy, which could bias the indexes because we do not have a random sample of respondents. For example, because manufacturers represent a sizable share of our respondents, our index could overrepresent trends in the manufacturing sector. The share of manufacturing output and employment in the U.S. economy has been declining for decades, so that in general, trends in the manufacturing sector are becoming less and less representative of trends in the overall economy.

Respondents’ respective average answers to a question can be interpreted as representing their historical trends or long-run averages. Thus, when we summarize respondents’ detrended responses by calculating diffusion indexes, we interpret zero index values to indicate that, on balance, the activity indicators are growing at their trend rates (or that outlooks are neutral). Likewise, positive index values indicate above-average growth (or optimistic outlooks) on balance, and negative values indicate below-average growth (or pessimistic outlooks) on balance.

For a concrete example of how we interpret the diffusion indexes, consider figure 1, which shows the CFSBC Activity Index (which is based on the question about product/service demand). It shows that 2013 was a bumpy year, with growth in activity about at trend on average. According to the index, 2014 started slowly (as you may recall, there was a lot of bad weather in the winter of 2014–15), but growth was consistently above trend for the rest of the year. Activity then slowed throughout 2015 to the point that growth was below trend by year’s end.

CFSBC - 2 - BBAct

We’ve found that the CFSBC Activity Index seems to do a good job of tracking U.S. real gross domestic product (GDP) growth, so that the index may be a good early indicator of the current state of the economy. Figure 2 shows this relationship, where I’ve aligned a zero value of the CFSBC Activity Index with the average of real GDP growth over the comparison date range. In general, the CFSBC Activity Index is positive when real GDP growth is above average and negative when real GDP growth is below average.

CFSBC - 3 - ActGDP

Because we use the results of the CFSBC to write our contribution to the Beige Book report, we will be releasing the CFSBC index data in conjunction with the Beige Book schedule. The Beige Book is released at 1:00 p.m. ET on the Wednesday two weeks before FOMC meetings, which take place eight times per year. The CFSBC index data are released two hours later.

For a more detailed description of the diffusion indexes and their properties, see the Chicago Fed Economic Perspectives article titled “The Chicago Fed Survey of Business Conditions: Quantifying the Seventh District’s Beige Book Report.”

[1] The full set of questions used for the CFSBC indexes is available here.

Seventh District Update, January 2016

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First, a special announcement: As a Midwest Economy blog reader, you may also want to sign up to follow our new Chicago Fed Survey of Business Conditions (CFSBC), which is a survey of business contacts conducted to support the Seventh Federal Reserve District’s contribution to the Beige Book. The Chicago Fed produces diffusion indexes based on the quantitative questions in the survey. Click here to sign up for email alerts and click here to view the latest release.

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

  • Overall conditions: Economic activity continued to increase at a modest pace, but contacts were optimistic that growth would pick up some over the next 6 to 12 months.
  • Consumer spending: Growth in consumer spending continued at a modest pace, though new and used vehicle sales continued to be strong.
  • Business Spending: Most retailers reported comfortable inventory levels. Current capital spending and plans for future outlays both picked up some, but growth remained modest. The pace of hiring remained slow, though more contacts noted plans to increase their workforces over the next 6 to 12 months than in the previous reporting period.
  • Construction and Real Estate: Residential construction edged up, and residential rents, home sales, and home prices increased slightly. Although commercial real estate activity slowed some, it remained strong and broad-based. Commercial rents increased slightly.
  • Manufacturing: Gains in manufacturing production picked up to a moderate pace. Growth remained strong in the auto and aerospace industries and picked up slightly in most other industries.
  • Banking and finance: Financial conditions tightened slightly on balance. Contacts noted greater illiquidity in the bond market, growth in small and middle-market business loan demand slowed slightly, and consumer loan demand was little changed.
  • Prices and Costs: Cost pressures continued to be subdued. Commodity prices remained low, retail prices were little changed, and wage and nonwage cost pressures remained mild.
  • Agriculture: District farm incomes declined as the large harvest pushed product prices down faster than input costs.

The Midwest Economy Index (MEI) moved down to –0.17 in November from –0.14 in October. The relative MEI rose to +0.13 in November from –0.32 in October. November’s value for the relative MEI indicates that Midwest economic growth was slightly higher than what would typically be suggested by the growth rate of the national economy.

The Chicago Fed Survey of Business Conditions (CFSBC) Activity Index declined to –17 from –12, suggesting that growth in economic activity continued at a modest pace in late November and December. The CFSBC Manufacturing Activity Index rose to –20 from –37, and the CFSBC Nonmanufacturing Activity Index fell to –16 from zero.

Understanding the Seventh District’s economic slowdown in 2015

As I noted on this blog in February 2015, 2014 was a pretty good year for the Seventh District. Real District gross state product (GSP) grew 1.2%, the unemployment rate fell from 7.3% to 5.8%, and payroll employment grew 1.5%. The strong finish to 2014 led me to feel quite optimistic for how 2015 would turn out. Unfortunately, it has become increasingly clear that economic activity in the Seventh District has steadily slowed as 2015 has progressed. While the District is certainly not in recession, it is now likely growing at a below-trend pace. In this blog post, I provide evidence of the slowdown and explore how the fortunes of District states’ signature industries have both contributed to and helped mitigate the slowdown.

While we wait for the GSP data for 2015 to be released (due out in June), arguably the best overall indicator we have for 2015 District economic activity is our Midwest Economy Index [1] (I should note here that we will be releasing a new survey-based activity index later this month). Figure 1 shows values for the MEI from 2014 to the present. The index was well above zero throughout 2014, indicating that growth was consistently above trend. Just as 2015 began, the index began to decline, and it entered negative territory in June. The most recent reading of the MEI (for November 2015) indicates that District growth is somewhat below trend.

1-MEI

Some important indicators included in the calculation of the MEI are payroll employment, the regional Purchasing Manager Indexes (PMIs) [2], and per capita personal income. Not surprisingly, they also largely suggest that economic activity in the District slowed in 2015. Figure 2 shows that while District payroll employment grew by an average of 23,000 jobs per month in 2014, the pace of growth slowed to only about 12,000 new jobs per month in 2015. Figure 3 shows the simple average of the five PMIs available for the Seventh District. This average also indicates that economic activity declined notably starting in 2015. As a counterpoint, figure 4 shows that the pace of growth in real personal income per capita has not slowed much in 2015: The annualized growth rate for 2014 was 3.08% and the available data for 2015 (through Q3) indicate that the annualized growth rate has only slowed to 2.94%.

2&3-Emp&PMIs

4-RIPC

While the preponderance of evidence suggests that Seventh District economic activity slowed in 2015, it turns out that the experiences of individual states within the District have been quite different. Figure 5 shows the sum of the contributions to the MEI for the eastern states of the District (Indiana and Michigan) and the sum for the western states of the District (Illinois, Iowa, and Wisconsin). Growth in 2014 was above the District’s long run trend in both sub-regions, but the western states outperformed the eastern states. The pace of activity in the eastern states picked up steadily through the first half of 2015 and has since slowed to near the District’s trend. This experience contrasts quite notably with that of the western states. Activity in these states began to slow at the end of 2014 and continued to slow until the middle of 2015, at which point conditions improved some.

5-WEMEIs

One approach to understanding the different experiences of eastern and western District states is to do an economic base analysis for each state. Such an analysis identifies the industries whose employment is especially concentrated in a state (and therefore likely quite important for the state’s economy) by calculating a location quotient (LQ). A location quotient is the ratio of the share of employment in an industry in a state to the share of employment in an industry in the U.S. as a whole:

Formula

As an example, if the machinery industry’s share of employment in Michigan is 1.3% and the machinery industry’s share of employment in the U.S. is 1%, then the location quotient is 1.3, and we say that the machinery industry is 30% more concentrated in Michigan than in the U.S. as a whole.

For this blog post, I calculate location quotients for each state for each of the 3-digit NAICS industries that are available from the Bureau of Labor Statistics’ (BLS) payroll employment survey.[3] I then consider the industries in each state with a location quotient greater than 1.5. This approach successfully identifies the signature industries one typically thinks of for each state in the District. For example, the analysis picks up Michigan’s auto industry, Indiana’s steel industry, and Illinois’s, Iowa’s, and Wisconsin’s machinery industry.

Table 1 shows the high-location quotient industries for Indiana and Michigan, along with the percentage of overall employment the industry represents and the year-over-year employment growth rate of the industry from November 2014 to November 2015. With the exception of the primary metals industry (where employment fell by 0.93%), employment grew for all of Indiana’s high-LQ industries and was solid for most of them. The story is even clearer in Michigan, where the auto industry dominates. Employment in the transportation equipment industry grew 4.59% over the past year.

To summarize the overall growth of District states’ flagship industries, I calculate the average growth rate for the industries, weighted by their relative size. Employment in Indiana’s flagship industries grew 1.35% over the past year, while employment in Michigan’s flagship industries grew 3.38%. Thus, even though the pace of growth in economic activity slowed in Indiana and Michigan in the second half of 2015, it was still a good year for both states.

6-Table 1

The story is more mixed for the states in the western part of the District (table 2). Machinery (and the fabricated metal producers who support them) has not faired well in the past year: Illinois, Iowa, and Wisconsin all saw notable declines in machinery and fabricated metal employment (with the exception of Wisconsin’s machinery employment, which was flat). However, Iowa and Wisconsin were helped by strong growth in other flagship industries (food products in both Iowa and Wisconsin and finance in Iowa). Illinois has few other flagship industries to help it, though it’s worth noting that Chicago has fared much better than downstate Illinois because of its concentration in business services and finance. Average employment growth for Illinois’s high-LQ industries was dismal (-2.04%), while growth was solid for Iowa’s (1.58%), and slow for Wisconsin’s (0.73%). Thus, although some flagship industries have done well in the western states in the District, the struggles of the machinery industry appear to have put quite a damper on their economic performance.

7-Table 2

So we see that the overall slowdown in the District in 2015 was not a shared experience across District states. The eastern states (Michigan and Indiana) did notably better than the western states (Illinois, Iowa, and Wisconsin) and these differences are relatively consistent with the performance of states’ flagship industries. What does the future hold for these flagship industries? At the moment, it’s hard to find much evidence that there will be a significant reversal of fortunes in 2016. The auto industry is likely to continue to benefit from steady growth in the U.S. economy and low gasoline prices, while the machinery industry is likely to continue to suffer from weaker global growth and depressed commodities prices (which hurt demand for both mining and agriculture machinery).

That said, while flagship industries certainly play an important role in a state’s economy because of all the related industries that support them, there are still many industries that are not closely related to them. For example, Iowa’s contribution to the MEI has been negative for most of 2015 (not shown), likely because of the struggles in the farming industry (see the Chicago Fed’s latest AgLetter for more details). The converging trends in the MEI (figure 5) suggest that these other factors are also making their presence known.

[1] The MEI is a weighted average of 129 Seventh District state and regional indicators measuring growth in nonfarm business activity from four broad sectors of the Midwest economy: manufacturing, construction and mining, services, and consumer spending.

[2] The PMIs included in the index are for Chicago, Iowa, Detroit, and Milwaukee.

[3] Data are not available for all 3-digit NAICS industries because there is not sufficient employment in some industries in some states for the BLS to be able to cover them accurately.

Seventh District Update, December 2015

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

  • Overall conditions: Growth in economic activity in the Seventh District continued at a modest pace in October and early November.
  • Consumer spending: Growth in consumer spending continued at a modest pace, though new and used vehicle sales continued to be strong.
  • Business Spending: Most retailers reported comfortable inventory levels. Current capital spending slowed and now appears in line with modest plans for capital outlays. The pace of hiring slowed notably, particularly for non-auto-related manufacturers, and hiring plans remained modest.
  • Construction and Real Estate: Demand for residential construction increased moderately, though home sales and the pace of home price growth have slowed. Commercial real estate activity continued to increase moderately, while commercial rents increased slightly.
  • Manufacturing: Manufacturing production growth slowed to near zero in October and early November. Although the auto industry continued to experience solid gains, most other industries saw limited growth or reported declines in activity.
  • Banking and finance: Credit conditions were little changed on balance. Loan demand from large and middle market firms fell; however, small business lending ticked up. Consumer loan demand increased slightly, with multiple contacts citing strong demand for auto loans.
  • Prices and Costs: Cost pressures continued to be subdued. Steel prices declined, while the prices of other primary metals and energy remained low. Most retailers reported stable pricing and wage pressures were mild.
  • Agriculture: District corn and soybean harvests exceeded expectations, and most agricultural commodity prices fell.

The Midwest Economy Index (MEI) moved up to –0.14 in October from –0.17 in September. The relative MEI increased to –0.23 in October from –0.34 in September. October’s value for the relative MEI indicates that Midwest economic growth was somewhat lower than what would typically be suggested by the growth rate of the national economy.

Seventh District Update, October 2015

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

  • Overall conditions: Growth in economic activity in the Seventh District slowed to a more modest pace in late August and September, but most contacts expected growth to pick up somewhat over the next 6 to 12 months.
  • Consumer spending: Growth in consumer spending slowed to a more modest pace over the reporting period, though new and used vehicle sales continued to be strong.
  • Business Spending: Most retailers reported comfortable inventory levels, while many manufacturers indicated an undesirable increase in inventories. The pace of hiring and capital spending remained moderate, but many contacts reduced plans for future hiring and capital expenditures.
  • Construction and Real Estate: The pace of residential construction was unchanged. Residential rents, home prices, and home sales were also little changed, though residential rents increased modestly. Commercial real estate activity again increased moderately.
  • Manufacturing: Growth in production slowed to a more modest pace in spite of strong growth in the auto and aerospace industries. Capacity utilization in the steel industry remained low and sales of heavy machinery remained weak.
  • Banking and finance: Credit conditions were little changed. Financial market volatility declined, but remains high. Business and consumer loan demand increased slightly.
  • Prices and Costs: Cost pressures remained subdued. Energy and steel prices declined, while the prices of other primary metals remained low. Most retail prices changed little and wage pressures remained mild.
  • Agriculture: Corn and soybean crop conditions improved some as the harvest began, while the profitability of crop operations ranged from substantial losses to break-even. Wheat and milk prices moved up, while hog, cattle, and egg prices moved down.

The Midwest Economy Index (MEI) ticked down to −0.12 in August from −0.11 in July. The relative MEI declined to −0.23 in August from −0.06 in July. August’s value for the relative MEI indicates that Midwest economic growth was somewhat lower than what would typically be suggested by the growth rate of the national economy.

Seventh District Update, September 2015

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

  • Overall conditions: Growth in economic activity in the Seventh District was moderate in July and early August, and most contacts expect activity to rise at a similar pace over the next 6 to 12 months.
  • Consumer spending: Growth in consumer spending continued at a moderate pace. New and used vehicle sales continued to be strong.
  • Business Spending: Growth in business spending remained moderate. Overall, inventory levels were comfortable, though steel service center inventories were slightly elevated. The pace of hiring and capital spending remained moderate.
  • Construction and Real Estate: Residential construction ticked up, while residential rents, home prices, and home sales all increased slightly. Demand for nonresidential construction edged up and commercial real estate activity again increased moderately.
  • Manufacturing: Growth was again moderate, as the auto and aerospace industries continued their strong advance. Capacity utilization in the steel industry remained low. Sales of heavy trucks grew steadily, while sales of heavy machinery remained weaker.
  • Banking and finance: Credit conditions were little changed. Financial market volatility was higher, while credit spreads were largely unchanged. Business loan demand weakened some, while consumer loan demand was up slightly.
  • Prices and Costs: Cost pressures were subdued. Energy prices remained low, as did prices of steel and other primary metals. Most retail prices changed little and wages pressures remained mild.
  • Agriculture: The condition of the corn and soybean crops was uneven across the District, with record yields possible in some areas and low yields likely in others. Corn, soybean, and wheat prices declined. Hog prices were flat, dairy moved up, and cattle prices moved down. The recovery from the bird influenza has been slow, pushing egg prices up again.

Led by declines in the construction and mining sector, the Midwest Economy Index (MEI) decreased to −0.12 in July from a neutral reading in June. The relative MEI declined to −0.08 in July from +0.12 in June. July’s value for the relative MEI indicates that Midwest economic growth was slightly less than what would typically be suggested by the growth rate of the national economy.

Seventh District Update, July 2015

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

  • Overall conditions: Growth in economic activity in the Seventh District was moderate in late May and June, with the pace of advance appearing to be a bit slower than during the previous reporting period.
  • Consumer spending: Growth in consumer spending continued at a moderate pace. Non-auto retail sales slowed in late May but strengthened in June. Auto sales strengthened further, leading dealers to revise up their expectations for 2015.
  • Business Spending: Growth in business spending remained moderate. Overall, inventory levels were comfortable, though steel service center inventories remained elevated. Both the pace of capital spending and hiring was little changed.
  • Construction and Real Estate: Demand for residential construction was steady. Home sales, home prices, and residential rents all increased modestly. Nonresidential construction activity also increased modestly, while commercial real estate activity increased moderately.
  • Manufacturing: Growth was again moderate, as the auto industry continued its strong advance. Capacity utilization in the steel industry picked up some, but remained low. Sales of heavy trucks grew steadily, while sales of heavy machinery remained weaker.
  • Banking and finance: Credit conditions were little changed. Financial market volatility was slightly higher, while credit spreads declined marginally. Business and consumer loan demand both were little changed on balance.
  • Prices and Costs: Cost pressures were subdued. Energy prices remained low, as did prices of steel and other primary metals. Most retail prices changed little and wages pressures remained modest.
  • Agriculture: Widespread rains damaged crops and restricted fieldwork. Corn, soybean, and wheat prices rose as yield expectations declined. Both higher feed costs and lower prices for hogs, milk, and cattle hurt livestock producers’ margins. Egg prices remained elevated, as bird flu continued to hurt production.

Led by a slight decrease in service sector growth, the Midwest Economy Index (MEI) moved down to +0.17 in May from +0.28 in April. The relative MEI fell to +0.55 in May from +0.86 in April. May’s value for the relative MEI indicates that Midwest economic growth was somewhat higher than would typically be suggested by the growth rate of the national economy.

Seventh District Update, June 2015

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

  • Overall conditions: Growth in economic activity in the Seventh District remained moderate in April and early May, and contacts expected growth to continue at a similar pace over the next six to twelve months.
  • Consumer spending: Growth in consumer spending was moderate. Non-auto retail sales were steady, while auto sales continued their strong pace.
  • Business Spending: Growth in business spending remained moderate. Overall, inventory levels were comfortable, though steel service center inventories remained elevated. Both the pace of capital spending and hiring picked up some.
  • Construction and Real Estate: Demand for residential construction ticked up. Home prices and residential rents were up slightly. Nonresidential construction activity was somewhat higher, while commercial real estate activity grew at a strong pace.
  • Manufacturing: Growth was again moderate. The auto and aerospace industries remained a source of strength and capacity utilization in the steel industry increased some. Sales of heavy machinery and heavy trucks again grew slowly.
  • Banking and finance: Credit conditions continued to improve. Financial market volatility remained low and credit spreads declined slightly. Business loan demand ticked up, but consumer loan demand flattened with the exception of mortgage originations.
  • Prices and Costs: Cost pressures were little changed overall. Energy and metals prices were up slightly, but remained low. Retail prices were little changed and wage pressures increased slightly.
  • Agriculture: Corn and soybean planting proceeded rapidly, exceeding the pace of last spring. Higher output pushed down milk prices further, hog prices increased some, and cattle prices remained high. Poultry flocks were hit hard by bird flu, raising egg prices.

The Midwest Economy Index (MEI) ticked down to +0.29 in April from +0.33 in March. The relative MEI edged up to +0.95 in April from +0.90 in March. April’s value for the relative MEI indicates that Midwest economic growth was moderately higher than would typically be suggested by the growth rate of the national economy.

“Early Benchmarking” the State Payroll Employment Survey

One of the most important sources of information we have on current economic conditions is the Bureau of Labor Statistics’ (BLS) Current Employment Statistics (CES) program (also known as the payroll survey). The payroll survey reports monthly estimates of nonfarm payroll employment, hours, and earnings at the national, state, and metro area levels. Because the CES covers only a representative sample of employers, the BLS is able to release the results of the survey in a timely manner (typically three weeks after the reference month at the U.S. level, eight weeks after at the state level, and ten weeks after at the metro area level). At the same time, relying on a survey—instead of a census—means the results are subject to sampling error. The BLS does revise the CES estimates to address sampling error. With each new monthly release, it adjusts the two previous months’ estimates; and once a year in March, it revises the two previous calendar years at the U.S. level and the five previous calendar years at the state and metro area levels.1 In this blog post, I discuss a method pioneered by researchers at the Dallas Fed to predict the once-a-year revisions at the state level as many as nine months in advance. These predictions can provide valuable information, because state-level revisions can be substantial.

For their state CES estimates, the BLS relies primarily (but not entirely) on a sample of about one-third of the universe of employers that participate in states’ unemployment insurance (UI) programs. The information on employment and earnings from all employers participating in UI is eventually reported under the BLS’s Quarterly Survey of Employment and Wages (QCEW) program, with a delay of six months from the reference period. As noted above, in March of each year, the BLS revises state-level CES data for the prior five calendar years, using the previously unavailable QCEW data as a benchmark.2 It is important to note here that QCEW is only a benchmark (not the final answer), because the CES and the QCEW do not cover the same universe of workers. The CES does not count farm workers, but it does count the 3 percent of nonfarm workers who do not receive unemployment insurance. The QCEW only counts workers with unemployment insurance, which includes some farm workers. Because their universes are not exactly the same, the CES and QCEW have different levels. However, they overlap enough that their trends are about the same.

While the BLS rebenchmarks the payroll survey data once a year, the QCEW data are released four times a year (three months at a time). And because the payroll survey uses the QCEW as its benchmark, it is possible to use newly released QCEW data to predict how the BLS will eventually revise the CES data. For example, table 1 shows when the new QCEW data used for the March 2015 rebenchmark became available. Data for the fourth quarter of 2013 were available nine months before they were used to benchmark the CES. And by December 2014, it was possible to have a good idea of how the CES would be revised through the second quarter of 2014, even though the BLS had only revised the CES through the third quarter of 2013.

In what follows, I explain a method for “early benchmarking” the state payroll survey data pioneered by researchers at the Dallas Fed (explained by them here). I then look at how the method performed at predicting the March 2015 revisions for the five states in our Seventh Federal Reserve District.

early_bench_table1

The method begins with the last month of CES data that are benchmarked to the QCEW. From then on, monthly changes are calculated using growth rates from the (seasonally adjusted) QCEW, not the CES. Once the QCEW data run out, monthly changes are again calculated using the CES. In essence, the method amounts to substituting in growth rates from the QCEW data that are newly available but have not yet been used to benchmark the CES.

Figure 1 shows the early benchmarking method visually for the Seventh District states using the data available in December 2014.3 The blue line is the CES, where the dashed portion of the line represents months that have not been benchmarked by the QCEW. The green line is the QCEW; and it is clear that while the CES and the QCEW have different levels, their trends are quite similar. The red line is the early benchmarked version of the CES. The solid portion of the red line is the path generated by monthly growth rates from the QCEW, and the dashed portion of the red line is the path generated by monthly growth rates in the remaining CES data.

F1-EBEG

 

How did the early benchmarking procedure do at predicting the March 2015 CES rebenchmark? Figure 2 shows the revised payroll survey data from March 2015 in black. The QCEW-benchmarked data now go through the third quarter of 2014. Overall, the early benchmarked CES series appears to predict the most recent rebenchmarking of the CES better than the March 2014 rebenchmarked CES series does. This is especially true before the QCEW data run out in June 2014.

F2-EBE_di

One way to measure the accuracy of a forecast is to calculate its root mean squared error. Table 2 shows the root mean squared error for predictions of the March 2015 rebenchmarked CES using the March 2014 rebenchmarked CES and the early benchmarked CES. The early benchmarked CES performs as well or better at both the District and state levels. At the District level, the early benchmarked CES is typically about 31,000 jobs off, while the March 2014 rebenchmarked CES prediction is typically about 51,000 jobs off. In the case of Michigan, the early benchmarked CES performed substantially better. Figures 3 through 7 show the state-level comparison. Taken as a whole, these results demonstrate that early benchmarking the CES provided a tangible improvement in measuring growth in the Seventh District over the last year or so.

early_bench_table2

F3-EBE_il

F4-EBE_in

F5-EBE_ia

F6-EBE_mi

F7-EBE_wi

  1. For example, in March 2015, the BLS revised data for 2013–14 at the U.S. level and 2009–14 at the state and metro-area levels.
  2. While the new QCEW data only cover the previous year, the revisions go back five years because the BLS also recalculates its seasonal adjustment factors.
  3. I calculate the early benchmark series for the Seventh District by summing the early benchmark series for the District states.