All posts by Thomas Walstrum

Seventh District Update, October 2014

blog_image_7th_D

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 September, and contacts maintained their optimistic outlook for the rest of the year.
  • Consumer spending: Consumer spending was led by continued strength in auto sales. Non-auto spending increased slightly, as growth picked up for discretionary spending categories. Retail contacts generally expected that holiday sales would be up slightly relative to a year ago.
  • Business Spending: Capital expenditures and spending plans increased, as a number of manufacturing contacts reported plans for expansion in the near future. Both actual hiring and hiring plans increased at a moderate pace, and many contacts reported slightly higher turnover.
  • Construction and Real Estate: Residential and nonresidential construction increased. Growth in home sales and prices slowed somewhat, while vacancies ticked down and leasing of industrial buildings, office space, and retail space all increased.
  • Manufacturing: The auto, aerospace, and energy industries remained a source of strength. Demand for steel increased and demand for heavy machinery picked up some on net, as higher demand for construction machinery overshadowed weakness for ag and mining machinery.
  • Banking and finance: Credit conditions were mixed. Equity market volatility increased and corporate bond spreads widened, even as business and consumer lending increased.
  • Prices and Costs: Energy costs declined, while steel and aluminum prices increased. Retail prices were down slightly as contacts reported more generous sales promotions. Overall, wage pressures were modest, and non-wage labor costs changed little.
  • Agriculture: Overall crop conditions were very good and the District should see record corn and soybean harvests. The huge anticipated harvests pushed down corn and soybean prices.

The Midwest Economy Index (MEI) decreased to +0.55 in August from +0.63 in July, but remained above average for the fifth straight month. The relative MEI edged down to +0.26 in August from +0.31 in the previous month. August’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.

Gross State Product Growth and the Midwest Economy Index

In August 2014, the U.S. Bureau of Economic Analysis (BEA) published prototype quarterly estimates of gross state product (GSP). In releasing this quarterly supplement to its existing semiannual releases of annual GSP, the BEA noted that the availability of higher-frequency information on state output should help researchers to better understand national and regional business cycles.

In this blog entry, we take another look at the GSP data for the five states of the Seventh Federal Reserve District to see how they compare with the Midwest Economy Index (MEI) produced by the Chicago Fed.1 We find that the MEI is highly correlated with the new quarterly GSP data; moreover, the MEI remains timelier as an indicator of the Midwest business cycle because it is released on a monthly basis.

In 2011, the Chicago Fed began providing four times a year estimates of annual gross state product growth for each of the five states in the Seventh Federal Reserve District2 as an accompaniment to its MEI release.3 Using the forecasting model underlying these estimates and the BEA’s new quarterly GSP data, we extend our annual projections to include quarterly GSP growth. Below, we present what we’ve forecasted for each District state through the first half of 2014.

The MEI and GSP growth

The MEI is a weighted average of 129 state and regional indicators that measure growth in nonfarm business activity. Two separate index values are constructed, the MEI (providing an absolute value), which captures both national and regional factors driving Midwest economic growth, and the relative MEI (providing a relative value), which presents a picture of the Midwest’s economic conditions relative to the nation’s.

Both indexes are business cycle indicators capturing deviations in growth around a historical trend. MEI values above zero indicate growth above a Midwest historical trend, and values below zero indicate growth below trend. For the relative MEI, a positive value indicates that Midwest growth is further above its trend than would typically be suggested based on the current deviation of national growth from its trend, while a negative value indicates the opposite.

Together, the MEI and relative MEI provide a picture of the Seventh District’s state economies that is closer to being in real time than does the BEA’s GSP data. To see this, consider figure 1, which plots the MEI and the year-over-year gross domestic product (GDP) growth for all five District states combined using the BEA’s annual and quarterly data. The correlation here is quite striking, with the major difference being that the MEI is often released six months to a year (or more) in advance of the quarterly or annual GSP data.4

blog_figure1

Forecasting annual and quarterly GSP growth

By exploiting the historical correlation between annual GSP growth in each of the five District states and the MEI, we have been producing quarterly estimates of annual GSP growth since 2011. The statistical model we use to explain the annual growth in GSP for each Seventh District state is shown below.

The model succinctly summarizes the historical relationships between national (real GDP growth), regional (MEI and relative MEI), and state-specific (lagged GSP and state real personal income growth) factors driving each Seventh District state’s annual GSP growth since 1979.

We use a similar model applied to quarterly data to assess how well we can predict growth in the BEA’s new quarterly estimates of GSP. Before we do so, we review the annual GSP growth model. The regression coefficients estimated for our annual model using data through 2013 are listed in table 1. Each coefficient represents the “effect” of an input on GSP growth. For example, a 1% increase in real U.S. GDP growth leads to about a 0.5% increase in GSP growth on average across the     Seventh District states (first row of the table).

blog_table1

The historical fit of our annual model varies across the five District states, as seen in their root mean-squared errors (RSME) (next to last row of the table). To put these deviations in perspective, we generated figure 2, which plots the actual annual GSP growth for each state, as well as GDP growth for the United States (blue bars), against the fitted values from the regression (red lines). The model does quite well at predicting Illinois’s and Wisconsin’s GSP growth rates, which tend to be less volatile and more closely resemble U.S. GDP growth. Its worst fit is for Iowa’s GSP growth rate, largely because it does a poor job of capturing fluctuations in agricultural conditions.

blog_figure2

We now extend our analysis using the BEA’s quarterly GSP data. To predict GSP growth for the first and second quarters of 2014, we estimate a “bridge equation” for each District state linking current and previous values of the monthly MEI and relative MEI to its quarterly annualized GSP growth, where the number of monthly lags spans both the current and previous quarters.5 We also include the current and previous quarters’ state real personal income growth and the previous quarter’s annualized GSP growth. We estimate the model on data from 2005 through 2013 and then project forward two quarters.

Figure 3 displays the quarterly regressions’ fitted values (red lines) against actual quarterly annualized GSP growth (blue bars). As our model did with the annual GSP data, it fits quite well for the majority of District states’ GSP growth rates. The green lines in the figure denote the forecasts for the first and second quarters of 2014. We project declines in GSP growth for District states in the first quarter that are largely offset by second quarter growth—consistent with U.S. data. The green lines in figure 2 depict similar annual forecasts for the entirety of 2014.

blog_figure3

Our 2014 forecasts

Table 2 shows our complete projections for District states’ 2014 GSP growth rates. Our annual growth projections suggest that Illinois’s growth rate will be closer to the District average in 2014, at around 2%. We project Michigan and Wisconsin to grow at above-average annual rates, while we project below-average growth for Indiana and Iowa. However, our quarterly model projections through the first half of 2014 suggest some downside risk to our annual Michigan and Wisconsin forecasts and upside risk for our annual Indiana and Iowa forecasts.

blog_table2

As we’ve seen from tables 1 and 2, each state’s forecast is affected differently by the five inputs to our model. To further illustrate this point, we break down each state’s projected GSP growth rates into the expected contributions from national, regional, and state factors in table 3. National factors represent the effect of national GDP growth on our state GSP growth forecasts. Regional factors capture the roles played by the MEI and relative MEI, while state factors incorporate the effects of state real personal income growth, as well as the idiosyncratic dynamics of each state’s GSP growth.

blog_table3

State and national factors have played a dominant role so far in 2014, but not every District state is projected to share equally in the national second quarter rebound from the slow start to the year. Regional factors have increased in importance over the course of the year; and with both the MEI and relative MEI showing above-trend growth so far in the third quarter, they are likely to continue to do so in the second half of 2014.

As we work to merge our annual and quarterly forecasting models, we will be reporting both annual and quarterly annualized estimates of District states’ GSP growth in conjunction with the MEI. These projections following the third release of national GDP data are available at www.chicagofed.org/webpages/region/midwest_economy/index_data.cfm.

 

 

  1. This blog entry serves as an update to a previous Chicago Fed Letter examining GSP growth and the MEI, available at www.chicagofed.org/digital_assets/publications/chicago_fed_letter/2011/cfldecember2011_293.pdf.
  2. The Seventh District comprises all of Iowa and most of Illinois, Indiana, Michigan, and Wisconsin. The MEI and our GSP forecasts are for the entirety of each state that lies within the District.
  3. Our estimates of annual GSP growth are made available following the third release of national gross domestic product (GDP) data for each quarter at www.chicagofed.org/webpages/region/midwest_economy/index_data.cfm.
  4. The 2014 release schedule for the MEI and the quarterly GSP growth forecasts can be found at www.chicagofed.org/mei.
  5. A similar model linking quarterly annualized U.S. GDP growth and the Chicago Fed National Activity Index is described in an article available at www.chicagofed.org/webpages/publications/chicago_fed_letter/2010/april_273.cfm.

Seventh District Update, July 2014

By Thom Walstrum and Scott Brave

District%20Map.gif

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 remained moderate in June and contacts maintained their optimistic outlook for the rest of the year.

Consumer spending: Consumer spending increased in June, but the overall pace of growth remained modest. In most cases, retail sales met or fell slightly below expectations. Light vehicle sales rose as consumers continued to enjoy favorable incentives and credit conditions.

Business spending: Business spending continued to grow at a moderate pace in June. Capital expenditures and spending plans continued to increase, with expenditures still concentrated on industrial and IT equipment. Hiring picked up and hiring expectations continued to increase, with the gains more pronounced in the service sector than in manufacturing.

Construction and real estate: Construction and real estate activity increased at a moderate pace in June. Residential construction increased, but home sales declined modestly. Nonresidential construction strengthened considerably and commercial real estate activity continued to expand.

Manufacturing: Manufacturing production continued to grow at a moderate pace in June. The auto, aerospace, and energy industries remained a source of strength for the District. Steel service centers reported improving order books, as did many specialty metal manufacturers. Demand for heavy machinery grew at a slow but steady pace, weighed down by the weakness in mining.

Banking and finance: Credit conditions improved moderately. Corporate financing costs decreased further. Business lending increased, with contacts noting a pickup in demand for financing of equipment and commercial real estate. Growth in consumer loan demand was steady.

Prices and costs: Cost pressures increased, but remained modest. Energy costs remained elevated. Competition put downward pressure on retail prices, but wholesale prices changed little, compressing margins. Wage pressures increased, primarily for skilled workers. Non-wage labor costs were little changed.

Agriculture: The District’s corn and soybean crops made up ground as favorable weather helped plants emerge more quickly than the five-year average. Corn, soybean, wheat, milk and cattle prices moved down, while hog prices moved higher as disease affected supplies.

Led by improvements in the manufacturing sector, the Midwest Economy Index (MEI) increased to +0.41 in May from +0.11 in April, reaching its highest level since December 2013. However, the relative MEI remained negative for the third straight month, after edging down to –0.38 in May from –0.36 in the previous month. May’s value for the relative MEI indicates that Midwest economic growth was moderately lower than would typically be suggested by the growth rate of the national economy.

Seventh District Update

by Thom Walstrum and Scott Brave

District%20Map.gif

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 April and May. Although contacts were expecting a stronger pick-up in growth, they maintained their optimistic outlooks for the remainder of the year.

Consumer spending: Growth in consumer spending increased slightly, but overall remained modest. Several retail contacts reported higher than normal inventories in anticipation of stronger summer sales. Light vehicle sales decreased slightly.

Business Spending: Business spending grew at a moderate pace, led by higher capital expenditures on equipment and software. Hiring plans changed little from the previous period.

Construction and Real Estate: Growth in construction and real estate activity picked up. Residential construction increased, while nonresidential construction continued to expand at a slow pace. Contacts also noted improvement in residential and commercial real estate markets.

Manufacturing: Manufacturing production continued to grow at a moderate pace. Capacity utilization in the auto and steel industries increased as production levels rose. Demand for heavy machinery grew at a slow but steady pace, weighed down by the weakness in mining.

Banking and finance: Credit conditions improved slightly. Corporate financing costs decreased. Business lending increased, driven by commercial and industrial loan demand from small businesses. Growth in consumer loan demand remained modest.

Prices and Costs: Cost pressures increased, but overall were modest. Energy and transportation costs remained elevated. Contacts reported lingering shipment delays of goods and raw materials from the harsh winter weather earlier in the year. Wage pressures rose slightly and non-wage pressures rose moderately.

Agriculture: Corn and soybean planting progressed quickly after precipitation and cool temperatures slowed fieldwork earlier in the spring. Corn and wheat prices were lower, while soybean prices drifted higher. Livestock prices remained well above the levels of a year ago, although hog prices moved lower.

The Midwest Economy Index (MEI) increased to +0.12 in April from –0.04 in March. However, the relative MEI decreased to –0.23 in April from –0.13 in the previous month, remaining negative for the second consecutive month. April’s value for the relative MEI indicates that Midwest economic growth was somewhat lower than would typically be suggested by the growth rate of the national economy.

Seventh District Update

by Thom Walstrum and Scott Brave

District%20Map.gif

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 picked up in March, and contacts generally maintained their optimistic outlook for 2014.

Consumer spending: Growth in consumer spending increased slightly in March, but remained modest. Sales of winter-related items were stronger than normal, while other sales categories, in particular light vehicles, picked up as the weather improved.

Business Spending: Growth in business spending increased to a moderate pace in March. Growth in capital spending picked up. The pace of hiring increased, and while hiring plans decreased slightly, they remained positive.

Construction and Real Estate: Growth in construction and real estate activity was modest in March. Although conditions improved, residential construction and real estate contacts reported that adverse weather continued to restrain growth. Demand for nonresidential construction grew at a moderate pace and commercial real estate activity continued to expand.

Manufacturing: Growth in manufacturing production increased from a mild to moderate pace in March, with contacts from a number of industries reporting increased activity. The auto, aerospace, and energy industries remained a source of strength. Auto and steel production recovered from the weather-related slowdown, while demand for heavy machinery remained soft.

Banking and finance: Credit conditions were again little changed on balance over the reporting period. Corporate financing costs decreased slightly, as bond spreads narrowed. Banking contacts reported moderate growth in business loan demand and modest growth in consumer loan demand.

Prices and Costs: Cost pressures were mild. While energy and transportation costs remain elevated, they were lower than during the previous reporting period. Wage pressures were slightly lower and non-wage pressures moderated.

Agriculture: The slow arrival of spring-like weather delayed fieldwork, but farmers were generally not too worried about the delay. Soybean prices rose relative to corn. The livestock sector moved further into the black, as milk, hog, and cattle prices increased.

The Midwest Economy Index (MEI) decreased to –0.03 in February from +0.32 in January, falling below zero for the first time since June 2013. Moreover, the relative MEI moved down to –0.01 in February from +0.23 in the previous month. February’s value for the relative MEI indicates that the Midwest economy was growing at a rate consistent with national economic growth.

Michigan’s Automotive R&D Part II

By Thomas Klier, Bill Testa, and Thomas Walstrum

The automotive industry is somewhat synonymous with Michigan. This relationship was born of an explosion of technological innovation in Southeast Michigan, including the assembly line and key developments in the internal combustion engine and transmission system. Looking at innovative activity today, a hundred years later, it is not far-fetched to state that the geography of automotive innovation in North America resembles that of yesteryear, with Michigan retaining its dominant role. The state has been highly successful to date in sustaining its leading automotive R&D concentration. Yet, for good reason, policy initiatives in the state are aimed at retaining and building on its strength.

The research and development (R&D) activity of private industry is increasingly being recognized as an important part of the innovation that spurs economic growth and competitiveness. Companies undertake R&D both to improve their production processes for cost and quality and to create wholly new products and services.

Among mainstay U.S. industries, automotive remains one of the most innovative in this regard. R&D that was both financed and performed by U.S. domiciled automotive companies amounted to $11.7 billion in 2011, representing 5.2 percent of total R&D spending. The R&D intensity of automotive manufacturing (as a share of the industry’s value added) is 15.3 percent, compared with 9.2 for all manufacturing, and 1.7 percent for all private industry.[1]

The importance of innovation to automotive companies remains paramount. A recent report by the Boston Consulting Group cited nine automotive companies among the world’s most innovative companies in 2013. The report names several factors behind the innovative burst among automotive companies, including the quickly tightening fuel-efficiency and environmental standards, which have spurred interest in electric and hybrid vehicle technologies. At the same time, auto companies continue to strive to meet ongoing demands for safety, comfort, and performance. Today’s vehicles increasingly comprise advanced electronic and IT components, which are developed both by automotive companies and purchased from technology companies in other industry sectors. By one estimate, “Electronics make up nearly 40% of the content of today’s average new automobile, and their share will continue to grow.” R&D initiatives to enhance the performance and to lower the cost of batteries that may power many of tomorrow’s autos are one example of an important and emerging R&D direction; automatic guidance systems for tomorrow’s (driver-less) cars is another.

Today, Michigan remains the epicenter of automotive R&D in the U.S. The state has maintained its leading place even while production has dispersed throughout the nation. According to data from the National Science Foundation that has been assembled for recent years only, R&D that is both funded and performed by auto companies in Michigan held fast at between 70 and 80 percent of the nation’s total from 1998 to 2011, amounting to $8.87 billion in 2011.

Automotive R&D has propelled Michigan to a leadership position among Midwest states. The table shows Michigan leading the region with $13.7 billion in total business-performed R&D by all industries in 2011, closely followed by Illinois ($12.0 billion), but far ahead of Ohio, Indiana, and Minnesota.[2]

Michigan is also a leader in employment of auto engineers to support long-term R&D and innovation. Drawing on data from the Census and the more recent American Community Survey, we can see how large Michigan’s share of the nation’s automotive engineers is relative to its share of the nation’s work force. Michigan employs over one-half of the nation’s automotive engineers, but its work force overall represents just 3 percent of the nation’s. Granted, Michigan’s share of the nation’s automotive engineers has fallen by ten percentage points since 1980; nonetheless, the state has added 18,000 (two thirds) of its engineers since 1980.

The remarkable importance of automotive technology in Michigan (as represented by engineering workers) can also be understood by comparing it with Michigan’s eroding share of automotive production. By overlaying Michigan’s automotive production workers as a share of the nation on the chart above, the strong role of automotive technology becomes clearer. Since 1950, Michigan’s share of production workers has fallen from 54 to 19 percent, a loss of approximately 255,000 jobs.

And while there are many technologically advanced industries in Michigan—including bio-pharma, medical equipment, industrial chemicals, and office furniture—automotive engineering has come to dominate further in recent decades. As the chart shows, automotive engineers once comprised 30 percent of engineers in all industries in Michigan. By 2012, their share had risen to 51 percent.

What is the future of automotive R&D in Michigan; will the region’s extreme concentration in the activity continue? There are no hard and fast answers, yet there are identifiable features that will come into play. On the one hand, there are many historical instances of geographically concentrated centers being very cohesive and long-lived. Once established, such “clusters” tend to grow and feed on themselves. Technology activity is drawn to technology activity. Skilled workers are drawn to activity-rich cities, and companies are, in turn, drawn toward pools of skilled workers. For example, global financial centers such as New York and London have held their dominant positions for many decades, even centuries. The San Francisco Bay area has enjoyed a long run of dominance in the areas of IT and biotech. In a similar way, Michigan’s established leadership in automotive R&D may persist.

On the other hand, company reorganizations and the geographical shifting of activities that tend to be interdependent with technological activities represent risks to Michigan’s position. It may be beneficial for some industries to locate technology and production in close proximity to facilitate (and reduce the cost of) communication and transportation between the two activities. Thus, the fact that Michigan has lost automotive production in recent decades may have negative implications for automotive R&D in the state.

Similarly, co-dependence between R&D and company headquarters activities such as marketing and strategic planning has also been seen as important in some industry sectors. Thus, any major shift in corporate headquarters activity away from Michigan would raise the concern that it might be accompanied by a shift in R&D activity.

Finally, mature industries such as automotive are often severely disrupted by the emergence of wholly new and sometimes unexpected technologies that greatly shake up their organization and geography. For example, the development of aerospace technologies for military uses shifted the locus of related U.S. production from the Northeast to the Southwest and West during the course of the twentieth century. So far, this has not yet taken place as Michigan continues as the U.S. leader in automotive innovation and R&D activity.

________________________________________

[1]For 2011, National Science Foundation, National Center for Engineering and Scientific Statistics, Business R&D and Innovation Survey, and U.S. Department of Commerce, Bureau of Economic Analysis. (Return to text)

[2]Latest data from the National Science Foundation, available here. (Return to text)

Seventh District Update

by Thom Walstrum and Scott Brave

District%20Map.gif

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 in January and February, as severe winter weather affected activity in a number of sectors. The modest pace of growth to start the year tempered contacts’ expectations only somewhat, as most generally maintained their optimistic outlook for 2014.

Consumer spending: Growth in consumer spending slowed to a modest pace in January and February. The poor winter weather initially benefitted some retail categories through increased sales of necessities, but eventually led to declining customer traffic and sales.

Business Spending: Growth in business spending also slowed to a modest pace in January and February. Growth in capital spending slowed somewhat, while plans for future capital expenditures edged higher. The pace of hiring slowed, as did expectations of future hiring, though expectations for the coming year remained positive.

Construction and Real Estate: Construction and real estate activity again increased modestly in January and February. While the weather affected the housing market, it continued to improve slowly, with home prices and residential rents rising modestly. Nonresidential construction grew slowly, and commercial real estate activity ticked up.

Manufacturing: Manufacturing production growth slowed to a modest pace in January and February, as unusually bad winter weather dampened demand. The auto industry remained a source of strength. Demand for steel dropped as weather interfered with transportation, and demand for heavy equipment remained soft.

Banking and finance: Credit conditions were little changed on balance over the reporting period. Equity market volatility increased and credit spreads widened some. Growth in business loan demand was slow but steady, and growth in consumer loan demand remained modest.

Prices and Costs: Cost pressures remained mild overall, though the weather pushed up prices for energy commodities. Contacts continued to report rising healthcare premiums.

Agriculture: The weather delayed shipments of agricultural products. Corn and soybean prices were up. Livestock producers’ bottom lines improved with higher prices for milk, hogs, and cattle combined with lower feed cost.

Led by improvements in the service sector and consumer spending indicators, the Midwest Economy Index (MEI) reached its highest value in December since May 2012, increasing to +0.48 from +0.33 in November. Moreover, the relative MEI increased to +0.15 in December from +0.13 in the previous month. December’s value for the relative MEI indicates that Midwest economic growth was higher than would typically be suggested by the growth rate of the national economy.

Seventh District Update

by Thom Walstrum and Scott Brave

District%20Map.gif

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: The rate of growth in economic activity in the Seventh District increased in late November and December, though the overall pace continued to be moderate. Contacts were more optimistic about 2014 than they were during the previous reporting period.

Consumer spending: Growth in consumer spending picked up to a moderate pace in late November and December, with holiday sales modestly exceeding expectations. Total holiday spending was generally lower this year, though contacts indicated that improving consumer confidence and falling unemployment boosted retail activity in some areas.

Business Spending: Business spending edged up in late November and December. Growth in capital expenditures increased slightly, led by spending on structures. The pace of hiring picked up, as did expectations of future hiring.

Construction and Real Estate: Construction and real estate activity increased modestly in late November and December. Demand for residential construction continued to expand and home sales, prices, and rents all rose. Demand for nonresidential construction remained modest, but picked up some, and commercial real estate activity also improved.

Manufacturing: Manufacturing production growth was solid in late November and December. The auto and aerospace industries were again a source of strength. Low steel service center inventories continued to lift the demand for steel, and demand for heavy equipment increased slightly.

Banking and finance: Credit conditions loosened slightly over the reporting period. Equity markets continued to rise, and credit spreads moved lower. Business loan demand improved, while household loan demand was more mixed.

Prices and Costs: Cost pressures increased slightly over the reporting period, but remained mild. Wage pressures were down slightly. Non-wage costs increased, with a number of contacts reporting higher healthcare premiums.

Agriculture: Corn and soybean prices moved a bit higher, but remained well below levels a year ago. Hog prices moved lower, cattle prices were little changed, and milk prices edged up.

The Midwest Economy Index (MEI) increased to +0.27 in November from +0.23 in October, and the relative MEI increased to +0.24 in November from +0.21 in October. November’s value for the relative MEI indicates that Midwest economic growth was higher than would typically be suggested by the growth rate of the national economy.

Seventh District Economic Update

by Thom Walstrum and Scott Brave

District%20Map.gif

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: The rate of growth in economic activity in the Seventh District continued to be modest, but slowed a bit in October and early November. Contacts remained hopeful for improvement in 2014, although they were slightly less optimistic than they were during the previous reporting period.

Consumer spending: Consumer spending growth remained modest in October and early November. Auto sales in the District slowed during the government shutdown, but subsequently picked up in late October and November. Non-auto retailers reported typical sales levels during the lull between the back-to-school and holiday season. They expected moderate growth in sales during the holiday season.

Business Spending: Growth in business spending flattened out in September. Growth in capital spending slowed slightly and inventories were at comfortable levels for most retailers and manufacturers. The pace of hiring edged lower and retailers indicated that seasonal hiring plans were about the same as last year.

Construction and Real Estate: Construction and real estate activity increased moderately over the reporting period. Demand for residential construction grew slightly and conditions in the residential real estate market continued to improve, but at a slower pace. Nonresidential construction grew modestly and commercial real estate activity continued to expand.

Manufacturing: Growth in manufacturing production remained moderate. The auto and aerospace industries were again a source of strength. Steel production fell slightly, as did demand for specialty metals. Demand was up for construction materials and heavy- and medium- duty trucks; demand for heavy equipment remained soft.

Banking and finance: Credit conditions changed little on balance over the reporting period. Volatility decreased significantly across several asset classes and equity markets saw significant improvements. Demand for commercial and industrial loans remained relatively unchanged. Contacts noted increased consumer borrowing, but saw declining residential mortgage activity as the increase in borrowing rates discouraged refinancing.

Prices and Costs: Cost pressures changed little since the last report. Overall, commodity prices were up slightly. Retailers noted that heavy promotional activity is planned for the holiday season. Wage pressures were up slightly and non-wage labor costs were steady.

Agriculture: Harvesting took longer this fall because of delays from precipitation and a larger crop. Pastures and winter wheat fields were in better shape than they were last year. Crop and hog prices fell; milk and cattle prices were a bit higher.

The Midwest Economy Index (MEI) decreased to +0.22 in October from +0.34 in September, and the relative MEI fell to +0.19 in October from +0.62 in September. October’s value for the relative MEI indicates that Midwest economic growth was higher than would typically be suggested by the growth rate of the national economy.

The Chicago Fed Midwest Manufacturing Index (CFMMI) increased 0.4% in October, to a seasonally adjusted level of 97.4 (2007 = 100). Revised data show the index was up 0.3% in September. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) moved up 0.3% in October. Regional output rose 5.7% in October from a year earlier, and national output increased 3.6%.

Michigan Automotive, More Than Production

By Thom Walstrum and Bill Testa

The dispersion of auto assembly line-type jobs from Michigan to the rest of the U.S. has been widely discussed. But it may be important to examine whether other jobs in the automotive value chain have also dispersed, particularly R&D and headquarters-administrative jobs. It is possible that a sizable part of automotive R&D and administration are spatially separable from production, with important implications for the economic health and growth prospects of Michigan.

To shed some light on this, we use microdata from the IPUMS CPS[1] to track trends in production, office, and R&D jobs in both Michigan and the rest of the U.S. We sort any individual who reports working in the auto industry into one of these three occupational categories. For example, we classify engineers and technicians as R&D and assembly line workers as production workers. (We further classify as “other” those occupations that could fall into multiple categories, such as security or janitor).

Figure 1 shows that total employment in the automotive industry has been relatively steady in Michigan, averaging 413,000 from 1970 to 2005. Since then, there has been a distinct decline; by 2012, Michigan’s auto employment was 262,000. In contrast, auto employment steadily increased in the rest of the U.S., rising from 588,000 in 1970 to a peak of 974,000 in 2007. The rest of the U.S. also saw heavy losses in the second half of the 2000s, with auto employment at 710,000 in 2012.

Trends in the R&D segment of the auto assembly are quite different. As figure 2 shows, R&D employment in Michigan grew steadily until the 2000s, from 28,000 in 1970 to a peak of 90,000 in 2001. Growth in R&D jobs in the rest of the U.S. generally kept pace, though with the exception of a couple years in the early 2000s, the majority of R&D jobs have resided in Michigan.

And so we see that R&D employment has made up an increasing share of overall auto employment in Michigan. In 1970, 6 percent of Michigan’s auto employment was found in R&D. By 2012, this share had climbed to 22 percent. This contrasts sharply with the rest of the U.S., where the proportion of auto employment in R&D grew from 1 percent in 1970 to 6 percent in 2012. Looking more broadly, 46 percent of Michigan’s employment is in either R&D or office occupations, compared with 24 percent in the rest of the U.S. At least by this measure, Michigan remains the nerve center and the creative engine of the U.S. auto industry, even as production jobs have dispersed.

This glimpse of the changed employment composition of Michigan’s auto assembly sector raises further questions. In particular, what is the outlook for Michigan’s R&D activities in light of the shifting geography of auto production activities? And what, if any, public policies might be influential to R&D’s continued success in the state?

________________________________________

[1]cps.ipums.org. IPUMS CPS provides an occupation variable that is unified across changing occupational coding schemes from 1968 to present. The CPS survey combined Michigan and Wisconsin from 1968 to 1976. To allow the time series to extend back to 1968, we calculated by employment category the proportion of worker-years Wisconsin contributed to combined MI-WI totals from 1977 to present. We then used that proportion to scale down the pre-1977 MI-WI employment numbers to represent only Michigan and to scale up the ROUS numbers so to include Wisconsin. (Return to text)