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January 30, 2007

Forecasting the Seventh District Super Bowl

By Guest Blogger Michael Munley

As you can imagine, many here in Chicago are fired up for this year’s Super Bowl: The hometown Bears make their first return to the big game in 21 years. But this game is extra special for us at the Chicago Fed: The Bears are playing the Indianapolis Colts, another Seventh District team. If you are interested in such arcane trivia, this marks only the third time both Super Bowl teams represent the same Federal Reserve District (see map). The first was the New York–Buffalo game in 1991, the second was the San Francisco–San Diego game four years later.

Most football fans have been breaking down the game in terms of what might happen on the field. Will we see good Rex or bad Rex? Will Peyton Manning finally step up in a big game? Or will the Bears defense shut him down? I, however, am interested in taking a look at the matchup in terms of economic performance. That is, does the economic performance of the teams’ cities have any influence on what happens in the game?

Theories linking business activity to the Super Bowl and vice versa have been around for some time—even if they are often referenced as classic examples that correlation does not equal causality. One theory relates the performance of the Dow Jones Industrial Average between the end of November and game day: If the Dow rises over this time, the team from the city whose letter is later in the alphabet will win the game. In the case of this year’s match up, the Dow was 12221.93 on November 30 and was up to 12487.02 last Friday, so it predicts that Indianapolis will beat Chicago.

For some reason, this theory has a track record of accuracy. When Floyd Norris of the New York Times wrote about it in 1996 (here’s the link, but if you aren’t a member of TimesSelect you’ll have to pay to read the article), the theory had accurately picked 18 winners of the 21 previous Super Bowls, whereas the Las Vegas point spread had only picked the winner in 16 of 20 games.

While this looks like an impressive record, I can’t think of any reason why the Dow should affect the outcome of the game in this way (though I welcome suggestions). Why should one team (especially a team that just happens to be from a city later in alphabetical order) benefit from an increase in a stock market index that affects everyone?

Now if the theory could in some way account for the economic differences between the two cities, then I’d be more tempted to believe it could affect the game. Suppose one of the Super Bowl teams represented a city that was enjoying a period of strong growth. Its residents would feel wealthy, and they’d be more likely to attend the game. In turn, the extra fan support at the game could be enough to affect the outcome.

To explore such a theory, let's consider the cities’ unemployment rates to indicate the difference in their relative prosperity. (Other data might be better indicators of a city’s prosperity, but the unemployment rates were what I had readily available for all of the Super Bowl teams’ cities, with a good amount of history. For the same reason, I used the city unemployment rates, as opposed to metro area unemployment, which would probably more accurately reflect the teams’ fan base.)

Below, I’ve added a graph showing the unemployment rates in the cities that won the Super Bowl versus the cities that lost. (The unemployment rate is the average of the monthly rates during the year indicated on the X-axis, which is the year prior to the corresponding Super Bowl. So, 1984 shows the 1984 unemployment rates in San Francisco and Miami, referring to the 1985 Super Bowl game between the Forty-niners and the Dolphins.) As you see, in 16 of the past 22 Super Bowls, the team that won the game represented a city with the lower unemployment rate.

Click to enlarge.

This would be another bad sign for the Bears. The final data for 2006 are not available yet, but through the first 11 months of the year, the Chicago unemployment rate averaged 5.4% while the Indianapolis unemployment rate averaged 5.1%.

But take heart Bears fans. Twenty-two games isn’t really a long enough track record to definitively prove anything. And the unemployment rate has only predicted 3 of the last 7 games. (Perhaps this indicates that the National Football League’s revenue sharing programs are helping teams overcome any economic deficiencies of their host cities.)

The Dow-related theory seems to have fared even worse in recent years. Using the changes in the Dow from the end of November to the end of January as a proxy, I estimate that the Dow theory has correctly predicted the Super Bowl winner only twice in the past 10 years. (Of course, that would put its cumulative record at 20 out of 31, which is still slightly better than flipping a coin.)

And if that’s not enough to comfort you Bears fans, consider this: the predictions using the Dow and the unemployment rates both failed in 1986, the last time the Bears were in the Super Bowl.

Then again everyone around here says this year’s team is NOTHING like the ’85 Bears….

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Posted by Testa at 10:03 AM | Comments (4)

January 22, 2007

Chicago's Pursuit of the Global Prize

Policy and business leaders in Chicago continue to advance the metropolitan area’s prospects as a global hub for professional and financial services. This initiative arises from both necessity and opportunity. Chicago’s traditional markets, principally in the surrounding Midwest, are not growing rapidly. At the same time, however, the Chicago economy specializes in advanced producer service sectors that are increasingly traded more broadly and, in many cases, internationally.

As the business service center of the Midwest, serving regional markets and industries, Chicago companies’ prospects for growth are somewhat limited. That is so largely for two reasons. First, the Midwest economic base centers on agriculture and manufacturing. Since productivity growth is so very high in these industries, and competition keeps commodity prices low, income and revenue (and attendant jobs) grow slowly. The second reason is climate. As the U.S. economy restructures toward information industries and knowledge workers, service production is being pulled toward locations where workers prefer to live, often milder climes.

However, globalization of the economy has also brought new opportunities to populous information-based cities like Chicago. Large cities often have wonderful amenities that are not dependent on climate, such as sports, restaurants, museums, and cultural diversity. But more fundamentally, it is because expanding global trade in goods, services, and capital requires the complex and specialized functions and industry sectors that are concentrated in large cities, including legal services, logistics, distribution, finance, insurance, business meetings, R&D, and professional business services.

Chicago has been developing such sectors almost since its inception. Today, Chicago features world-leading risk exchanges, universities, business meeting and personal air travel firms, legal services, headquarters facilities, and management consultancies.

During the 1990s, the growth of Chicago’s professional services was robust. According to the data reported on payroll employment, the Chicago metropolitan area added a net 80,000 jobs in the sector from 1990 to 1999, more than the Los Angeles metropolitan area and more than New York City.

However, since then, job performance in Chicago has often been much weaker, raising doubts about whether the city’s economic structure has divorced itself from the surrounding region as much as previously believed. The chart below displays year-over-year growth in the professional, technical, and R&D sectors. Employment growth experienced year-over-year declines for most of the 2002-2004 period, before reviving in 2005.

Click to enlarge.

How much of Chicago’s business service economy has expanded to global markets or even to other large U.S. cities in the global network?

We know very little about the geography and changing geography of these hallmark industry sectors. However, one informative study by Peter J. Taylor and Robert E. Lang of the Metropolitan Policy Program at The Brookings Institution measures the prominence of major global service companies among large cities in the world.

Taylor and Lang examine 100 global companies drawn from the business or producer sectors of accounting, advertising, banking/finance, insurance, law, and management consulting. For each city, the sum presence of their offices (weighted by size and function) determines a score for a city’s commercial presence and ties to the global city service network.

According to the Taylor-Lang study, Chicago scores high in its global connectivity, both relative to other U.S. cities and relative to the world’s major cities. Among U.S. cities, Chicago ranks second only to New York. Among world cities, Chicago ranks seventh, behind London, New York, Hong Kong, Paris, Tokyo, and Singapore.

The Taylor-Lang study scores Chicago’s connections with domestic cities such as Atlanta and New York in the same way it scores connections with international cities such as Sydney. This seems correct. International borders can be arbitrary. And to otherwise score border-crossings might bias the results toward cities located on continents where national boundaries are near each other, such as Europe.

The study does provide a separate “hinterland” scale for each city, which tries to measure the degree to which a city’s global connectivity relies on nearby national trading relations. Here, with the exception of New York City, U.S. cities tend to be less international than those on other continents. However, Chicago again scores well. It places third among U.S. cities, behind New York and Miami.

How this relates to Chicago’s recent growth performance and prospects is not clear. The construction of the Taylor-Lang study is creative, clever, and somewhat revealing, but it provides more impressionistic than definitive evidence of global linkages among producer services. Those who would like to draw their own conclusions from the evidence should take a look at the authors’ map of each global city’s linkages, including Chicago. Outside of North America, for example, the map suggests that Chicago's economy links strongly with Zurich, Switzerland, and Sydney, Australia.

Chicago’s employment in business-professional services is once again growing strongly, at a 3% annual year-over-year pace. If the recent period of weak performance reflects some unusual and fleeting conditions such as a post 9-11 falloff in business travel and related business service activity, then perhaps Chicago’s march to global success will now continue.

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Posted by Testa at 10:37 AM | Comments (2)