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March 17, 2008

Metropolitan area exports

Expanding export activity has taken on added importance in recent years. For example, the newly released Economic Report of the President (ERP) reports that export growth accounted for one-third of U.S. economic growth in 2006 and 2007. Looking ahead to 2008, this export importance will continue as the U.S. economy slows even while economic growth in many developing regions continues to be robust. Rising incomes abroad stimulate appetites for U.S.-made goods and services alike.

It is timely, then, that new information on goods exports for individual metropolitan areas has just been released by the International Trade Administration (ITA), based on U.S. Census Bureau data. Exports figure prominently in regional economies such as ours that are steeped in manufacturing and agricultural production. On a national scale, the ERP describes the many benefits of export activity. In addition to high-paying jobs and incomes, exports spur U.S. producers to innovate to compete with in global markets. So too, as U.S. producers expand to serve global markets, they can often achieve low-cost economies of scale, thereby reducing prices for consumers.

The new data series on metropolitan exports covers goods only. This means the importance of exports to metropolitan economies is understated in the data because exports of services such as medical, tourism, banking/finance, and transportation now account for 28% of U.S. exports. Moreover, metropolitan areas typically specialize in such services, with ongoing shifts toward service concentration now underway.

Despite our lack of data on service exports, a metropolitan area's rank order in goods exports very likely reflects its local service exports as well. In the production process, manufacturing companies purchase many services ranging from finance to management consulting, transportation, design, law, R&D, and advertising. The value of these services become part of the value of the final goods for export, and many of these services are purchased locally. Accordingly, in many instances, a host of value added products from surrounding service companies lies behind a metro area’s goods exports.

Given the Midwest region’s prowess in durable goods manufacturing, it comes as no surprise that metropolitan areas in the Seventh District originate considerable goods exports. The chart below shows export values for several metropolitan areas. The Detroit area leads with a reported $43.3 billion in exports in 2006, comprising 74 percent of Michigan’s exports abroad (see right axis). Detroit’s automotive trade with Canada remains considerable. Currently, the rising value of the Canadian dollar is pressuring production towards the U.S. side of the Michigan–Ontario corridor.

The Chicago area’s total goods exports approached $30 billion in 2006. In addition to traditional heavy manufacturing and food products, Chicago exports medical supplies and equipment and pharmaceuticals.

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In order to gauge the relative importance of exports to metropolitan areas, we make use of recent BEA (Bureau of Economic Analysis) estimates of total metropolitan area product. Dividing a metropolitan area’s exports by its gross product yields a rough measure of each region’s income share that is earned by producing goods for export abroad. By this measure, we see in the chart below that Peoria, Illinois, home of construction equipment manufacturer Caterpillar, derives over 50% of its income from producing goods for export. While this is a useful indicator, it does overstate Peoria’s share somewhat because Caterpillar and other Peoria manufacturers assemble final goods using component parts and services from other parts of the Midwest, the nation, and the world. So part of the measured value of Peoria’s exports reflects the embedded value added of goods and services produced elsewhere. For larger regions, such measures tend to be more accurate since the intermediate components are more likely to be produced within the region.

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The next chart shows export intensity for all of the Seventh District metro areas. Most lie above the U.S. average in export intensity. Open markets abroad are an important part of the economic vitality of these communities.

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Where do District metro areas export? The ITA provides the destination by both country and general region of the world. Canada and Mexico—our NAFTA partners—predominate as export destinations for metro areas (chart below). Europe also remains important, especially Germany, France, and the U.K. In Asia, Japan figures prominently, with China as the fastest growing export destination.

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Finally, the ITA data offer a finer breakdown, indicating both the specific industry categories of exported goods and their destination. As one example, the next chart displays export patterns for the Milwaukee metro area. True to its industry structure, the Milwaukee area exports durable goods such as electrical equipment (e.g., medical scanners and electronic controls) and nonelectrical machinery (e.g., small engines and construction equipment). All major regions of the world (and trading blocs) are destinations for Milwaukee exports.

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The outlook for Midwest exports remains strong. As the 2008 ERP suggests, foreign income growth is likely the strongest impetus to U.S. export growth. As developing nations raise their standards of living, their appetite for manufactured goods rises sharply, as does their demand for food products.

The 2008 ERP also indicates that U.S. exports are very sensitive to income growth abroad. In part, that is because developing countries are investing heavily at home both to produce goods for export and to serve rising domestic demands. For that reason, they purchase capital goods—those that are needed to expand production capacity such as machinery and equipment. Since capital goods are needed to expand production capacity, a slowing economy ratchets down purchases of capital goods and an accelerating economy ratchets up purchases. The U.S. economy specializes in capital goods, such as those produced in Milwaukee and Peoria.

But what generates the income growth in developing countries that, in turn, propels their demand for U.S. exports of capital goods? In part, trade agreements allow developing countries to generate income (from sales abroad) and thereby raise living standards by lowering tariff and nontariff barriers to export sales abroad.

The ERP reports export sales from the U.S. to regions of the world with which the U.S. has recently signed trade agreements. In almost every instance, subsequent export growth to the trade agreement nations well exceeded overall export growth.

Of course, these agreements also make it easier for foreign nations to sell into U.S. markets. In many instances, such foreign competition displaces firms employing domestic workers. Though the overall process of expanding trade is vital to raising living standards both here and abroad, the related labor market upheaval often gives rise to anti-trade sentiment.

Estimates of import sensitivity by individual metropolitan area are problematic. Imports are counted and tracked at the U.S. border and no further. But in a 2003 article, I constructed some rough estimates of import sensitivity by examining a metro area’s industry mix and then weighting a metro area’s industry mix by the degree to which imports had penetrated U.S. markets. I found that large metropolitan areas were not experiencing growth in trade sensitivity to the same degree as smaller and medium-sized metro areas. However, this may be explained by the growing service orientation of large metro areas. Since many of these services do become embedded in the value of manufactured goods, the trade orientation of large metropolitan areas may be understated by my (goods-based) estimates.

Vanessa Haleco-Meyer contributed to this entry.

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Posted by Testa at 8:10 AM | Comments (0)

March 3, 2008

The fiscal state of the states (and municipalities): Not so good

By Rick Mattoon

Plenty of evidence is emerging that state and local governments are headed into a major fiscal pinch. Tax revenues are decreasing across the board, as everything from corporate profits to employment declines. The big question is how well are the states positioned to weather this storm? Is there anything different in the nature of this economic slowdown that will make circumstances more difficult?

Based on some preliminary evidence, the future looks challenging. The Center on Budget and Policy Priorities released a survey of state budget conditions on February 25, 2008. The survey reported 25 states having budget deficits for fiscal year 2009. Specific estimates of the magnitude of the deficits were available for 21 states. These particular states report an aggregate gap of between $36 billion and $38 billion, representing roughly 8% to 9% of total general fund spending. Of the states in the Seventh Federal Reserve District reporting a gap, Illinois has a $1.8 billion deficit (6.6% of general fund); Iowa, $350 million (6%); and Wisconsin, $652 million (4.8%).

The center’s report notes that one of the more vexing fiscal problems is the current instability of property tax revenues related to the housing downturn and mortgage foreclosures. In the 2001 recession, states were able to push expenditures on to local governments because property tax revenues were relatively stable. In the current housing crisis, it is more likely that local governments will be asking state governments for help.

The report also finds that states are rapidly drawing down rainy day funds. These fund levels peaked at 11.5% of annual state spending in fiscal year 2006 and are estimated to decline to 6.7% of state spending by the end of this fiscal year. It is unlikely that this is sufficient to see the states through even a shallow recession.

A final national development is that at the February meeting of the National Governors Association, the governors requested that the federal government offer a fiscal stimulus package for the states aimed at financing infrastructure investments. It is unlikely that this will go anywhere. In the 2001 recession, the federal government offered a $20 billion aid package to the states. Half of the $20 billion was earmarked for a temporary increase in the share of federal support for Medicaid programs, with the remaining half set aside for general grants based on population.

A closer look at the impact of the housing downturn on state and local revenues

The fallout from the subprime loans and foreclosures has had a negative effect on state and local revenues. The United States Conference of Mayors (and the Council for the New American City) hired the consulting firm Global Insight to estimate the implications of the mortgage crisis. The firm estimates that U.S. gross domestic product (GDP) will be $166 billion lower than otherwise because of the crisis and that 524,000 fewer jobs will be created. The firm further estimates a $1.2 trillion decline in property values in 2008.

The report provides estimates of metropolitan growth rates and changes in tax revenues for selected metros and states. For example, the estimated real gross metropolitan product (GMP) growth rate for metro Chicago in 2008 will be 2.23%. This represents a 0.56% reduction, or $3.9 billion decrease, attributable to the mortgage crisis. Metro Detroit’s real GMP growth rate is estimated at 1.3%. A reduction of 0.97% is attributable to the housing slowdown representing a $3.2 billion decline in GMP.

As for changes in tax revenues, the following table provides the fiscal impact estimates for ten states.

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As the table illustrates the fallout goes beyond just property tax revenues. Sales taxes decline because of the reduction in big-ticket items, such as appliances and furniture, that occur during a housing slump. Transfer taxes—the taxes on the passing of a title to property from one person (or entity) to another—fall in response to the lower volume of transactions; in recent years, transfer taxes had become increasingly important to municipalities. All in all, such trends suggest significant challenges.

What is the fiscal state of the states? Not very good. And it appears that the housing slowdown will make conditions more challenging than was found during the 2000-01 downturn.

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Posted by Testa at 2:09 PM | Comments (1)