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October 30, 2008

Chicago Business Cycles--Now and Then

Downturns in economic conditions often come as a surprise. In fact, time lags between statistical releases and the conditions that they reflect can mean that economic slowdowns are not known until months after they have begun. Statistical information covering individual reasons tends to be worse in this regard.

Today there is, however, a widely held view that the U.S. economy has slowed sharply and that economic conditions will not immediately improve. Broad-based measures of national economic activity, such as the Chicago Fed National Activity Index (CFNAI), indicate that U.S. economic growth is well below its historical trend. As a result, observers in regions such as the Chicago metropolitan area are preparing for hard times. And they are asking whether they are likely to feel the worse for this apparent slowdown—and how long it will last.

In the Chicago area, memories are becoming dim of those days when the pace of the local economy fell sharply in response to national economic downturns. However, the chart below should remind us or inform us anew of the fact that Chicago’s economy often experienced sharp swings in employment. In the past (especially before 1990), Chicago’s employment base had been steeped in durable goods manufacturing industries, such as machinery and steel, which experienced layoffs and downsizings when the national economy turned downward. Twice during the 1950s, Chicago area payroll job declines approached 5 percent on a year-over-year basis as national job declines reached 3 and 4 percent on those two occasions. Chicago fared little better during the recessions of 1970–71, 1974–75 and 1981–82.


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Given this track record, it may seem pointless to ask how the region’s economy will fare in the months ahead. However, the question is well considered both because the economic structure of our economy is always changing and because no two economic downturns are alike with respect to their causes and impacts on industries.

Chicago’s economy is continuing to restructure in several important ways. Most dramatically, the region’s employment structure no longer concentrates directly in manufacturing. As recently as 1969, 30% percent of the Chicago metropolitan statistical area’s employment could be found in manufacturing in comparison with 24% for the overall U.S. By 2005, manufacturing’s share of employment had fallen to 9% percent and it had converged with the U.S.’s percent share. At least this element of sensitivity to national business swings seems to have partly abated.


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At the same time that manufacturing has waned, the Chicago area has also restructured into higher-order professional services, business meeting and travel, and financial services. (The chart below indexes the Chicago area payroll employment by major industry sector. An index value greater than 1, for example, indicates that Chicago’s employment base in that sector exceeds the national average.) Especially during the 1990s, the metropolitan area experienced very rapid growth in these industry sectors. This expansion was thought to have been accompanied by geographic changes. In particular, while Chicago’s services industries had historically grown and developed through its local trade linkages with Midwest goods producers, business and financial services were now thought to have strengthened and lengthened their ties with international and U.S. cities and regions. If this were actually the case, the traditional patterns in which Midwest manufacturing production declines are strongly transmitted through Chicago’s services industries would have weakened.


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To the contrary, the subsequent experiences of the recessionary period of 2001 and its aftermath tend to suggest that Chicago’s restructuring into business and financial services has not buffered it from national business downturns. As measured by total payroll jobs, the Chicago area’s decline of 3 percent in 2001 was at twice the pace of the national average (see chart below). And if the professional and technical services sector has become Chicago’s new bellwether, its performance during the past downturn is not encouraging. From a year-over-year growth peak of 7 percent in 1999, Chicago jobs in the professional and technical sector fell by over 8 percent during 2002. Though we may not think of these services as being sensitive to the general level of business activity, their responsiveness to business swings is much like producers of investment goods and capital equipment. That is, firms tend to expand their purchases of professional services such as advertising, marketing, business meeting travel/convention, and management consulting when they are expanding their markets and investing, but they tend to retrench their purchases of such services when they are retreating.


Click to enlarge.

More generally, although Chicago has broadened and diversified its economy, many of its hallmark sectors remain sensitive to swings in the overall economy. According to the chart above, Chicago remains concentrated in manufacturing. So, too, Chicago remains a goods transport and distribution hub for manufactured goods that are both domestically produced and internationally traded. While many of the area’s services such as education and health are somewhat impervious to general slowdowns, many of its business services are volatile, depending on the fortunes of Midwest goods-producing sectors and, increasingly, on the prosperity of national and international customers.

Chicago also maintains high job concentration in financial and insurance sectors. Unlike the job bases of the New York and Los Angeles metropolitan areas, Chicago’s job base is not greatly exposed to the most adversely affected subsectors of financial services—namely, investment banking, securities dealers, and mortgage finance companies. That said, the remaining financial services subsectors are not expected to be sources of net job growth in the months ahead.


Note: Thanks to Emily Engel for assistance.


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Posted by Testa at 8:03 AM | Comments (0)

October 16, 2008

Fresh Water Issues and Conference

Sometimes when I am out speaking to groups about the Midwest’s economic future, someone in the audience will assert that the Great Lakes Region’s past glories will ultimately be restored because “they (other U.S. regions) will run out of water and we have plenty of it.” This assertion may be only partly true, and its fulfillment may require deliberate action and hard work rather than passive waiting.

It is true that the Great Lakes states border one of the world’s largest bodies of fresh water. With regard to surface fresh water, the Lakes are estimated to contain 18% of the world’s supply, and 90% of the U.S. supply (though we share these shorelines with Canada’s Ontario and Quebec provinces).

However, in replying to the “water revival” assertion, I am always careful to temper the sanguine outlook with several “the glass is half empty” caveats.

First, while it is true that water is becoming increasingly scarce in much of the West and even, more recently, in the Southeastern United States, the problem there mostly lies with poor allocation of water among competing uses rather than with sudden scarcity. Especially in the West, most fresh water is used for agricultural irrigation rather than for residential purposes. Since agricultural use of water hardly begins to approach its value for use in human living, it is difficult to imagine that the scarcity will soon present a significant obstacle to growth. Rather than in agriculture, most economic growth in the West is taking place in the service-oriented economies of its large metropolitan areas. Since water requirements for urban households and their typical jobs are light, rising water demands need not be onerous. Indeed, much of the difficulty with scarcity in metropolitan areas arises because available water is not properly priced. When water is underpriced, or priced poorly among different types of users, the resource is invariably wasted. In the case of water, legal and governmental arrangements compound the waste and misallocation. That is because many water users in agriculture can by law only use available water for immediate purposes (e.g., irrigation) and cannot sell it to others for a higher value use such as residential use.

While the water shortages that emerge from such arrangements do present some drag on growth, fast-growing metropolitan areas of the West do ultimately manage to wrest water away from existing uses. And so, looking to the future, it is more likely that existing water will be allocated to its higher value use for residential purposes in the West and will not (much) constrain growth there.

Still, the history of water allocation in many parts of the world is littered with tragic outcomes, as water is diverted by mammoth diversion projects and overused by those zealous users who draw on the “free” resource while imposing scarcity on others. Recently, in documenting historical water diversions into and out of the Great Lakes Basin, author Peter Annin also chronicled the devastation of the Aral Sea in Kazakhstan and Turkemistan. A Soviet program of the 1950s diverted much of the water from the Aral River Basin into agricultural uses. As a result, the Aral Sea has shrunk by 75%, with catastrophic consequences for the environment and the people who lived along its shores. Annin believes that clean water scarcity is on the rise in many regions of the world and throughout the United States. Accordingly, we can expect that tensions and conflicts will increasingly emerge over fresh water use and ownership.

We already have seen such conflicts here. Uncontrolled or ill-conceived withdrawals threaten to expunge water resources from underground aquifers of the American West. According to Mark Reisner, federal government-sponsored water diversion projects have contributed to today’s depletion and water misallocations there. Water resources in the West have been historically commandeered through federal government actions such as the construction of dams and the re-channeling and transport of vast quantities of fresh water.

The lessons for the Great Lakes Basin are plain. As water grows scarcer in faster-growing regions of the U.S., and as political representation of the Midwest wanes with lagging population growth, wholesale water diversions from the Great Lakes Basin may become more likely.

Anticipating such a scenario, ten years ago policy leaders of the Great Lakes began working on an agreement to protect the waters from diversion and depletion. After much wrangling in and among individual states, the agreement was signed by President Bush last week on October 3. The Great Lakes–St. Lawrence River Basin Water Resources Compact arrived on the President’s desk following ratification by the eight states bordering the Lakes and subsequent approval by both houses of Congress. (Ontario and Quebec have adopted parallel agreements).

What does the compact mean for the region’s prospects? The compact does not guarantee that these waters will never be diverted for broader national purposes. However, it does give the region some assurance that it can plan to preserve and develop its natural advantages of abundant water in ways that secure a brighter future. In fact, the compact imposes uniform and stringent conditions on further water withdrawals even within the Great Lakes states and requires the states themselves to implement new management and conservation programs.

With its inland fresh waters now more secure, and as the region must rethink its own water management policies, there is perhaps no better time to consider how the region’s fresh water legacy can best serve its residents. For this reason, on November 10, 2008, the Federal Reserve Bank of Chicago will host a conference on “Fresh Water and the Great Lakes Future” in Detroit. This will be an opportunity for regional leaders to explore the increasing value that these assets hold for our residents for residential, aesthetic and recreational purposes.

As U.S. income and population rise, the recreational and scenic value of open waters, wetlands and other open spaces also rises. But how will these assets be used and what will be the level of demand? And how will this be manifested in migration and growth in income? What sustainable and responsible policies should the region undertake to cultivate its own fresh water legacy and related assets?

Investment in preservation and clean-up of Great Lakes waters presents one set of policy options, as do related decisions concerning regulation, land use policies, and consumptive uses of the waters. So too, both rural and urban communities are moving forward with infrastructure and other economic development programs that promote the recreational and residential advantages of lakes and rivers. These include lively riverfront and lakefront mixed-use developments in downtown areas of big cities, as well as the promotion and development of more rural recreational assets.

Our conference will also investigate the region’s legacy of fresh water treatment technology. During its rapid industrialization and urbanization, much water degradation took place. In some instances, the region’s subsequent adoption of stringent water quality regulation has spawned the growth of associated firms, university research, and associated water treatment technologies. Can our water treatment firms and university researchers grow more prominent, perhaps serving communities in other parts of the world where clean fresh water is less readily available?



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Posted by Testa at 12:45 PM | Comments (2)