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August 23, 2011

Digging Out of a Hole – A View from Detroit

Paul Traub

Digging out of a hole sounds like an oxymoron, but that seems to be what is happening with this particular economic recovery compared with recoveries from past recessions. Rather than the more rapid growth we would expect from the type of recession the U.S. just experienced, the economy is experiencing very tepid growth. The latest gross state product (GSP) data show just how slowly the recovery is proceeding for the Seventh District. [1]

Even though the District is leading the nation during the recovery in its manufacturing and agricultural sectors, as of the end of 2010 its total output is still lower than it was in 2005. The District is making some progress, but the direction of the recovery does look more like tunneling out of a hole than a vertical assent.

To get a sense of how different this recovery is, we can look at past rebounds from recession. For example, on average, three years after the start of the previous two recessions, the region had already experienced expansion of over 10.0%. By 2010, three years after the start of the 2007 recession, total GSP for the District is still 2.6% below its 2007 level. This hole is pretty deep.

It is important to note that the recession was not evenly distributed across all District states. The following chart shows the GSP for each state in the District indexed to calendar year 2000. It can be seen here that Michigan never really recovered from the 2001 recession. In fact, Michigan’s previous GSP peak was eight years earlier back in 2003.

While Wisconsin, Indiana, and Illinois seem to have tracked each other very closely over the past decade, Iowa has shown the strongest growth of all the states in the District. In fact, Iowa has experienced 21.3% growth since 2000. Its growth has been supported by a rise in agricultural commodity prices and the fact that it didn’t experience a housing price bubble, which has allowed the real estate sector to continue to show growth over the last decade. On the other hand, Michigan’s economy, which has been hurt significantly by declines in auto sales, has shown the weakest growth, its 2010 total GSP is still below where it was in 2000.

The next chart compares real state product growth in the District states from 2009 to 2010 with the nation as a whole.

The District grew at 2.8% in 2010, compared with 3.0% for the nation. Two of the five states grew at rates greater than the nation and four out of five states grew faster than more than half the states in the country. Michigan, which has been struggling for the past decade, actually did quite well growing at 2.9% and coming in at 16th place among all the states. Indiana, Iowa, Wisconsin and Illinois placed 3rd, 13th, 23rd, and 32nd, respectively.

In terms of job growth, the region’s economy may be performing slightly better than the nation overall in 2011. Through June 2011, the District had created jobs at a faster pace (0.9%) than the nation as a whole (0.7%), albeit from a much lower trough.

Michigan, which lost population in the last census, actually led the District in the first half of this year with job growth of 1.9%, it ranked 4th in the nation in growth of nonfarm payroll jobs. On the other hand, Indiana ranked last with employment down 0.4% in July 2011 on a year-to-date basis.[2] Even though Indiana has seen a decline in total nonfarm July 2011 year-to-date, the state has experienced job gains in two sectors, mining and logging (1.5%) and manufacturing (1.2%).

Still, total nonfarm payroll employment in the District remains well below its previous peak. In fact, as can be seen in the following chart, nonfarm payroll employment for the District is still below where it was in 1996. In addition, the nation as a whole has also seen a sharp decline in nonfarm payroll jobs since the start of the latest recession -- nonfarm payroll employment for the country is currently about where it was in 2004.

If we take a closer look at manufacturing employment data for the nation and the District, we see an even more distressing picture. Since 1990, the nation and the District have lost about 35% of their manufacturing jobs. This is equivalent to over 6.0 million jobs nationally, of which the District accounts for about 1.1 million. At its peak in 2000, the District accounted for 19.1% of the nation’s manufacturing employment. By July 2011 its share had fallen to about 18.6%. Also at the peak in 2000, the region had 474,000 auto related jobs, which accounted for about 14.4% of the region’s manufacturing employment. As of July 2011, manufacturing employment in the region was 2.2 million jobs, of which 203,600 or 9.3% were in the auto industry.

Some of the employment declines have come about from labor-saving productivity improvements, but many are the result of declining U.S. auto sales together with declining market shares of the Michigan-based Detroit 3 auto makers and their suppliers.

In the past couple of months total light vehicle sales have been disappointing but, on the bright side, the traditional domestic manufacturers have been doing relatively well. In fact, on a year-over-year basis through June of this year, the Detroit 3 collectively saw sales increase by 15.5% versus an increase of just 7.6% for the industry as a whole. The Japanese manufacturers experienced a decline in sales on a year-over-year basis of 11.6%, largely due to supply disruptions as a result of devastating earthquake in Japan. In addition, some customers may be postponing purchases until the Japanese manufacturers can get their inventories replenished. Thus, absent the impact of the earthquake and related supply disruptions, auto sales overall would have been stronger in recent months.

It remains to be seen when auto sales will regain the positive momentum they had shown earlier in the year but despite recent setbacks, the August 2011 Blue Chip consensus for light vehicle sales for 2012 is 13.6 million units. This is a 30.1% increase from the 10.6 million units sold in 2009 and an increase of 1.4 million units from the July SAAR of 12.2 million units. In addition, Ward’s Automotive is projecting that by 2012, vehicle production in the District will be up by 2.3 million units from its low point in 2009. If these projections are correct we would expect to see some more positive gains in manufacturing employment for our region -- especially Michigan. Meanwhile, we just have to keep digging.
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[1]GSP is the equivalent of GDP at the national level – the sum total value of all goods and services.(Return to text)
[2]State rankings include the District of Columbia. (Return to text)


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Posted by Testa at 3:49 PM | Comments (0)

August 12, 2011

Not Much House Lock So Far in Seventh District

By Britton Lombardi and Bill Testa

Two years following the end of the national recession, the national unemployment rate remains above 9%. Part of the explanation stems from the financial crisis element of the recession. In the past, aggregate demand (including new hiring) has tended to bounce back only slowly under similar circumstances, in which household wealth has declined sharply and traditional lending channels have continued to struggle. This time, other potential influences are being suggested. One point of debate is the potential impact of house lock, which is a decline in household mobility that is said to hamper job search. In particular, due to a high degree of underwater mortgages (where the mortgage debt level exceeds the current sales price of the home), working age adults may be constrained from long distance job-related moves by their inability to pay off their existing residential mortgage.

A new Chicago Fed Letter examines whether house lock has, in fact, contributed significantly to a higher than expected unemployment rate. To start, the authors lay out the background of concerns about house lock against the backdrop of the pickup in job openings during late 2009 and 2010 that has failed to translate into increased hiring rates.

To further analyze labor mobility, Aaronson and Davis compare the residential mobility of renters versus that of homeowners. The idea here is that, if house lock is important, the mobility of home owners would decline relative to that of renters, who are unencumbered by mortgages. In their analysis of the U.S., the authors define a household move as the relocation of a household across a state border. They further measure the migration rates of renters versus owners, in the preceding four months. In their results, they find no statistically significant changes over time in the difference between the tendencies of moving between renters versus owners.
To further explore this dynamic, Aaronson and Davis evaluated separately the five states that experienced the steepest house price declines (California, Florida, Nevada, Arizona and Rhode Island), postulating that the larger the decline in home prices, the more likely households would have negative equity, thereby reducing their ability to move. But even in these states, they find that homeowners do not appear to have changed their migration behavior relative to renters.

Midwest

How does the Seventh District compare if we apply the same methodology as Aaronson and Davis? First, as seen from the chart below, the Seventh District seems to have had a varied experience in the past decade’s run up in home prices. In general, home prices did not rise as much as the U.S. average, though in some instances, the home price falloff was just as steep. In Indiana, Iowa and Wisconsin, home prices did not fall much from their peak. However, Illinois did experience a similar pattern to the U.S., and in Michigan home prices have actually fallen below their 2000 levels.


On average, did the Seventh District experience some level of house lock during the most recent recession? Aaronson and Davis were willing to run their methodology for the Seventh District states for us, and the results are shown below. The four-month migration rate for Seventh District homeowners fell from 0.0024 to 0.0017, a 0.0007 decline (annualized, this would be 0.0007*3=.0021 or just over two-tenths of a percentage point). At the same time, renter migration rates barely increased, moving from 0.01 to 0.012. The last row, called “Difference,” compares the patterns between renter and homeowners and shows that the difference between the two is relatively small over time and statistically insignificant for the Seventh District states.


And so, the experience of house lock in the Seventh District states appears to be consistent with that of the rest of the U.S. That is, while the continued home market weakness is detrimental in other regards, it does not appear to be a primary driver of lingering unemployment.

It is true that District homeowner migration rates fell slightly during the recession. This is consistent with past downturns; migration rates tend to be procyclical in nature, falling during recessions and rising during expansionary periods as job opportunities become more abundant.


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Posted by Testa at 2:18 PM | Comments (0)

August 1, 2011

Midwest Economy Update

By Norman Wang and Scott Brave

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A summary of economic conditions in the Seventh District from the latest release of the Beige Book:

“Economic activity in the Seventh District continued to expand slowly in June and early July. Contacts expressed heightened uncertainty about the economic outlook given recent weaker-than-expected demand as well as the ongoing fiscal issues in the U.S. and Europe.”

Consumer spending: Consumer spending picked up some in June and early July. Consumers took advantage of early summer promotions for apparel and accessories. Auto sales edged lower in June, but then improved moderately in early July as incentives increased.
Business Spending: Inventory investment decreased, but expenditures on equipment and structures increased. Labor market conditions weakened. Hiring continued at a slow pace, layoffs picked up, and unemployment in the District increased.
Construction and Real Estate: Construction activity was again subdued, apart from an increase in construction of apartments and manufacturing facilities. Residential real estate conditions remained weak, while commercial real estate conditions improved, albeit moderately.
Manufacturing: Manufacturing production continued to expand at a steady pace. Automakers indicated that production was recovering from the Japanese supply chain disruptions, and capacity utilization in the steel industry reached its highest point since 2008.
Banking and finance: On balance, credit conditions improved modestly in June and early July. Volatility increased, but funding costs and liquidity tightened only marginally. Credit terms and availability continued to improve, though standards remained tight for many borrowers.
Prices and Costs: Despite recent price declines, prices for many commodities remained elevated. Fuel surcharges and shipping costs also have yet to come down, and pass-through of higher wholesale costs to the retail sector picked up. Wage pressures remained moderate.
Agriculture: Despite recent above-average temperatures, contacts remained optimistic for corn and soybean yields this fall. On balance over the reporting period, cash prices for corn, wheat, and cattle were down while prices for soybeans, milk and hogs prices moved higher.

The Midwest Economy Index (MEI) declined to +0.37 in June from +0.85 in May, but remained above its historical trend for the sixteenth consecutive month. In addition, Midwest growth continued to outperform its historical deviation with respect to national growth, although the relative MEI decreased to +1.01 in June from +1.48 in the previous month.

The Chicago Fed Midwest Manufacturing Index (CFMMI) was essentially unchanged in June, at a seasonally adjusted level of 84.0 (2007 = 100). Revised data show the index increased 0.4% in May. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) was also essentially unchanged in June. Regional output in June rose 7.1% from a year earlier, and national output increased 4.1%.


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Posted by Testa at 1:49 PM | Comments (0)