April 18, 2012
Manufacturing as Destiny, Part II
By Bill Testa
During a recent visit and tour of Racine, Wisconsin, and vicinity, I was reminded of the difficult challenges that face older manufacturing-oriented cities. It would be tough to find a place as steeped in manufacturing as the Racine area. As recently as 1969, over 40 percent of the Racine metropolitan area’s jobs were to found in the sector—double the national level. Since then, the Racine area’s experience has been similar to that of so many manufacturing-oriented places. Due primarily to job losses in the sector, manufacturing now represents only 20 percent of the Racine area work force, and this is still more than double today’s national average!
Forty years ago, with such a heavy orientation in manufacturing, it would have been risky indeed for Racine area leaders to neglect the needs of this sector and focus their full attention toward diversifying the local economy. Even today, Racine’s makers of household cleaning products, farm machinery, and hydraulic mechanisms used in marine craft remain a vibrant part of its economy.
So, over the years, Racine’s leaders have pursued a dual development strategy of maintaining the region’s manufacturing base to the extent possible, while also trying to shift gears to the growing services sectors of the economy, including residential living, tourism and recreation, and business and professional services. In particular, the region has, on the one hand, worked to rebuild its downtown and neighborhoods and develop its lakefront and riverfront with bikeways, beaches, downtown festivals, and marinas for pleasure boats. At the same time, it continued to pursue manufacturing and distribution through cleanup and environmental remediation of vacant industrial land, development of new industrial sites, aggressive work force training and education, and construction of viable overland transportation for moving freight and materials.
Driving around the City of Racine, one can clearly see the challenges to planning and redevelopment as they relate to region’s economic base and physical footprints. This area was built around manufacturing and heavy industry and has a legacy of neighborhoods with small houses where former factory workers resided and frequented neighborhood stores, meeting halls, churches, and taverns. The challenges lie in creating cohesive links between the parks and revitalized downtown across areas of older factory buildings, railway tracks, and busy highways carrying freight among still-working factory operations and warehouses. At the same time, new land to accommodate today’s spacious industrial development, such as warehousing and distribution, must be fashioned or reclaimed from a hodge-podge of small parcels of varied-use land. Mayors, county officials, town planners, and economic development officials have their hands full in Racine as they do in many towns of the Midwest.
The issues and lessons from such redevelopment efforts are currently being assessed by the Community Development and Policy Studies (CDPS) group at the Chicago Fed as part of their Industrial Cities Initiative (ICI). At the recent inaugural conference to discuss the ICI, I presented some statistical results which, I think, corroborate the sharp challenges of industrial cities such as Racine.
In our statistical analysis of 83 metropolitan areas (MSAs) located in the midwestern states from Iowa and Minnesota eastward to Ohio, we examined two main influences on MSA growth. We measure growth both as per capita income and separately by total jobs. Drawing on the large existing body of research, we demonstrate that an MSA’s initial “educational attainment of the adult work force” apparently exerts a strong influence on subsequent growth in jobs and income across MSAs. Educational attainment has been previously found to be influential for several reasons. For one, places with higher educational attainment have been better able to shift into new industries and occupations when their former mainstays (such as manufacturing) have declined. Further, new business start-ups and entrepreneurial activity appear to arise more easily among work force populations having higher education.
We also tested the degree to which MSAs with higher initial concentrations of manufacturing employment were more or less successful in their subsequent economic growth. What we found was that, even after accounting for the influence of educational attainment, a historical manufacturing orientation tended to depress subsequent growth. Moreover, the effects were long-lived. An MSA’s tendency to host manufacturing 20 years prior continued to depress overall economic growth. For example, we correlated MSA manufacturing concentration in 1969 with subsequent growth during 1990 to 2009 and found that the manufacturing legacy was a significant drag on economic growth and development for the much later period.
All things considered, the redevelopment achievements of many of our older manufacturing cities are remarkable.
April 11, 2012
Seventh District Update
by Norman Wang and Scott Brave
A summary of economic conditions in the Seventh District from the latest release of the Beige Book:
• Overall conditions:Economic activity in the Seventh District continued to expand at a moderate pace in late February and March.
• Consumer spending: Consumer spending increased significantly, as retailers reported unseasonably warm temperatures boosted sales.
• Business Spending: Business spending continued to increase and inventories were generally indicated to be at comfortable levels. Labor market conditions continued to improve, although hiring remained selective in many industries.
• Construction and Real Estate: Construction activity increased as demand continued to be strong for multi-family construction and single-family construction edged up some from its depressed levels.
• Manufacturing: Growth in manufacturing production leveled off, but activity continued to increase. The auto industry remained a source of strength, and demand for heavy equipment was boosted by the need to replace ageing equipment.
• Banking and finance: Credit conditions were slightly improved. Volatility and risk premia edged lower, and credit availability for households improved, particularly for auto loans and credit cards.
• Prices and Costs: Cost pressures increased, particularly for energy. Wage pressures also increased, but continued to be moderate. Contacts indicated difficulties in passing on higher costs to customers.
• Agriculture: Unseasonably warm weather jumpstarted field work and corn planting and soybean and cattle prices increased while corn, milk, and hog prices decreased.
The Midwest Economy Index (MEI) increased to +0.36 in January from +0.20 in December, reaching its highest level since May 2011. Midwest growth continued to outperform its historical deviation with respect to national growth, but the relative MEI decreased to +0.31 in January from +0.45 in December.
The Chicago Fed Midwest Manufacturing Index (CFMMI) increased 1.0% in February, to a seasonally adjusted level of 91.7 (2007 = 100). Revised data show the index was up 2.1% in January. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) increased 0.4% in February. Regional output in February rose 10.1% from a year earlier, and national output increased 5.4 %.
April 6, 2012
Hog Butcher No More, but Service Purveyor to Same?
By Bill Testa
For Chicago (and the U.S.), no one would argue that economic conditions have approached a state of full recovery. Almost three years into the expansionary phase of recovery from the 2008–09 recession, Chicago’s unemployment rate remains lodged near 9 percent. Yet, these three years of expansion may be telling in other ways. That is, comparing Chicago’s current experience with its past recovery experiences can provide insights into the structure and outlook for Chicago’s economy.
As seen in the chart, the Chicago area’s unemployment rate is typically slower to recover from recessions than the U.S. overall. This is somewhat to be expected, since Chicago and Midwest recessions are typically sharp and deep owing to the region’s preponderance of manufacturing companies. Following steep recessionary declines, it takes a while for these and other companies to re-engage the work force.
A further glance at the chart reveals that the Chicago area’s economy was especially tardy in its labor market recovery following the short and shallow recession that ended in the fourth quarter of 2001. The Chicago area’s unemployment rate did not converge with the national rate until very late in 2006. Today, by contrast, ten or more quarters past the end of the national recession, the Chicago area’s unemployment rate seems to be making substantial progress toward convergence with the rest of the U.S.
One of the underlying reasons for this difference in experience is probably the different behavior of the manufacturing sector in these two periods. In the current period, manufacturing has been growing since the end of the recession both in the nation and the Midwest. In contrast, the period surrounding the 2001 recession saw manufacturing declining markedly. From 2000- 2003, the Great Lakes states surrounding Chicago lost almost 700,000 manufacturing jobs on net—representing about one-fourth of all U.S. manufacturing jobs lost in that period.
To be sure, the Chicago economy does not have the deep manufacturing orientation that it once had—at least not directly. Once “hog butcher to the world,” Chicago is now more of a provider of high end business and financial services. Today, Chicago is the capitol of the risk product financial exchanges and a center of vibrant job opportunities in accounting, law, management consulting, business meeting/travel, and corporate headquarters operations. Nonetheless, looks can be deceiving, in that these service operations are often vitally linked to goods-producing service customers. That is, the Chicago economy continues to sell its business services to Midwest and national goods producers, both in agriculture and especially in manufacturing. Accordingly, regional and national trends in goods production continue to matter to Chicago’s economic performance and well-being.
The table lays out the Chicago area’s job performance during the ten quarters following each of the past two recessions. To begin with, as measured by total private sector job growth, we see that Chicago’s overall performance following the 2001 recession was abysmal. During the national recovery, the Chicago metropolitan area (CMA) experienced a jobs decline of –2.6 percent or over 100,000 jobs. In contrast, so far in the current recovery, private sector payroll jobs in the CMA have expanded by 1.2 percent.
Which particular industry sector differences explain this overall performance? In the recent period, the CMA shares some important trends with the national economy. In the aftermath of the housing market collapse, for example, job growth in the construction sector is much weaker. State and local governments also continue to downsize today, unlike the post-2001 expansionary period. So too, financial activities such as banking and real estate continue to shrink during this expansion. The latter presents a challenge for Chicago, as its economy is more concentrated in financial activities than the nation (column 6).
But perhaps the most concentrated industry for Chicago is “professional and business services.” In this sector, and unlike the earlier experience, the region has achieved net job growth of 7 percent this time around, versus a loss of 2 percent at this point in the post-2001 expansion.
A look at the past behavior of this industry reveals that, during the last expansion, CMA employment in business and professional services did not bottom out until almost 2004 (Figure 3 below). Nationally, the sector also performed poorly. However, the national business services sector outperformed Chicago's business service sector, hitting bottom nationally several quarters ahead of the CMA trough.
To understand Chicago’s business services performance, we must look to trends in manufacturing. Chicago remains a major wholesaler, transporter, and warehouser of goods that are produced in the broader Midwest region. It is here in Chicago that all six major North American railroads come together and the largest North American intermodal freight operations (i.e., between truck and rail car) take place. As shown in the table, employment in the CMA’s “transportation and warehousing (and utility)” sector has expanded by 5 percent over the past ten quarters, versus a decline of 5 percent during the post-2001 expansion.
It is likely that Chicago’s vaunted business and professional services sectors are also being led by demand from the surrounding goods-producing customers. The final chart shows a strong correlation (0.88 out of 1.0) between Chicago’s business/professional service job growth and manufacturing job growth in the Great Lakes states that look to Chicago as a regional business hub. The correlation in job growth between Chicago’s own professional services and manufacturing sectors is similarly high, at 0.86).
Midwestern policy leaders need to understand these correlations in order to influence the CMA’s job prospects and economic conditions. Certainly, the CMA economy has an important footprint as a global city that is tied to services and travel around the world. But its economic base remains strongly tied to goods production in the nation and the nation’s mid-section.