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August 30, 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 and from other indicators of regional business activity:

Overall conditions: Economic activity in the Seventh District expanded at a moderate pace in July and early August, with the pace of growth once again slowing.
Consumer spending: Growth in consumer spending increased slightly due in large part to heavy discounting by retailers to clear inventory space for back-to-school items. Auto sales were, however, little changed from the prior reporting period.
Business Spending: Growth in business spending slowed. Capital expenditures were proceeding as planned, but contacts noted a greater degree of restraint in new spending and inventory accumulation.
Construction and Real Estate: Construction activity continued to increase at a slow pace. Multi-family construction remained an area of strength and demand for nonresidential construction continued to gradually improve.
Manufacturing: Growth in manufacturing production slowed further, with contacts expecting this slower rate of growth to persist throughout the second half of the year. Exporters noted weaker demand from Europe and Asia.
Banking and finance: Credit conditions continued to gradually improve. Banking contacts reported that many of their customers are waiting to assess the impact of the upcoming election on tax and healthcare policies before accessing credit.
Prices and Costs: Cost pressures were mixed. Prices fell for a number of commodities but rose for materials like steel and lumber. Wage pressures continued to be moderate.
Agriculture: The drought has substantially reduced expected yields for corn and soybeans. Livestock pastures are in poor shape as well, and fields with low corn yields were being chopped for silage to feed livestock.

The Midwest Economy Index (MEI) decreased to –0.10 in July from +0.22 in June, marking the first time in nine months that the index has indicated below-average Midwest growth. The relative MEI declined from +0.61 in June to –0.01 in July—its lowest value since October 2011.

Led by strong growth in the automotive sector, the Chicago Fed Midwest Manufacturing Index (CFMMI) increased 1.8% in July, to a seasonally adjusted level of 95.6 (2007 = 100). Revised data show the index was up 0.9% in June. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) increased 0.5% in July. Regional output rose 12.5% in July from a year earlier, and national output increased 5.2%.

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August 8, 2012

First-Half Seventh District Manufacturing Performance

By Martin Lavelle

While manufacturing activity has been slowing over the past couple of months, its performance over the first half of 2012 would definitely be scored as a positive for the region. Seventh District manufacturing activity built on its momentum from last year and continued to grow through the first half of 2012. Growth occurred at rates fast enough to virtually eliminate the output deficit that the Seventh District had developed relative to the U.S. during the Great Recession. Chart 1 shows the performance of the Federal Reserve Bank of Chicago’s Midwest Manufacturing Index versus the Federal Reserve System’s Manufacturing Production Index, which is part of its Industrial Production release. The Seventh District’s output deficit narrowed quickly in the early months of 2012, as growth in the Midwest manufacturing sector accelerated.

Chart 1: Chicago Fed Midwest Manufacturing Index vs. U.S. Manufacturing Production Index

Source: Federal Reserve Bank of Chicago

In an earlier blog, I noted that, based on purchasing managers’ index (PMI) reports throughout the Seventh District, manufacturing was expanding at a faster rate in the Midwest than in the U.S., most likely leading to faster economic growth for the region than the U.S. as a whole during last year and into this year. Over the first half of 2012, PMI reports for the Seventh District indicate this trend is continuing. However, recent individual PMI reports suggest the nationwide slowing of manufacturing has spread into some parts of the Seventh District.

Chart 2 shows PMI readings from Seventh District locations since the beginning of 2011.[1] Since January 2012, manufacturing activity in Iowa and Southeast Michigan (metro Detroit) has continued to expand at a fairly steady pace. Meanwhile, Western Michigan, and Milwaukee have seen some slowing in the rate of increase in manufacturing activity—especially in Western Michigan, where office furniture production has slowed somewhat due to a softening expansion in U.S. business fixed investment spending and automotive suppliers have slowed production because of increasing national and global economic uncertainty.

Chart 2: U.S. and Seventh District PMIs: Total

Source: Haver Analytics, ISM

Despite an overall slowing of the pace of growth in some areas, manufacturers continue to add modestly to their payroll employment. Indeed, according to PMI reports, employment gains have accelerated in Chicago and Southeast Michigan. Using data on payroll employment from the Bureau of Labor Statistics, Chart 3 compares manufacturing employment growth rates in the U.S., Seventh District, and Michigan. Manufacturing employment has grown at faster rates in the District thus far in 2012, and especially in Michigan, than in the nation, thanks in large part to a rebound in auto-related production, spurred by rising national demand for light vehicles.

Chart 3: U.S., Seventh District, Michigan Employment: Year/Year Change in Manufacturing Employment Growth

Source: Bureau of Labor Statistics

However, employment gains haven’t been limited to auto-related manufacturing sectors. Chart 4 compares job growth in manufacturing sectors excluding auto-related manufacturing. Other manufacturing sectors in the Seventh District and Michigan have also added jobs at faster rates than the U.S. Agriculture continues to be a boon for the Seventh District economy, translating into job growth in food manufacturing and machinery. Employment levels among Seventh District food manufacturers are 1.8% higher than a year ago, compared with just 0.4% growth nationally. In Iowa, food manufacturing employment has grown 2.2% over the last year. Iowa has also seen robust hiring from machinery manufacturers, specifically agriculture, construction, and mining machinery. Machinery sector employment in Iowa has increased 16% from the previous year.

Chart 4: U.S., Seventh District, Michigan Employment: Year/Year Change in Manufacturing Employment Growth Excluding Autos

Source: Bureau of Labor Statistics

The District has recorded significant employment growth in agriculture, machinery, printing, plastic, rubber, metal, and furniture-related industries. With improving employment and output growth across such a wide range of sectors, the region continues to outperform the nation to a modest degree.

[1]These PMI readings have been smoothed with a 12-month moving average as they are not seasonally adjusted (so that all locations can be compared). (Return to text)

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August 2, 2012

Families and Central Cities

For central city economies like those of New York and Chicago, the 1970s were a low point as middle- and upper-income households in large numbers suburbanized out of older cities of the Northeast and Midwest. Since then, some central cities have been rediscovered, especially by younger and educated singles. Moreover, to a lesser extent, central cities have also been rediscovered by older (often retired) households with middle and upper incomes. Prominent researchers, such as Ed Glaeser, have described this return to central cities, along with the particular features of urban areas that have attracted households back. Some of the attractiveness of central cities has been attributed to such amenities as high culture venues, falling crime rates, lively night life, older architecture, and an active “marriage market.” Others note that highly skilled and educated workers have also found superior employment opportunities in central cities, and so, their decisions to reside in urban areas have often been affected by their locations of work.

But how have central cities (relative to suburbs) fared in attracting and keeping families with children? Since the 1970s and 1980s, many cities have been criticized for their poor quality of public schools, and in turn, many city officials have pledged to reform and improve cities’ educational offerings. Additionally, unsafe or crime-prone neighborhoods have been sometimes associated with central cities, although crime rates have generally been falling over time.[1] Lower-income children attending poor-quality schools and living in unsafe neighborhoods are perhaps most at risk, since their families may often be hard-pressed to provide them with the attention and resources necessary to build up their human capital and keep them safe.

That said, more telling insights on the city versus suburb location decision may be gleaned by examining households that have high educational attainment and high income. Such households are usually the ones that are most mobile and most able to choose—that is, they are the families who can “vote with their feet” and who aren’t constrained by a lack of household income, challenges in gaining access to information on outlying neighborhoods, and limited housing/neighborhood opportunities.[2]

It is further evident that households with high education and high income tend to choose communities based on criteria such as the quality of local schools, safety, and the education level of residents.[3]

For these reasons, residential choices of households with high levels of education and income may be an important bellwether for many families in identifying their preferred residential locations. So, too, the attraction and retention of such high educations households in central cities may be a keen public policy target. To repel highly educated, highly paid workers from living in central cities would impose real costs—indeed, without a pool of such workers readily available, cities might have greater challenges in attracting more businesses and jobs, as well as building up a strong commercial tax base.

Preliminary evidence suggests that, on average, cities have shown limited progress in becoming more amenable places in which to live for families with children. The table below, drawn from the National Opinion Research Center’s General Social Survey, indicates that since the 1970s, suburbs have maintained their edge over cities as the preferred locale of residence for families with children. For the 100 largest metropolitan statistical areas (MSAs) surveyed, the share of the total adult population living in central cities has declined in tandem with the share of those adults having children. Similarly, the share of the overall college-educated population residing in central cities has also declined in tandem with the share of such college-educated adults having children.

However, the General Social Survey data do suggest that college-educated adults have tended to suburbanize at a much lower rate than the overall population. Likewise, college-educated adults with children have also tended to move to the suburbs at a lower rate relative to the overall population with children.

Percentage of 25+ year olds living in central cities of 100 largest MSAs, 1970s and 2000s

Source: Author’s calculations based on data from the General Social Survey, http://www3.norc.org/gss+website/.

The table below offers a demographic snapshot of 16 large metropolitan statistical areas, with a focus on the population share living in the central city. The first column itemizes the shares of the MSAs’ total populations that live within central city boundaries. This column offers an important point of comparison among MSAs because city versus suburban land share (and population share) can vary widely across MSAs. Such differences stem from the fact that in many instances, city boundaries have been cut short historically because cities failed to annex population growth on their urban fringe.

The second column provides population shares of college-educated adults aged 25 years and older living in central city limits. Some cities, such as Boston, Minneapolis–St. Paul, San Francisco, and Washington, DC, rank highly as the chosen locations of residence for college-educated adults; indeed, this is indicated by their shares of living within central city boundaries being higher than that of the general population.

In the third column, cities are generally shown to be the domicile of far fewer college-educated parents with school-age children (relative what is seen for the total population and for the overall college-educated population). On average, these 16 central cities are home to 24% of their MSA populations, but only 14%% of their college-educated parents with school-age children. Even for cities with a relatively high share of all college-educated adults residing within them, college-educated parents with school-age children will tend not to follow their counterparts without children. For example, 16% of the college-educated adults in the Washington, DC, metropolitan area live within the District, yet only 5% of the college-educated parents of school-age children do. There are some exceptions: Central Charlotte and New York tend to retain a share of such college-educated parents in their respective MSAs roughly in proportion to college graduates who are not parents.

Percentage living within central city boundaries of the Metropolitan Area 2009

Source: Author’s calculations based on data from the U.S. Census Bureau, American Community Survey.

What explains these differences across metropolitan areas? As always, there are many crosscurrents to understand and account for. For instance, some cities may be more successful than others at hosting employers with job opportunities for highly skilled and educated workers, who, in turn, choose to live in proximity to their job sites. Additionally, some cities may attract highly educated (but childless) persons because of their amenities such as excellent night life and architectural preservation. Such features may not be very high priorities for parents (regardless of educational background) with school-age children. However, differences in schools and safety may matter greatly to families with children. Indeed, many complex factors go into the decisions of different demographic groups choosing to live in and out of central cities. Accordingly, over the coming year, Bill Sander and I will be further analyzing data while accounting for all of these considerations.

[1]Crime rates in cities and in suburbs have fallen markedly (on average) since the 1990s, with city crime rates tending to fall more steeply but with suburban communities maintaining lower (average) rates of crime over a longer period. See Ingrid Gould Ellen & Katherine O’Regan and Elizabeth Kneebone and Steven Rafael.(Return to text)

[2]For data on the frequency of moves by demographic characteristics, see, U.S. Census Bureau, Geographical Mobility: 2010 to 2011. Households with higher educational attainment move more frequently for long distance moves. For local moves, this is not the case.(Return to text)

[3]See, for example, Julie Berry Cullen and Steven D. Levitt, 1999, “Crime, Urban Flight, and the Consequences for Cities,” Review of Economics and Statistics, Vol. 81, No. 2, May, pp. 159–169; this article shows that households with high human capital demand a safe environment, which make many suburban areas more attractive to such households. Additionally, see David Albouy and Bert Lue, 2011, “Driving to opportunity: Local wages, commuting, and sub-metropolitan quality of life,” University of Michigan, working paper, August 8, 2011, available here; this paper shows that households pay premia to live in those suburban areas and city neighborhoods having low crime and well-funded schools.(Return to text)

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