October 18, 2012
Government Employment in the Seventh District
By Bill Testa and Norman Wang
There is ongoing discussion about the appropriate and sustainable size of government in our society. At the national level, some of the debate centers on the demographic-driven expansion and long-term sustainability of social benefit programs, such as Medicare and Social Security. Expansion in outlays for such programs has been rapid. Growth in these programs chiefly involves transfers of income across population segments—from wealthier to poorer and from younger households to older ones—rather than expansion of direct government service provision and employment.
Direct employment by government in the process of program delivery is an important though not-comprehensive dimension of government’s size and importance to the economy. Direct employment represents services produced and provided by government agencies, including services such as education, police and fire, and national defense and security. The chart below illustrates government employment as a share of the economy’s “payroll” employment. Combined, the three sectors of government—federal, state, and local government—employ between one-sixth and one-seventh of the nation’s payroll work force.
Government employment as a share of payroll employment has not changed appreciably over time. During the post-World War II era, government employment in education grew strongly with the large baby-boom generation. Since that time, the share has been falling at a slow pace.
Comparing the nation with the Seventh District, the nation’s average share lies one to two percentage points above the Seventh District average (see chart below). In the District, all levels of government employ 15 percent of payroll workers, compared with 17 percent for the U.S. overall. The chief difference arises from the fact that federal government employment tends to be greater outside the Seventh District. In particular, federal government employment is heavily concentrated in the nation’s capital and surrounding areas in Virginia and Maryland.
Interestingly, the federal government is by far the junior partner in government employment, accounting for only 2.2 percent of payroll employment in the U.S. and 1.4 percent in the Seventh District. In comparison, local governments employ over 10 percent of workers in the Seventh District, which is very similar to local government employment across the nation.
Who are the local government employees? The U.S. Census Bureau tabulates employment by the general sector in which workers are serving. The following tables report local government employment for the five states of the Seventh District. For local government, it is clear that school district employment of teachers and non-instructional personnel accounts for the largest share. For 2011, employment of local public school systems in the District accounted for 56 percent of full time equivalent employment (776,000) of overall local government employment. By general category, public safety (police and fire) personnel comprised 9.5 percent of local jobs, followed by health and hospitals (6.2 percent), and higher education (4.1 percent, i.e. community colleges).
In the Seventh District, state government employment amounts to less than one-half the level of local government. Of these, higher education comprises over one-half of state government employment. Unlike local school outlays, state government pays for ever smaller shares of higher education costs. Rather, funding is derived from tuition and fees, grants to university researchers, federal government R&D, and other sources.
Other prominent state government functions include prisons and corrections, with 9.3 percent of District state government jobs (up over 9 percent since 1992). Not surprisingly, at 10.5 percent of state employment, health care has been another growth area in state government. Medicaid expansion accounts for much of the growth of state spending. The federal government picks up at least 50 percent of the cost of Medicaid provision, but the share varies directly according to individual state per capita income measures and other provisions.
State and local government employment has grown moderately over the past decade. As seen in the chart below, every District state except Michigan expanded employment at a moderate pace over the decade overall, though state and local government employment has been falling over the past two to three years. Locally, the depth of the 2008–09 recession has hit government budgets hard, which has resulted in work force reductions (and service cutbacks) in cities, counties, and school districts. It is somewhat unusual that these retractions in state–local government services and employment have come about during the recovery phase of the business cycle—a time when the government sector has historically tended to support economic recovery rather than weaken it.
Government employment levels were sustained during 2008 and 2009 as the federal government stepped in with increased grant funding for state-local government services, principally through the Anti Recessionary Economic Recovery Act (ARRA). However, as these monies have run out, the devastating effects of the recession on state–local revenues has been revealed through declining levels of personnel.
As seen below, Michigan’s government employment began to fall earlier in the decade as the state’s auto-related economy weakened..
Over the past two years, state and local governments have shed over 70,000 jobs, nearly erasing the gains of the previous years of the decade. Most recently, as the national and regional economies have begun to recover, state and local government fiscal conditions are also strengthening in many locales. Accordingly, over the past few months, the pace of government job declines is beginning to attenuate.
 Since the 1960s, the expansion of so-called “transfer programs” (which transfer income across household sectors) has been the fastest growing general category of government spending. In particular, prominent programs include OASDI (Social Security) and Medicare, and Medicaid—the joint federal-state government health care program that is targeted at lower income households. (Return to text)
 Direct employment also excludes purchases made by government agencies in the process of service provision. Among the more important of these, for example, federal government defense agencies contract extensively for military equipment with private sector companies and vendors. Federal government "consumption and investment expenditures" comprise between seven and eight percent of GDP.(Return to text)
 The split between state and local employment is roughly similar throughout the United States except in a few states, such as Hawaii, for example, where the state has assumed responsibility for elementary and secondary education.(Return to text)
October 10, 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 continued to expand in late August and early September, but again at a slow pace.
• Consumer spending: Growth in consumer spending was little changed. Contacts noted that the rise in gasoline prices had further deterred consumers from increasing discretionary spending and retailers lowered their expectations for the holiday shopping season.
• Business Spending: Business spending continued to increase slowly. Capital expenditures were proceeding as planned and inventories were generally indicated to be at comfortable levels.
• Construction and Real Estate: Growth in construction moderated some. Single-family construction continued to rise at a slow but steady pace, while multi-family construction was stronger and nonresidential construction weaker by comparison.
• Manufacturing: Manufacturing production edged lower, with contacts reporting that new orders had slowed considerably. Nonetheless, a number of contacts also indicated that quoting activity for next year had picked up.
• Banking and finance: Credit conditions continued to improve, with both credit spreads and market volatility decreasing. Banking contacts reported continued weak demand for business loans.
• Prices and Costs: Cost pressures increased some, primarily due to a rise in food and energy prices. Prices for construction materials also increased while most metal prices were steady. Wage pressures remained moderate.
• Agriculture: The corn and soybean harvest began a few weeks earlier than normal, as plants were dry due to the drought. In some areas, late rains helped produce higher-than anticipated yields, but these made only a small dent in the large drought-related losses. Crop quality was also an issue in parts of the District.
The Midwest Economy Index (MEI) decreased to –0.38 in August from –0.11 in July, reaching its lowest value since December 2009. The relative MEI declined from +0.05 in July to –0.30 in August—its lowest value since August 2011. Estimates of annual growth in gross state product for the five Seventh District states were updated through the second quarter of 2012 in this release. Estimates for Illinois, Iowa, and Michigan were slightly below the national rate of growth, while those for Indiana and Wisconsin were higher.
The Chicago Fed Midwest Manufacturing Index (CFMMI) decreased 1.2% in August, to a seasonally adjusted level of 94.1 (2007 = 100). Revised data show the index was up 1.5% in July. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) decreased 0.7% in August. Regional output rose 10.1% in August from a year earlier, and national output increased 4.0%.
October 4, 2012
How Do High Gas Prices Impact Detroit Vehicle Producers?
by Thomas Klier and Ryan Patton
The Detroit automakers (Chrysler, Ford, and GM) appear to be making headway in their market shares during this era of high and volatile fuel prices. If so, this represents something of a turnabout.
When the price of gasoline rises quickly, Detroit usually tends to struggle in the marketplace. It is not surprising that increases in the price of oil can lower the demand for automobiles. But the Detroit automakers feel the pinch more than their foreign-headquartered competitors. Those companies produce a more fuel-efficient mix of vehicles, not least because their home markets face much higher taxes for gasoline and, therefore, they need to focus on fuel efficiency all the time, not just when gas prices go up.
Let’s take a closer look at the two most recent episodes when the price of gasoline in the U.S. rose quickly and to similar levels. Between October 2007 and July 2008, the price of gasoline rose by 45%, topping out at $4.06 per gallon in the summer of 2008 (see figure 1). Just over two years later, after giving back all of its increase and then some during the second half of 2008, the price of gas rose in a similar fashion from September 2010 to May 2011, when it peaked at $3.91 per gallon. (Figure 1 also includes a third episode of rising gasoline prices. It is shorter in duration than the other two, ending in April 2012 with gasoline topping out around $3.90.)
Note that these two episodes took place at different points of the business cycle. During the first half of 2008, the U.S. economy was in a deep recession: GDP was contracting, and light vehicle sales were falling fast. The second period takes place after the recession ended. At that time, vehicle sales were rising, albeit slowly. During both periods of rising gasoline prices, consumers purchased an increasing share of cars versus trucks, especially small and midsize cars (see table 1).
In combining data on vehicle fuel efficiency (available from www.fueleconomy.gov) with vehicle sales, we can calculate the change in the fuel efficiency of all new vehicles purchased during the respective periods (see table 2). Not surprisingly, we find that during periods of high and rising gasoline prices, consumers on balance favor cars over trucks. This effect was more pronounced during episode 1, which mostly took place during the recession. In both episodes, consumers purchased a more fuel-efficient mix of vehicles. That effect was stronger during episode 1 when the sales-weighted fuel efficiency of light vehicles rose by 5%, and fuel efficiency increased in seven of the eight vehicle segment groups.
How well did the Detroit producers fare in the market place during these two episodes? Overall the Detroit producers lost market share during the first episode, but gained market share during the second episode (see figure 2).
Given that consumers purchased a more fuel-efficient mix of vehicles in both episodes, it is possible that the improved market share gains of the Detroit automakers reflect improvements in the fuel efficiency of their products. To explore this hypothesis, we focus on the small and midsize car segments, the part of the market in which Detroit has traditionally not done well during periods of high gasoline prices. Tables 3 (small cars) and 4 (midsize cars) tell the story. During the second episode of rising gasoline prices, Detroit’s product offerings, even among the small cars, fared noticeably better than during episode 1. The tables highlight only the top five selling small and midsize models, measured in units sold, for both the Detroit producers and their competitors. For each model, the tables report the market share and fuel efficiency (averaged across individual trim lines and combinations of engines and transmissions on offer).
Note that all continuing Detroit models listed became more fuel efficient over time. In addition, new models, such as the Chevy Cruze, were successfully launched. But not only did the fuel efficiency of the Detroit carmakers’ products improve, so did their market share. In both segment groups, the five best-selling Detroit models as a group picked up market share—nearly 3 percentage points in small cars and just over 6 percentage points among midsize cars.
The previous two tables suggest that it was indeed improved product offerings that resulted in market share gains for the Detroit producers. There is, however, a caveat to this interpretation: Episode 2 took place shortly after the March 2011 earthquake and subsequent tsunami in Japan, which severely affected its manufacturing sector. It is possible that Detroit’s gains in this period were related to supply constraints among Japanese competitors.
We try to get some additional insight by looking at a more recent, though less sustained, episode of gasoline price increases. Between December 2011 and April 2012, the price of gasoline rose quickly to $3.90 per gallon. While episode 2 took place shortly after the earthquake, episode 3 covers a period that includes the recovery of the Japanese producers, notably Honda and Toyota, from production constraints related to the earthquake. (The industry press suggests that both companies had returned to full production by September 2011; see for example a story from Automotive News).
Tables 3 and 4 also provide information from the last three months of episode 3, and we can see that a couple of trends continued: All of Detroit’s continuing models became more fuel efficient, and Detroit’s market share continued to be higher than in episode one in both segments, despite the abating supply constraints for the Japanese producers. On the other hand, the Japanese producers regained market share, especially for the midsize car segment. Note the strong increase in market share for the Toyota Prius, a vehicle exclusively produced in Japan, between episodes 2 and 3. Four of the five top-selling midsize cars not produced by the Detroit carmakers were produced by Japanese carmakers. The share of those four dropped by nearly 10 percentage points between episodes 1 and 2, likely reflecting supply constraints. By April 2012, it had recovered 3 percentage points. In small cars, the market share rebound of Japanese models was smaller in magnitude, with Detroit’s share barely falling back between episodes 2 and 3.
We conclude that, on net, the evidence suggests that the relative improvement in market shares of small and midsize vehicles produced by the Detroit automakers during the first half of 2011 was due to both product improvements in fuel efficiency and supply constraints experienced by their Japanese competitors.
Much has been written about renewed consumer interest in the fuel efficiency of vehicles (see for example here). Detroit appears to have taken note of this trend—leading to positive results in the marketplace.
Consumers tend to substitute vehicles subject to the utility they expect to obtain from a specific vehicle, such as transporting a family, towing a boat, or mainly commuting to work. Substitutions across specific vehicle models likely involve vehicles within the same or closely related segment groups (Table 1 distinguishes four segment groups each for cars and trucks). Trucks tend to be less fuel efficient as a group. For example, in 2011 the sales weighted average fuel efficiency for cars was 26.0 mpg; for trucks it was 19.2 mpg. (Return to text)
We do not have evidence of changes in the relative price of Detroit’s versus the Japanese companies’ products during this time. Note, however, that episode 3 includes the Chevrolet Sonic, the only subcompact currently being produced in the U.S. Its production is supported by a special labor agreement with the UAW that provides for a much higher share of entry-level wages being paid at the Orion, Michigan plant, where the car is being produced (see, for example, the following story in the New York Times).(Return to text)