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July 28, 2014

Economic Development in Indianapolis, Indiana

By Rick Mattoon

This is a second in a series of blogs that highlights findings from an upcoming Economic Perspectives article on economic development efforts and industry trends in the largest metropolitan areas in the Seventh District. (For a complete profile of all five cities see, Industrial clusters and economic development in the Seventh District’s largest cities.) This blog focuses on Indianapolis. Like Des Moines, Indianapolis has the advantage of being the state capitol. This helps stabilize its performance in economic downturns. In addition, Indianapolis has a fairly unique regional governance structure called Uni-gov, which it adopted in 1970. This structure supports more unified economic planning across the metropolitan area. When it comes to industry structure, there is a diverse mix of industries in the area, along with some specialized niche industries, such as amateur athletics and auto racing.

Indianapolis MSA Industry Structure
Table 1 displays the industry structure of Indianapolis (based on employment relative to the U.S. as a whole). In addition, the table provides location quotients (LQs)[1] that demonstrate the relative concentration of that industry in the Indianapolis MSA versus the U.S. as a whole. Any score above 1 indicates that the MSA has a concentration above the U.S. average. For example, construction employment in Indianapolis has an LQ of 1.06, which means that its employment share is 6 percent above the U.S. average.

The BLS figures for 2012 have nondisclosure issues for some large sectors, such as manufacturing and accommodations and food service, which likely make significant contributions to the metropolitan economy. Based on the available sectors, Indianapolis’s metropolitan employment shows above national average concentrations in real estate (LQ = 1.1), finance and insurance (1.07), transportation and warehousing (1.66), administrative and waste services (1.29), and construction (1.06).

Indianapolis MSA Economic Development Strategy
Develop Indy is a business unit of the Indianapolis Chamber of Commerce that partners with a wide array of local agencies to identify the region’s competitive advantages and target industries for growth.[2] The initiative has identified six factors that provide a competitive edge to the region: 1) low cost of doing business, including favorable taxation rates (lowest sales tax rate in the Midwest), real estate prices, and utility rates; 2) superior transportation infrastructure, including five major interstate connections, new airport terminal with significant cargo operations, the second largest Fed Ex hub in the nation, more than 100 trucking companies, five major rail lines, and three maritime ports; 3) available and well-trained work force with skills focused in life sciences, digital technology, advanced manufacturing, logistics, motor sports, and clean technology; 4) global appeal, with large foreign direct investment as evidenced by more than 500 foreign companies in the state; and 5) excellent higher education and cultural institutions, including Indiana University-Purdue University Indianapolis, Butler University, University of Indianapolis, and Ivy Tech Community College, amateur and professional sports teams, museums, zoo, and many public parks.

Finally, as the figure below illustrates, employment growth for Indianapolis has done well relative to the Seventh District as a whole. Both before and after the Great Recession, Indianapolis has shown more robust employment gains than has been the case for the District.

[1]The U.S. Bureau of Labor Statistics (BLS) defines LQs as "ratios that allow an area's distribution of employment by industry to be compared to a reference or base area's distribution". (Return to text)

[2]See developindy.com. (Return to text)

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Posted by Testa at 11:05 AM | Comments (0)

July 21, 2014

Economic Development in Des Moines, Iowa

By Rick Mattoon

In a forthcoming article in the bank’s Economic Perspectives, I profile the economic development efforts underway in the five largest cities in the Seventh District—Des Moines, Indianapolis, Milwaukee, Detroit, and Chicago. (For a complete profile of all five cities see, Industrial clusters and economic development in the Seventh District’s largest cities.) Each city faces its own unique set of challenges and has a distinctive economic base that has influenced its growth path. In a series of blogs, I would like to summarize some of the major trends in each metropolitan economy, starting with Iowa’s capital city—Des Moines.

The Des Moines MSA (metropolitan statistical area) economy has developed a strong mix between financial and professional service firms and manufacturing. In addition, the city benefits from being the capitol of the state, leading to a high concentration in state government employment. Large employers in the area include Wells Fargo (banking), Principal Financial (financial services), Mercy Medical and United Point Health (both health care), DuPont Pioneer (agribusiness), John Deere (agricultural machinery), Marsh (insurance), and UPS (shipment and logistics).

Des Moines MSA Industry Structure
To get a sense of which industries are most important to the metropolitan area’s economy, we can look at its employment concentration in industries relative to the U.S. Table 1 shows the employment percentage for each industry for both the U.S. and the Des Moines MSA. For example, Des Moines has only two industries where the share of local employment is above the national share of employment—wholesale trade and management of companies. In addition, the table provides location quotients (LQs)[1] that demonstrate the relative concentration of each industry in the Des Moines MSA compared with the U.S. A reading of 1 indicates that Des Moines has the same industry employment concentration as the U.S. As the table shows, Des Moines has significantly above average employment concentrations in two industries—wholesale trade at 1.27 ( or 27% above the U.S. average) and management of companies at 1.17. Additionally, Des Moines’s industry concentrations are roughly in line with the U.S. averages for such important industries as construction, retail trade, administrative and waste services, and arts and entertainment. The industries that are much less represented in Des Moines are agriculture, mining, and utilities (although clearly agriculture is of key importance to Iowa as a whole). Interestingly, two sectors that the city targets for growth, professional and business services and manufacturing, have relatively low concentrations (0.74 and 0.64, respectively). In the case of professional and business services, an issue with the data is that nondisclosure rules do not permit an LQ to be calculated for the important finance and insurance sector, which is likely to have high levels of professional employment.

Des Moines MSA Economic Development Strategy
The Greater Des Moines Partnership led an effort to develop a five-year plan for Des Moines and the capital region. The plan aims to position Des Moines as a midsized city with a specialized industry base. It focuses on an industry and demographic comparison with other similar regions, including Omaha, Nebraska, Madison, Wisconsin, and Denver, Colorado. The plan identifies key clusters in which the region is most competitive and recommends that the region market itself specifically to these sectors: finance and insurance; information solutions; health and wellness; agribusiness; manufacturing; and logistics.

The other elements of the plan are similar to most of the other cities’ development plans in stressing appropriate human capital development and work force training. In particular, the Des Moines plan emphasizes developing an employment and training pipeline that meets the needs of local businesses. There is also a geographic component to the plan, targeting growth along the I-35 corridor.

If one reviews the strategy relative to the data on industry structure, it becomes clear that the targets for development consist of a mix of large employment centers (finance and insurance) and logistics-related wholesale trade, as well as historically important industries, such as manufacturing and agribusiness. Manufacturing does not currently represent a high employment concentration in Des Moines, so its inclusion may signal a hope to revive the sector. Given recent speculation that manufacturing is seeing favorable conditions for reshoring of jobs and activities (due to factors such as lower energy costs), many midwestern cities are hoping to restore some manufacturing activity. Finally, Des Moines also benefits from a stable fiscal situation. While the city’s credit rating was recently downgraded by Moody’s due to unfunded pension obligations, it still has an Aa2 rating. And the state government’s fiscal condition is relatively solid.

Finally, Des Moines’ recent economic performance has been quite strong relative to much of the Seventh District. The following chart shows the year-over-year growth in payroll employment for Des Moines versus the Seventh District average. With the exception of a brief period coming out of the Great Recession, the MSA’s employment growth rate has been favorable. In particular, Des Moines has opened a significant gap with the District since 2013.

[1]The U.S. Bureau of Labor Statistics (BLS) defines LQs as "ratios that allow an area's distribution of employment by industry to be compared to a reference or base area's distribution". (Return to text)

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July 16, 2014

Seventh District Update, July 2014

By Thom Walstrum 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: Growth in economic activity remained moderate in June and contacts maintained their optimistic outlook for the rest of the year.
Consumer spending: Consumer spending increased in June, but the overall pace of growth remained modest. In most cases, retail sales met or fell slightly below expectations. Light vehicle sales rose as consumers continued to enjoy favorable incentives and credit conditions.
Business spending: Business spending continued to grow at a moderate pace in June. Capital expenditures and spending plans continued to increase, with expenditures still concentrated on industrial and IT equipment. Hiring picked up and hiring expectations continued to increase, with the gains more pronounced in the service sector than in manufacturing.
Construction and real estate: Construction and real estate activity increased at a moderate pace in June. Residential construction increased, but home sales declined modestly. Nonresidential construction strengthened considerably and commercial real estate activity continued to expand.
Manufacturing: Manufacturing production continued to grow at a moderate pace in June. The auto, aerospace, and energy industries remained a source of strength for the District. Steel service centers reported improving order books, as did many specialty metal manufacturers. Demand for heavy machinery grew at a slow but steady pace, weighed down by the weakness in mining.
Banking and finance: Credit conditions improved moderately. Corporate financing costs decreased further. Business lending increased, with contacts noting a pickup in demand for financing of equipment and commercial real estate. Growth in consumer loan demand was steady.
Prices and costs: Cost pressures increased, but remained modest. Energy costs remained elevated. Competition put downward pressure on retail prices, but wholesale prices changed little, compressing margins. Wage pressures increased, primarily for skilled workers. Non-wage labor costs were little changed.
Agriculture: The District’s corn and soybean crops made up ground as favorable weather helped plants emerge more quickly than the five-year average. Corn, soybean, wheat, milk and cattle prices moved down, while hog prices moved higher as disease affected supplies.

Led by improvements in the manufacturing sector, the Midwest Economy Index (MEI) increased to +0.41 in May from +0.11 in April, reaching its highest level since December 2013. However, the relative MEI remained negative for the third straight month, after edging down to –0.38 in May from –0.36 in the previous month. May’s value for the relative MEI indicates that Midwest economic growth was moderately lower than would typically be suggested by the growth rate of the national economy.

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July 10, 2014

District Housing Update

By Bill Testa

The housing sector has made halting progress throughout the five-year recovery from the Great Recession. Beginning in June 2013, progress began to slow as mortgage rates jumped, thereby hampering affordability and lending viability. Even as home mortgage rates and lending standards were beginning to ease, this past winter’s unusually cold and stormy weather dealt another setback to sales and construction activity in several regions, including the Midwest, Northeast, and parts of the South.

In an effort to analyze residential real estate market developments in the Seventh District, I have developed an index that monitors its metropolitan statistical areas (MSAs).[1] The index combines observations of each District MSA’s housing market on a year-over-year basis. Any index value greater than 50 (indicating that more MSA observations are positive than negative) signals expansion for the Seventh District’s residential real estate sector; index values less than 50 indicate contraction.

As of the first quarter of 2013, the Index entered positive (expansionary) territory for the first time since 2005, where it remained throughout 2013, although the pace of expansion eased during the second half of the year. However, the most recent reading for Q1:2014 shows that downward momentum from 2013 coupled with the depressing effect of a harsh winter pushed the index into contractionary mode once again.

In observing individual MSAs (below), scattered contractionary trends are evident in each District state, but especially in smaller MSAs. In contrast, large MSAs continued to expand (e.g., Chicago and Des Moines) or at least showed neutral growth trends (e.g., Detroit, Indianapolis, and Milwaukee).

A look back to the fourth quarter of 2013 (above) shows that, to a greater extent, local housing markets continued to display improvement before the onset of winter, which raises the question of whether forward momentum will soon be reestablished. During the past couple of months, housing indicators suggest that activity has bounced back to some extent. Nationally, three major housing activity indicators—new housing sales, existing home sales, and pending home sales—have all flashed positive in May.[2] Though these measures are not recorded for the particular geography of the Seventh District, all four major U.S. regions expanded by these measures in May—including the Midwest.[3] Seemingly, Midwest housing is back on the road to recovery. Still, strong activity in the second quarter of 2014 may partly reflect pent-up demand from last winter’s stall.

Note: thanks to Thom Walstrum for assistance.

[1]The number of MSA observations varies slightly as MSA boundaries change and some observations must be temporarily dropped from the sample. This index is built from two distinct data measures of housing market activity in each metropolitan area. The first measure is residential building permits. Permits are obtained prior to the construction of both single-family homes and multi-family buildings, such as apartments and condos; and data on the issuance of these permits are collected on a monthly basis. The second measure is the Federal Housing Finance Agency’s House Price Index (HPI), which is a quarterly measure that tracks the movement of single-family house prices. For a discussion of methodology see this earlier blog post. (Return to text)

[2]See http://www.census.gov/construction/nrs/; http://www.realtor.org/research-and-statistics; http://www.realtor.org/topics/pending-home-sales/data (Return to text)

[3]The Midwest region consists of 12 states—Ohio, Indiana, Michigan, Illinois, Wisconsin, Minnesota, Iowa, Missouri, North Dakota, South Dakota, Nebraska, and Kansas. Though positive, growth in Midwest new home sales was weak. (Return to text)

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