May 14, 2007
Congestion tolling and privately operated roads—An idea whose time has come?
As our roads become increasingly congested, tolling and privatization of highways will be increasingly important lifelines, especially for large urban economies. The idea that motorists should pay tolls when driving on congested highways has long been advocated by economists. Conceptually, the “public” part of highway transportation is limited to the necessary intervention by public authorities to strategically acquire land for transportation and assure that all have access to travel freely in pursuit of commerce and recreation. However, the individual’s use of a roadway is often “private” in that it imposes congestion costs on other drivers (and some pollution as well). That is, in the motorist’s decision to use a road, the individual driver does not consider the congestion costs imposed on other drivers, thereby leading to the overuse of limited public roadway capacity. As a remedy, congestion tolls bring these individual driving decisions back into line with the greater public good. As the degree of road use (and congestion) varies by time of day and by day of the week, so should the amount of tolls vary accordingly.
After a long hiatus, interest in congestion tolling and privately operated roads has been climbing. European and Asian cities have made innovative headway in congestion fees. Both Stockholm and the City of London have implemented motor vehicle charges for the privilege of access to their central area; so has Singapore. Most recently, New York City has proposed to charge auto motorists $8 for the privilege of driving around Manhattan during peak traffic hours, with higher fees for those driving trucks.
Such actions are largely being spurred by rising congestion—which did not materialize overnight. The Texas Transportation Institute (TTI) creates a “travel time index” that indicates the relative change in travel time from peak traffic to free-flow traffic. In a TTI report, Chicago in 1982 had a travel time index of about 1.2, meaning that given a 40-minute commute during a free-flow period, a person driving during peak hours would drive about 48 minutes (20% longer than it “should” take). This had climbed to 57 percent longer by 2003. In four major cities of the Seventh District, the added time to a commute during peak hours has increased from 14% in 1982 to 46% in 2003.
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Prior to the recent spate of toll programs, some highway authorities experimented with non-price-rationing measures such as “high occupancy vehicle” (HOV) lanes. To curtail congestion, HOV lanes set aside and dedicated freeway lanes to those vehicles, including cars and buses that have multiple occupants. Unfortunately, the results were sometimes disappointing in relieving congestion because HOV lanes merely attracted vehicles that already contained multiple occupants, without prompting a significant number of single-passenger motorists to carpool. So, too, the dedicated HOV lanes, while often uncongested, tended to push even greater congestion onto unrestricted lanes of the highway.
In response, the so-called “high occupancy toll” or HOT lanes have sometimes been called into action. HOT lanes are essentially HOV lanes that allow single-occupancy vehicles to motor in them—but for a price.
What has brought us to this state of affairs? Under the best of circumstances, motorists prefer to drive when and where they choose at no charge. But Americans’ penchant for driving has far outrun our financial ability to build roads. Lifestyle changes have tremendously raised the miles traveled in cars by U.S. households. Rising household incomes have lifted the desires for ever larger houses and lots, which are, in turn, often satisfied by homes located quite far from work sites. In addition, owing to the desire for residential privacy, homes are often built on dead-end or nonthrough streets, which has aggravated traffic on the major arterial roads surrounding residential communities.
Also, the rising trend of two-earner households makes it difficult for both earners to simultaneously live near their workplaces. More generally, there are extensive logistics (and driving miles) for today’s American family to coordinate their many trips for work, shopping, education, and recreation. By one estimate (DOT), highway travel miles climbed 23.4% from 1995 to 2005 in comparison to a population increase of 11.4%. To accommodate such rising traffic, road expansion has climbed by only 2.6% over the same period.
Many observers recognize that improved community land use planning could help curtail our appetite for driving. For example, allowing developers to build high-density apartment-type residences around existing commuter rail stations would allow at least one of a household's commuters to keep a car parked during the workday commute. So, too, stronger community planning efforts to assure that households of modest means can find affordable housing could help curtail the need for very long commutes. In the Chicago area, for example, policy think tanks such as Chicago Metropolis 2020 and the Metropolitan Planning Council spearhead efforts and programs that promote such community planning. Still, however sensible such planning may be, there has been very little of it implemented in many U.S. cities to date, and so, the increased commuting has often overtaken existing roadway capacity.
In past decades, state governments have often tried to keep pace with rising demands for driving and for far-flung housing by building more roads, including freeways. Several forces are now conspiring to slow such construction, especially tight fiscal conditions. The primary source of highway grant assistance to states, the Federal Highway Trust Fund, is replenished from the federal tax on gasoline. But the tax of 18.4 cents per gallon has not been raised since 1993 so that while revenues do rise somewhat along with vehicle miles traveled, they do not keep pace with rising gasoline prices and higher milage automobiles. Meanwhile, the revenue resources of state governments have also been besieged. Many state gasoline taxes are themselves imposed on a stagnant "cents per gallon" basis, and the voting public strongly resists the raising of gasoline taxes—especially as motor fuel prices have put increased pressure on household budgets over the past three years.
This leaves state government officials in a quandary, since the costs for competing public services, especially health care, education, and prisons, are concurrently squeezing state budgetary funds. State and local governments are hard pressed to even maintain existing highways, let alone fund expansions to curtail growing traffic congestion.
In addition to charging tolls, elected officials are also responding by increasingly turning to the private sector to assume responsibilities that include the financing, planning, marketing, construction, operation, and pricing of roads and bridges. Many combinations and arrangements of these functions are being attempted, from simple outsourcing of management and toll collection of highways to the all encompassing long-term leasing of highways as a publicly regulated private business entity.
Increased congestion and financial stress are not the only reasons behind the privatization and tolling of transportation infrastructure. New and improved technologies for payment of highway tolls have recently come to the fore. In contrast to the driver of yesteryear who had no option but to deal with the delay-plagued coin and cash toll booths, today’s driver can often make payment with little or no slowing down. Toll payments can be made online by transponders carried within vehicles or offline by remiote reading of license plates.
Seventh District initiatives lie at the recent epicenter of these movements in the U.S. In particular, the City of Chicago entered into a 99-year lease to a private consortium in 2005, turning over operational responsibility for and revenue returns from an 8-mile stretch of toll highway called the Chicago Skyway. By many accounts, the City benefited greatly from this transaction, while the public interest of drivers was also well served by enhanced operational efficiencies. The City of Chicago used income from the deal to retire existing debt on the Skyway infrastructure, and with the remaining revenue, it also set up a trust fund and purchased a sizable annuity that will help finance the city’s general operating funds well into the future. The driving public now enjoys rapid roadway maintenance and toll collection and eased congestion, albeit with prospective increases in toll fees.
Following Chicago’s lead, the Indiana Finance Authority leased its east–west toll turnpike for $3.8 billion in 2006. In large part, Indiana will use the proceeds to fund and maintain highway infrastructure throughout the state.
Meanwhile, in an effort to reduce rush-hour congestion around the Chicago area, the Illinois Tollway Authority introduced differential time-of-day pricing for only trucks in 2005. This program also doubled tolls for drivers in autos who choose to pay by cash at toll booths rather than by electronic transponder as they drive through rapidly. Revenues from these schemes are being used for repairs and expansion of the tollway system; they are also being used for the capital costs of new and reconfigured “open road” (or no-stop) toll collection system, which enables vehicles to pay tolls while traveling at highway speeds.
As the Illinois Toll Authority and other examples show, privatization and tolling of roads are separable actions. But in some ways they reinforce one another. Turning one’s operations over to private companies may provide one way to overcome the public’s resistance to congestion pricing, especially in contrast to government authorities who may be encumbered or distracted by non-transportation responsibilities or political constraints (i.e., the lack of political will to appropriately price use of the asset). Privatization potentially may also allow the operational authority to change pricing regimes and payment technologies more quickly in response to changing roadway conditions. Also, cost efficiencies and service quality are presumably improved when private agencies are watching the bottom line, though this has not always proved to be the case.
Still, the issues inherent in privatization schemes are contentious with respect to both purported operational efficiencies and sound fiscal management by governments. In awarding operational and pricing autonomy to private companies, it is not always clear whether the public interest is less than optimally served in favor of the profitability of the private operator. In particular, monopoly-type pricing by a private operator may be worse than publicly directed underpricing of congested facilities. Similarly, the data collected from the publicly rather than privately operated system may be more readily available for systemic public land use and transportation planning across entire metropolitan areas. For these reasons, as they enter into such partnership arrangements, elected officials must carefully craft contract terms and then follow up by monitoring the private companies during the terms of the contract.
Other concerns center on the behavior and actions of governments when they first enter into such agreements. Upfront revenue windfalls from the leasing of public infrastructure may cloud the judgment of governments and elected officials. Without proper disclosure and oversight of government by the public, the sale and leasing of transportation infrastructure to private buyers may pander to the near-sighted proclivities of elected officials. To plug current budget holes, or to plump up current spending for self-motivated reasons, public officials may unwisely commit large revenue streams immediately received from the sale or lease, while concurrently widening future budget deficits by eliminating public revenue streams. As always, the voting public and their representative think tanks must be on guard to oversee the terms of public–private partnership arrangements.
Elected officials must also represent and protect the public’s interests in matters of fairness and equity. Lower-income households are those who will be disproportionately burdened to pay for the use of less-congested roadways. In many ex-urban and suburban places, lower-income households must travel long distances to access their workplaces. Equity concerns are often compelling, since these workplace commutes are often lengthened by land use restrictions undertaken in high-income communities that limit the availability of affordable housing near work sites.
In response to equity concerns, some states and localities are adding capacity and subsidies to public transportation—both light rail and buses. When funding is short, as it usually is, governments often earmark part of highway toll revenues to such dedicated purposes.
However, for many households, public transportation is not an option. According to the 2000 U.S. Census, only 4.7 percent of workers currently use public transportation. The table below shows average usage of public transportation for Seventh District states. Public transportation is, of course, more viable in densely populated places, including large cities such as Chicago. Since large cities also coincide with highway congestion and tolling practices, the use of tolls to fund public transportation subsidies will work better there.
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The use of congestion pricing, privatization, and new payments technologies remain in their infancy. Yet, because of the ever-increasing demand for driving, accompanied by little highway expansion and poor land use planning, heavy congestion will soon be a reality in many communities. For this reason, the Federal Reserve Bank will hold a one-day workshop this June to understand how pricing schemes, public–private partnerships, and emerging payment mechanisms can be used to address congestion and efficiency in commuter networks.
Posted by Testa at 6:11 PM | Comments (2)
April 13, 2007
Financial Services Employment Growth in Chicago
Financial and insurance activities have historically concentrated in cities. In large part, this location tendency follows from the deep and broad information that is needed in allocating capital to those endeavors of highest return. Owing to their intense human interaction, large cities are advantaged in gathering and processing information about potential investments, and in matching specialized financial market participants on both sides of financial transactions.
Although it might seem otherwise, the heightened ease of global trade and communication in recent years has done nothing to break loose the urban advantage in financial services. To be sure, technological advances in information technology have lowered the costs of transmitting information over long distances, thereby allowing some financial functions to disperse to less urban areas. For example, routinized activities such as the processing of insurance claims and billing invoices can now be more cheaply carried out in small U.S. cities or even overseas. However, to the contrary, the complexity of financial transactions has grown considerably, putting a high premium on the advantages of urban location as the domicile for many higher order financial transactions and for highly skilled financial workers and entrepreneurs.
As the fourth largest metropolitan area in the world, measured by total annual output, the Chicago area harbors some hopes for a strong and growing financial services sector. Chicago has long served as a significant regional financial capital for the Midwest, especially in banking and insurance. So too, its risk management exchanges and member firms have evolved these particular specialties into industries of global reach and employment. Accordingly, while Chicago’s economic roles in manufacturing and other activities have waned, Chicago’s stature in financial services remains highly important in supporting the region’s economy. For 2005, financial and insurance payroll jobs amounted to 246,000 in the metropolitan area, comprising 5.8 percent of the total job base.
The current industry classification system (NAICS) breaks down financial services into three parts: Credit intermediation (NAICS 522), Securities and Commodities Contract Brokerages & Other Financial Services (NAICS 523), and Insurance Carriers and Other Activities (NAICS 524). “Credit intermediation” includes commercial banking along with credit card issuing, consumer lending, sales financing and mortgage lending. NAICS 523 includes not only stocks, bonds, commodities brokerage and exchanges, but also investment banking, portfolio management, and investment advice.
Using payroll employment by industry as a measure, the graph below displays the relative concentration of large U.S. cities in these industries versus the overall U.S. economy. An index value of one indicates parity with the U.S. in the industry’s job concentration; a value exceeding one indicates that the city’s employment concentration exceeds the U.S. For example, a value of two indicates that a particular industry concentrates twice as much employment in the city as compared to the U.S.
Generally, Chicago and other large metropolitan areas are seen to concentrate more highly than the U.S. across major financial industries. The Chicago area’s payroll employment index registers a value of 1.33 for 2006, indicating a concentration over the entire 522-524 sectors that is 33 percent more concentrated than the U.S. (This concentration was approximately the same as back as 1990).
The Chicago area’s sharpest employment concentration lies in the NAICS 523 sector, securities and commodities brokerage etc. with an index value of 1.96. In large part, this derives from the city’s world-prominent risk exchanges and their member firms. In addition, however, concentrated sub-sectors also include investment banking, portfolio management, and investment advice.
In addition to these activities, Chicago’s economy also concentrates employment in insurance related sectors (NAICS 524, an index value of 1.15) and credit intermediation (NAICS 522, an index value of 1.30).
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Despite some ups and downs, Chicago’s financial sector employment has contributed to the city’s growth. As elsewhere in the U.S., the wave of banking deregulation led to profound consolidation during the 1990s. During the era, the Chicago area experienced employment declines in NAICS 522 concurrent with waves of bank acquisitions, mergers, and attendant consolidation. Since then, Chicago area employment in credit intermediation businesses has grown. For one reason, in a recent study, Tara Rice and Erin Davis document the proliferation of commercial bank branches in the Chicago region. Previously, severe legislative restrictions on the branching of banks in Illinois resulted in an underserved population.
Similar performance experiences befell Chicago’s risk exchange community during the late 1990s and early years of this decade. Prior to their recent structural re-organization and successful adaptation to electronic trading, Chicago’s risk exchanges stagnated as emerging exchanges around the world gathered market share from them. Since then, Chicago’s risk exchange and risk management community is once again expanding, including firm spinoffs into emerging business lines and technologies. One recent study entitled “Exploring Entrepreneurship: The Chicago Futures Trading Industry” documents the spawning of local economic ventures centered around “technologies developed to enhance the buy-side of trading as well as post-trading management and technologies that cope with the increasing volume of market data that is being generated through electronic trading.”
Through such upheavals, the graph below shows that finance-insurance employment growth has kept pace with overall job growth in the Chicago metropolitan area over the longer term. Employment in the insurance arena has declined 10 percent since 1990. However, these losses were made up for by growth in both remaining financial sectors. In particular, job growth in the securities and commodities sectors expanded by 30 percent since 1990, an increase of about 10,000 jobs.
In more recent times--since year 2000, all three finance and insurance sectors are helping to pull along the Chicago area’s labor market. On an annualized basis, in 2006 Chicago’s total payroll job levels across all sectors, financial and otherwise, remained 2-3 percent below the peak year 2000. Yet, financial and insurance sector payroll employment jobs has risen 5 percent over the period.
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How important is this financial service performance to the Chicago regional economy? In some measure, Chicago’s financial industries serve the surrounding Midwest region and its industries which would suggest some drag on Chicago’s financial sector activity. Yet, despite slow growth of the broader Midwest, Chicago’s financial and insurance sectors continue to expand payroll. Such growth bears watching. Averaged across all sectors, payroll jobs in the NAICS 522-524 sectors carry an average annual payroll that is 75 percent above the region’s average annual payroll per job, clocking in at more than $81,000 per payroll job in 2005.
Posted by Testa at 11:15 AM | Comments (0)
March 13, 2007
Higher Education and Chicago’s Development
With economic growth lagging in many Midwest communities, institutions of higher education are being asked to play a bigger role in their surrounding regional economies. This past fall, the Chicago Fed held a conference addressing the role of higher education in promoting regional growth and development.
In what ways does higher education fit into the regional development picture? The ways discussed at the conference were many and varied; certainly, one size does not fit all. In places ranging from Silicon Valley to Route 128 in Boston and even to Fargo, North Dakota, universities are transferring technology to industrial facilities in adjacent industrial parks and to fledgling high tech firms. In other places, including Akron, Ohio, and Rochester, New York, universities are active in helping redirect mature but declining local industries into new products and markets. And Indiana’s Purdue University has embarked on an ambitious engagement and outreach mission along several fronts: teaching, discovery, community outreach, and identifying local targets of economic development.
While the conference did not address the university role in Chicago’s growth and development, our outstanding business schools have clearly played a key role. Today, among many fine business programs, the city touts the perpetual top ten national ranking of Northwestern’s Kellogg School of Management and the University of Chicago’s GSB, along with the frequent top ten ranking of Depaul University’s evening MBA program. As we look at Chicago’s industrial and business history, we see how these schools continually pump new life into Chicago’s economy.
For example, advanced business services and corporate headquarters activities are today the hallmark of Chicago’s economy. The city gave birth to some of the most prominent management consulting (NAICS 54161) firms and today continues to host a very significant number of such companies. Chicago ranks third in the U.S. among metropolitan areas in number of management consulting firms, and second in concentration of such firms, at some 120% above the national average.
How did this come about? Writing in the Encyclopedia of Chicago, Christopher McKenna describes the genesis of this Chicago-born industry. “Arthur Andersen, a professor of Accounting at Northwestern University, founded his eponymous firm in 1913. … Arthur Andersen & Co. began to specialize in financial investigations, the forerunner of the modern consulting industry.” And, “instead of employing local banking staff, New York and Boston financiers hired Chicago consultants to analyze the management of Midwestern companies in which they planned to invest.”
Andersen’s initiative was quickly followed in 1914 by Edwin Booz, a recent graduate of Northwestern in psychology. The company eventually became Booz Allen & Hamilton. So too, James O. McKinsey, an expert in cost accounting at the University of Chicago, founded a consulting practice (in 1926) that split off into the firm bearing his name as well as into A.T. Kearney. All became world-wide bulwark companies in what is now a global industry of great strategic importance to the world’s largest companies and businesses.
Jump ahead 50 years to the early 1970s. Chicago’s risk management and risk exchange community was re-invigorated when Leo Melamed, one-time Chairman of the Chicago Mercantile Exchange, launched contract trading in international currencies. Also in the 1970s, a former professor at the University of California at Berkeley, Richard Sandor, helped develop the Chicago Board of Trade’s U.S. Treasury futures contract trading.
Today, Chicago is a global leader in financial futures and options trading, with a 23% global share in exchange-traded contracts measured by volume. In addition to direct employment at Chicago’s exchanges and associated clearing operations, trading activity gives rise to ancillary employment in various Chicago businesses such as banking, brokerage, law, business publication, and computer systems and software.
For this industry too, the University of Chicago figures prominently in the story of its birth. University mentors both espoused the social value of trading financial instruments and also developed mathematical pricing models of assets that served as the basis for some trading. As recently described by Leo Melamed, Nobel Laureate and University of Chicago economist, Milton Friedman was a notable inspiration, teacher, and consultant to the launch of currency futures trading in the early 1970s.
Today, Richard Sandor remains busy in Chicago developing a new industry that addresses global climate change by capping polluting air emissions among member firms and then trading credits for pollution reduction among these firms.
Meanwhile, students from Chicago area business schools, such as Joe Mansueto of Morningstar, have recently grown new industries, this one centering on the tracking and analysis of mutual fund products.
In contrast to places such as the Stanford-Silicon Valley area, Chicago is not especially recognized for research and science-based commercial spinoffs from its universities. But several local universities are attempting to marry their business curriculums with their science and engineering activity. For one, the College of Business at the University of Illinois Chicago (UIC) is training future business leaders by encouraging them to construct business plans for inventions and intellectual property coming out of UIC labs. One recent sale of note involves a product that will possibly halve the time it takes orthodonic devices to straighten teeth.
What does this history imply for public policy? For starters, if we are to interfere effectively for purposes of economic development, we surely must understand the nexus among our assets and institutions. Chicago is clearly a “business town,” and its business schools have not only supported the business climate by training graduates for local companies but also indirectly by spinning off new businesses and industries.
But in considering issues of greatly enhanced public support or subsidy, it would be a mistake to attribute too much to universities alone. That is because causation goes both ways. While Chicago’s business schools have spawned much local growth, so too has local business growth created and supported the growth of universities and business school programs.
A city’s assets and institutions are best thought of, perhaps, as enjoying a symbiotic relationship. Accordingly, local public policy should start by strengthening inter-connections among local enterprises and enterprising people. Government likely has no great ability to pick and choose which particular connections to strengthen. And so, the primary course should be to provide desired and cost-effective public services and infrastructure, especially in transportation and communication. Restrained yet well-designed regulation and taxation should be another part of the mix.
Next, public-private programs and civic partnerships may be helpful in drawing closer social and cooperative connections among our diverse Chicago communities, industries, and civic institutions. As Chicago’s business history has shown, some amazing successes can arise from enterprising partners in a dynamic city.
Posted by Testa at 10:16 AM | Comments (0)
February 12, 2007
Sports Franchises and Urban Development
Are there worthwhile benefits to large urban economies from professional sports franchises and events? Critics are especially hostile to the idea of tax breaks, incentives and other public subsidies to sport franchises and events. At best, they claim that local spending on sports events displaces local spending on other activities, with no net impact on expenditure or income. Worse, they claim that public monies spent or foregone to subsidize sports franchises or events could have otherwise been more productively spent on enhanced public education or the like.
In rebuttal, there is another school of thought that posits that the changing nature of urban economies has heightened the value of recreational amenities as a draw for coveted workers. As the productive basis of city economies has shifted away from the manufacturing and distribution of goods, and towards a greater focus on information exchange by skilled and educated workers, some policy analysts argue that the successful workplace location is now driven by where people want to live rather than by its strategic location for moving materials.
In some instances, major league sports teams and professional sports events, such as the Super Bowl, can be counted highly among cities’ “public goods” amenities that attract and retain productive workers. In this, sporting events may be among several amenities whose sum total is more than the some of the parts because a large city’s varied restaurants, museums, cultural diversity, arts, and sports all go into making it “an interesting and exciting place to live.”
The measurable evidence on this effect is sparse, but several statistical studies have found favorable impacts. A thorough and balanced review of studies has been conducted by Mark Rosentraub. No doubt that many subsidies are ill-conceived. But Rosentraub concludes that the net value of a sports investment by the public sector rests on its context and the particular outcomes for the city and county making the investment. For example, the placement of publicly-subsidized stadiums in downtown areas have been found to help enliven and revive struggling downtowns. Another study found that Indiana residents valued the intangible benefits of having the Indianapolis Colts sufficiently to justify public subsidies. And in a statistical study across metropolitan areas, Jerry Carlino and Ed Coulson found that households tend to pay higher housing rents in metropolitan areas that choose to host sports franchises. Apparently, the value of nearby sports activity affects land and housing congestion that arises as greater population is attracted to such sports-minded places.
Among the most intangible, most difficult-to-measure benefits attendant to sporting events are the advertising or marketing values associated with the opportunity to re-cast a city’s image to a national or international audience. Places whose images become distorted or unfairly known due to their past travails may especially view large sporting events as valuable in setting the record straight.
In particular, an enhanced image may be helpful as businesses consider investment decisions and as workers consider various recruitment offers. The City of Detroit, for example, went to great pains and took great pride in successfully hosting the Superbowl XL in their new stadium situated amidst extensive downtown renewal.
This year’s two Super Bowl contestants, Chicago and Indianapolis, likely welcomed the media coverage of their cities deriving from both the Miami telecast and from national pre-game media hype. Chicago has been working to boost its image as a national and global city having superior amenities and functionality. In fact, it is one of two U.S. cities still vying to host the 2016 Olympic Games.
Meanwhile, Indianapolis has been pursuing sports-minded economic development for quite some time. During the 1970s, the city began to boost its support for amateur sports facilities and events, meeting some success in hosting the Pan American Games in 1987 and, among other things, it is now the headquarters locale of the National Collegiate Athletic Association. During times when high-profile events are not taking place in Indianapolis, its sports facilities are often in use by young athletes who come to town (often with their families), patronizing the city’s hotels and restaurants.
Despite scoldings by the majority of public policy analysts, many of which are well-founded, some cities still see gold in them thar’ games!
Posted by Testa at 2:15 PM | Comments (0)
January 22, 2007
Chicago's Pursuit of the Global Prize
Policy and business leaders in Chicago continue to advance the metropolitan area’s prospects as a global hub for professional and financial services. This initiative arises from both necessity and opportunity. Chicago’s traditional markets, principally in the surrounding Midwest, are not growing rapidly. At the same time, however, the Chicago economy specializes in advanced producer service sectors that are increasingly traded more broadly and, in many cases, internationally.
As the business service center of the Midwest, serving regional markets and industries, Chicago companies’ prospects for growth are somewhat limited. That is so largely for two reasons. First, the Midwest economic base centers on agriculture and manufacturing. Since productivity growth is so very high in these industries, and competition keeps commodity prices low, income and revenue (and attendant jobs) grow slowly. The second reason is climate. As the U.S. economy restructures toward information industries and knowledge workers, service production is being pulled toward locations where workers prefer to live, often milder climes.
However, globalization of the economy has also brought new opportunities to populous information-based cities like Chicago. Large cities often have wonderful amenities that are not dependent on climate, such as sports, restaurants, museums, and cultural diversity. But more fundamentally, it is because expanding global trade in goods, services, and capital requires the complex and specialized functions and industry sectors that are concentrated in large cities, including legal services, logistics, distribution, finance, insurance, business meetings, R&D, and professional business services.
Chicago has been developing such sectors almost since its inception. Today, Chicago features world-leading risk exchanges, universities, business meeting and personal air travel firms, legal services, headquarters facilities, and management consultancies.
During the 1990s, the growth of Chicago’s professional services was robust. According to the data reported on payroll employment, the Chicago metropolitan area added a net 80,000 jobs in the sector from 1990 to 1999, more than the Los Angeles metropolitan area and more than New York City.
However, since then, job performance in Chicago has often been much weaker, raising doubts about whether the city’s economic structure has divorced itself from the surrounding region as much as previously believed. The chart below displays year-over-year growth in the professional, technical, and R&D sectors. Employment growth experienced year-over-year declines for most of the 2002-2004 period, before reviving in 2005.
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How much of Chicago’s business service economy has expanded to global markets or even to other large U.S. cities in the global network?
We know very little about the geography and changing geography of these hallmark industry sectors. However, one informative study by Peter J. Taylor and Robert E. Lang of the Metropolitan Policy Program at The Brookings Institution measures the prominence of major global service companies among large cities in the world.
Taylor and Lang examine 100 global companies drawn from the business or producer sectors of accounting, advertising, banking/finance, insurance, law, and management consulting. For each city, the sum presence of their offices (weighted by size and function) determines a score for a city’s commercial presence and ties to the global city service network.
According to the Taylor-Lang study, Chicago scores high in its global connectivity, both relative to other U.S. cities and relative to the world’s major cities. Among U.S. cities, Chicago ranks second only to New York. Among world cities, Chicago ranks seventh, behind London, New York, Hong Kong, Paris, Tokyo, and Singapore.
The Taylor-Lang study scores Chicago’s connections with domestic cities such as Atlanta and New York in the same way it scores connections with international cities such as Sydney. This seems correct. International borders can be arbitrary. And to otherwise score border-crossings might bias the results toward cities located on continents where national boundaries are near each other, such as Europe.
The study does provide a separate “hinterland” scale for each city, which tries to measure the degree to which a city’s global connectivity relies on nearby national trading relations. Here, with the exception of New York City, U.S. cities tend to be less international than those on other continents. However, Chicago again scores well. It places third among U.S. cities, behind New York and Miami.
How this relates to Chicago’s recent growth performance and prospects is not clear. The construction of the Taylor-Lang study is creative, clever, and somewhat revealing, but it provides more impressionistic than definitive evidence of global linkages among producer services. Those who would like to draw their own conclusions from the evidence should take a look at the authors’ map of each global city’s linkages, including Chicago. Outside of North America, for example, the map suggests that Chicago's economy links strongly with Zurich, Switzerland, and Sydney, Australia.
Chicago’s employment in business-professional services is once again growing strongly, at a 3% annual year-over-year pace. If the recent period of weak performance reflects some unusual and fleeting conditions such as a post 9-11 falloff in business travel and related business service activity, then perhaps Chicago’s march to global success will now continue.
Posted by Testa at 10:37 AM | Comments (2)
December 15, 2006
A Chicago-Milwaukee Region?
Could cities located near one another, Milwaukee and Chicago for example, enhance their respective growth and development through closer linkages? Why might a greater Chicago–Milwaukee metropolitan area want stronger ties, and what policies, if any, might be considered to bring about such a union?
There are several reasons why larger metropolitan areas are generally leading U.S. economic growth. In recent decades, larger metropolitan areas have typically become more specialized in managerial and technical occupations, while smaller metropolitan economies have become more specialized in production activities. For example, one recent article found that those U.S. metropolitan areas having a population above 5 million had increased their concentration of management to production workers to 39 percent by 1990 from 10 percent in 1950. In part, this increasing concentration in larger cities is due to advances in communication and transportation that have allowed companies and organizations to administer and manage from a central location or to travel easily to multiple production locations.
In this light, it is understandable, then, that larger cities have also tended to grow more rapidly in terms of income and/or population. That is because specialized professional and managerial occupations tend to pay more than production. Moreover, since at least the late 1970s in the U.S., economic returns to labor, including wages and salaries, have generally been growing faster for managerial, technical, and other occupations attendant to higher educational attainment.
A second reason for such shifting specialization and growth owes much to the growth in work force participation of women. In the U.S., the labor force participation of working age women rose from 37.7 in 1960 to almost 59.6 percent today. Moreover, the educational attainment of women has also been rising such that it now exceeds men among the younger age cohorts. Since young singles tend to marry someone with similar education, this has given rise to growing numbers of “power couples” who often must find not one, but two, specialized jobs in the same labor market. Because large metropolitan areas have both deep labor markets and more specialized occupational opportunities, these places have become magnets for such “power couples.” In turn, firms respond to the greater labor supply of professionals by siting their establishments in larger metropolitan areas, and thereby transform local economies.
There are several reasons to keep an eye on the greater Chicago and Milwaukee areas to examine the prospects that they will someday become a single labor market and benefit from the attendant economies of larger scale and scope of such a merger. The Chicago and Milwaukee areas are only 86 miles apart, as measured from city center to city center. The Chicago metro area is more populous at 9.4 million as compared to 1.5 million in Milwaukee, but together they yield a population of 11.0 million.
Historically, Chicago–Milwaukee work force linkages have been limited. Only 13,000 Milwaukee residents commute to Chicago, daily, as of year 2000, up from 1,600 in year 1990. The reverse commute is even smaller. However, commuting in both directions is growing rapidly.
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Still, a closer look at some important subsectors of professional industry workers is suggestive of the greater work force that may soon arise from combination. The chart below combines industry employment for Chicago and Milwaukee metro areas across several professional, management and business service sectors. As combined, for example, employment in the Chicago–Milwaukee “computer systems design” sector would rank second to New York, allowing Chicago to bypass both the San Francisco and the Los Angeles metro areas. Other sectors of mutual benefit in Chicago and Milwaukee can be seen at the Midwest Economy website.
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While such stronger within-industry labor markets might be advantageous, the additional attraction across multiple sectors may be greater still. For households with members having differing but specialized occupations, the possibilities for a multiple match of people with jobs in a combined Chicago–Milwaukee metro area labor pool could be great. This would enhance companies’ ability to attract and retain skilled labor in both regions.
So too, not all jobs within the professional and business services sectors require the very highest educational attainment. For example, according to recent estimates of the U.S. Bureau of Labor Statistics, office and administrative support jobs comprise one-third of all employment in the combined professional services, finance, and management of companies when measured in industry sectors. So too, spin-off employment would also generate a wide range of local employment as the spending of added service professionals ripples through the local economy. This feature is especially important since job needs are great for lesser-skilled labor in both markets.
How might Chicago and Milwaukee push along their destiny as a combined metropolitan area? One low-cost way is to publicize their mutual proximity in marketing each region to prospective employers and to job recruits. Both Chicago and Milwaukee are highly active in economic development marketing. Of course, private sector employers and employment intermediaries may also be effective in spreading such information about the greater breadth of employment opportunities.
Another policy avenue may be greater investment in transportation between the metro areas that would facilitate commuting flows. Both interstate highways and train transportation are now in service. The possible labor market advantages of easier and more dependable auto and passenger train travel might weigh significantly in the consideration of any future roadway/rail expansion and maintenance decisions. Combined efforts in applying for federal transportation grant monies to serve a large and more closely-integrated Chicago–Milwaukee market might also be effective—for both personal travel and for freight transportation including railroad.
Milwaukee’s major airport is also located between downtown Milwaukee and downtown Chicago. At a time when the Chicago area’s air travel capacity is strained, better access to Milwaukee’s Mitchell field could be advantageous.
Other cooperative ventures and ideas have yet to be identified. The absence of organized efforts to do so is a bit puzzling in the Chicago–Milwaukee corridor. In contrast, the advent of the trade agreements between Canada and the U.S. has sparked any number of private and private-public associations to promote natural trade flows across the border within local corridors. As the chart below shows, the progress of employment growth has not been especially robust in either metropolitan area over the past 15 years. Perhaps a little détente along the Illinois-Wisconsin border might be advantageous to all.
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Posted by Testa at 9:02 AM | Comments (3)
December 4, 2006
Chicago Plans for Freight
The Chicago area economy developed on its ability to move freight. With heightened global trade, Chicago area freight transportation has grown rapidly and it is projected to continue to do so, leading to added congestion on highways that are shared by automobile drivers and trucks alike.
This raises important questions as to how the Chicago region should plan future modifications to its transportation infrastructure. The answers are not completely obvious for several reasons. To some degree, Chicago’s economy is shifting toward high-valued service production and away from freight-laden manufacturing. As a result, the value of Chicago’s existing roadways to bring workers to and from their offices is rising in relation to their value for moving goods around and through Chicago. And even with some concerted and likely expensive actions to expand and reconfigure infrastructure, there does not appear to be room for all roadway (and rail) traffic.
Building roadway capacity to serve all possible traffic is not an option. To do so would be too expensive in both construction costs and in taking up limited urban land. Yet, the region will want to act to maximize its ability to handle as much freight (and auto traffic) as possible. And so, in addition to some expansion of transportation capacity, the region will need to determine the most critical infrastructure to repair and build. So too, the region will need to engage in more efficient planning on the location of housing and commercial activity in order to economize on overall travel demand. Finally, more rational operational and pricing policies allocating existing transportation infrastructure will need to be adopted.
Rising global trade has dramatically added to cross-continental freight traffic through Chicago from imported goods landed on the East Coast going west and from the West Coast headed east. Much of this freight activity takes place in Chicago’s large railroad yards and side tracks. Chicago is also a major destination and transfer point for freight carried by truck. Because highway overpasses and underpasses for rail have not been constructed everywhere or they are of insufficient height, auto and truck traffic becomes further congested and delayed.
Adding to local truck-related congestion is the fact that, in order to accommodate rising freight traffic in a cost effective way, goods are now hauled in standardized containers. These containers are often transferred between transportation modes within Chicago, especially by “lifting” containers from truck to train and train to truck. According to World Business Chicago, the Chicago area now ranks among the top five cities in the world in container “lifts” behind Hong Kong and Singapore, where freight lifts mainly take place onto and off of large ocean-going vessels.
The strongest impulse of local policymakers is to find ways to keep transportation flowing through Chicago and possibly build on it as the opportunities arise. By one estimate, rail freight companies and their suppliers employ about 37,000 workers in the Chicago area, while trucking accounts for another 50,000 jobs.
In addition, proximity and low-cost access to delivered goods support income and jobs in related industries. The Chicago region and surrounding Midwest continue to host one of the nation’s largest concentrations of manufacturing establishments, in part due to these transportation advantages for bringing in raw materials and shipping out more-finished products. So too, Chicago remains a major center of wholesale and warehousing operations for its own manufacturing companies and for the greater Midwest region. Even aside from these related industries, as the nation’s third most populous metropolitan area, Chicago needs significant local freight capacity just to supply goods to its own consumers and households. Such freight-carrying ability translates into lower cost of living and greater variety of goods in generally attracting workers and other residents.
Further opportunities for Chicago to handle freight are in the offing. Much global freight now travels through the Panama Canal. Over the next few years, the canal will reach maximum capacity, while its ability to handle large vessels is becoming somewhat obsolete. Although Panama is planning to upgrade the Canal, during the interim the demands on overland inter-continental freight as a possible alternative will rise considerably. Here, Chicago’s history as a railroad town figures prominently, since the nation’s major railroad lines converge in Chicago. Much of the nation’s long-haul railroad freight now travels through the Chicago region, with much of it being transferred from one line to another, or to and from another mode of transportation, especially trucks.
To make headway in accommodating freight, local initiatives have been formed as public–private partnerships. One such partnership is the CREATE rail infrastructure improvement program. The program is a cost-sharing partnership among the Chicago region’s railroads, the City, and the State of Illinois, which will loosen bottlenecks in railroad freight flow through the city.
More comprehensive approaches are also underway to plan for and accommodate more transportation. A new agency (CMAP) has recently been created, consolidating the Chicago area’s existing transportation planning agency with its land use authority. It is anticipated that more careful and coordinated consideration of the region’s land use, housing, and transportation will reduce overall highway travel demand in the region by both cars and trucks. Freight traffic considerations and opportunities are also explicitly on CMAP’s agenda as the agency works to promote collaborative planning in the Chicago region.
From a cost–benefit standpoint, it would be foolish, even it were feasible, to expand infrastructure to meet all possible freight traffic. Land is scarce and expensive in Chicago, which argues against unlimited expansion of land for use in freight transportation. Local benefits of infrastructure expansion may be especially limited for freight that flows through Chicago without off-loading. In these instances, the benefits of Chicago’s freight capacity are more national in scope, or perhaps of benefit to the broader Midwest region. For this reason, projects such as CREATE are requesting that the federal government as well as private freight carriers help finance local infrastructure.
New pricing policies that charge freight users for roads and rail can also help to ration limited roadway capacity and allocate it toward its highest value use. For example, the Illinois State Toll Highway Authority now charges higher fees for driving during peak traffic times on its highways in and around Chicago. At the same time, electronic payment of tolls helps to speed both cars and trucks through toll stations. In looking for further improvements, policy makers in the Chicago region can examine a host of models and experiments from around the world that are pricing highway congestion, often in combination with privatized ownership or operation of transportation infrastructure.
The Chicago region cannot probably accommodate all of the nation’s freight needs in coming years, nor would it want to do so. Still, Chicago’s built legacy of infrastructure affords it opportunities for further growth and development in the freight arena and in spin-off economic development activities. Through thoughtful planning and evaluation, cost-effective operation, and well-structured pricing mechanisms, the Chicago Region can realize a broader scope of development opportunities.
Posted by Testa at 10:04 AM | Comments (3)
September 13, 2006
Where is automotive employment in the Seventh District?
Perhaps the most notable economic development taking place in the Seventh District is the market shift away from the traditional "Big 3" domestic auto makers--General Motors, Ford, and (Daimler)-Chrysler--and their parts suppliers. Lost sales are shifting toward the "new domestics" such as Toyota and Nissan and their parts suppliers. The sales gainers tend to be located outside of the Midwest to a greater degree than the Big 3. This shift is documented and analyzed in a recent Economic Perspectives article by Thomas Klier and Dan McMillen. This market upheaval is tending to idle and displace workers in many Midwest communities. Per Klier and McMillen, Michigan automotive employment is down almost one-third since 1979 while southern states such as Kentucky, Tennessee, Alabama, and the Carolinas have experienced a tripling of jobs.
But despite these shifts, Detroit and much of the Midwest continues to be the center of the production. Which particular communities remain most sensitive to future swings in automotive fortunes? The data below attribute automotive employment to particular metropolitan areas in the Seventh District. Those metropolitan areas with green shading had an employment concentration in automotive that exceeded the nation; those shaded in red had a lesser concentration. Looking across metropolitan areas in the entire Seventh District region, an east-west split in auto employment concentration becomes very apparent. The Michigan-Indiana corridor contains most of the metropolitan areas having an above-average concentration. Darkly-shaded metropolitan areas in southeast Michigan are exceptionally concentrated in automotive. So too, an east-west band of metropolitan areas across north central Indiana is steeped in automotive employment.
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A numerical listing of automotive employment below shows just how concentrated some communities can be. Metropolitan areas including Detroit/Livonia/Deaborn, Flint, Holland, Saginaw, Battle Creek, and Lansing/East Lansing in Michigan all reported concentrations over 5 times the national average, as did the Kokomo and Lafayette metro areas in Indiana.
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The final table below further illustrates the sharp geographic rift in employment fortunes over the 1990-2005 period. As a whole, the state of Michigan lost over 64,000 jobs in automotive, on net accounting for all job losses nationally. Largely due to the Michigan experience, the Seventh District states experienced an 18 percent decline in automotive jobs since 1990 while the remainder of the U.S. experienced a 3 percent gain in similar employment.
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Posted by Testa at 10:05 AM | Comments (0)
August 16, 2006
Business services as a growth sector for Great Lakes cities?
As manufacturing activity shrinks and relocates, large cities of the Midwest look to another staple of their economic base, business and professional services. Large cities everywhere typically serve as centers of finance, communication, governance, and varied business services. In the Midwest, business service specializations in cities originally derived from goods production, as surrounding farms and factories looked to cities for financing, advertising, management expertise, product design, legal services, and engineering, as well as computer systems advice, more recently.
In the past few decades, agriculture and manufacturing activity have been shrinking in the Midwest, at least in terms of nominal personal income arising from manufacturing firms. In the overall U.S., for example, personal income derived from manufacturing activity has fallen from 32.9 percent to 15.5 percent from 1969 to 2004. This falloff is especially prominent in large Midwest cities, where manufacturing once thrived due to urban freight transportation advantages and the intense workforce needs of mass production.
Can advanced business services help fill the void in Midwest cities’ economies? There are several reasons to focus attention on these industries. First, there is already a pronounced urban location propensity for business services, so prospects for this sector in large cities are perhaps better than for others; also, in the overall U.S. economy, the business services sector has recently been a growth leader. Finally, many business services employ highly skilled occupations, and they tend to generate high levels of wages and income that may directly and indirectly buoy large city economies.
On the latter point, as formally defined by the North American Industry Classification System (NAICS), the “professional and technical services sector,” NAICS sector 54, tends to employ an above-average share of highly-educated (and highly paid) workers. As described by federal government statistical agencies (Census and BLS), the sector’s industries employ many executive and technical occupations, namely those found in research and development, legal services, management consulting, accounting, advertising, engineering, public relations, and product design.
In the analysis that follows, a focus on the NAICS 54 sector is advantageous because its services are almost exclusively sold to other businesses rather than to households, and many of these services can be sold to customers located far away. In thinking about regional economies, such tradable services may offer a wide scope for possible growth and development. Moreover, data covering employment in the sector are available for geographic regions as small as metropolitan areas.
Rapid growth characterizes the business services sector. The chart below illustrates that as a share of total payroll employment, “professional and technical services” has expanded from 4.2% to 5.3% from 1990 to 2005. The sector’s average annual growth of 3.0% per year easily exceeds that of total payroll job growth (1.3%), adding 2.5 million jobs to the U.S. economy since 1990.
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Business services’ urban orientation can be conveniently described by an index of employment. The concentration index is the ratio of two shares. For the ratio, the numerator is the business services sector’s share of total jobs in a particular region. The denominator is the business services sector’s share of total jobs in the overall U.S. And so, for example, if the sectoral share of total jobs in a particular region is equal to the sectoral share of jobs in the U.S., the index will take on a value of one. To the extent that a region’s share of jobs found in business services exceeds the nation’s, the index takes on a value greater than one, and so on.
Such a concentration index is constructed below for the most populous metropolitan areas in the U.S. The top five metropolitan statistical areas (MSAs)—New York, Los Angeles, Chicago, Washington, D.C., and San Francisco—are, taken as group, more than 50 percent more concentrated in business services jobs than the overall U.S. Moreover, an hierarchy of this concentration by city size is evident as we expand the index to include less populous metropolitan areas. Though still well above parity with the nation, the indexes of the top ten and top 20 most populous metropolitan areas lie below the concentration of the top five most populous metropolitan areas.
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Time trends in business services employment also tell us some important economic features. Most prominently, the concentration of business services employment in large urban areas has been falling (i.e., business services jobs have been spreading out toward smaller cities) in the U.S. since 1990. Apparently, the greater ability and lower cost to communicate electronically over time has allowed smaller cities, as well as other nonurban settings, to win out over large, densely populated cities that more easily facilitate face-to-face interactions.
It has been observed that business services employment dipped more than the overall employment during the recessionary periods of the early 1990s and 2000–03. Such cyclical sensitivity to the general economy has long characterized so-called blue-collar and production employment, but its emergence for occupations in business services was somewhat novel during the recession of 1990–91 and its aftermath, when labor market restructuring of mid-level managers and other white-collar occupations took place. In the more recent recessionary period, white-collar employment declines in business services were associated somewhat with the slackening of investment in information equipment and associated services. More generally, many business services may be characterized as “investment goods” by companies, meaning that their purchase tends to slacken during recessionary and subsequent recovery periods, when firms no longer need to expand their own production capacity.
Midwestern metropolitan areas have generally followed these national trends and characteristics of NAICS 54 employment, although there have been some exceptions. For one, as shown below, some of the region’s large metropolitan areas are generally less concentrated in business services as measured against the national employment structure. In part, this follows from the higher manufacturing intensity of Midwest cities; by construction, if a region’s employment base is high in one sector, that concentration must be offset in the others. And so, although Des Moines, Milwaukee, and Indianapolis are centers of business services in relation to the surrounding Midwest areas, their employment base is less concentrated in business services (as narrowly defined) than is the U.S. employment base.
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The Chicago and Detroit metropolitan areas register as the most concentrated in business services among large metropolitan areas in the Midwest, with Columbus, Pittsburgh, and Minneapolis–St. Paul also registering concentrations well above the national average.
Owing to its reputation for automotive manufacturing, it will surprise some to find that the Detroit metropolitan area claims the largest concentration in business services. In fact, in this regard, Detroit leads the Chicago area, which is generally renowned as the region’s services and financial capital.
A closer look at the employment structures within the general category of business services raises some interesting and serious questions about the growth prospects of business services for large metropolitan areas in the Midwest. The bar chart below displays the concentration indexes for each detailed business services category, comparing the Detroit MSA with the Chicago MSA.
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Chicago and Detroit specialize in different sectors of business services. The Detroit MSA scored highest for “architectural and engineering services,” while Chicago scores lowest in this category. This specialization’s high score in Detroit reflects the product engineering completed for the automotive industry, much of which is driven by local demand by domestic automakers. However, some of Detroit's business services have evolved to serve global customers as well. Another one of Detroit’s employment concentrations, scientific research and development (R&D), also largely reflects Detroit’s reputation as a global research and design center for the world’s prominent automakers. Toyota, for example, has recently announced a new $150 million R&D facility to be built near Ann Arbor, Michigan.
The Chicago MSA’s most significant specialization is “management and technical consulting.” The Chicago area is the domicile of major offices of world-renowned management consulting firms, including Accenture, Booz Allen Hamilton, McKinsey & Company, and A.T. Kearney. Facilitated by the strong air travel connections at Chicago’s O’Hare International Airport, these firms’ consulting operations are able to serve clients throughout the region, the nation, and the world.
As the Midwest’s historic industry specializations decline in size, especially manufacturing, such business and professional services will be increasingly important in maintaining the region’s size and high household incomes. But to what degree are such industries derivative and dependent on local manufacturing itself? If sales to local firms dominate these sectors, then the prospects are possibly dimmer because productivity gains in goods production continues to shrink the nominal share of income derived from manufacturing and agriculture.
The recent employment performances in business services in Detroit and Chicago offer some clues regarding the degree to which business service firms in the Midwest have expanded their customer base beyond the immediate region. The evidence suggests that business services in these cities do continue to depend on midwestern customer demand in an important way. Midwest employment growth has been lagging significantly since the 2001 recession. At the same time, as the chart below suggests, local employment in the professional and technical services category has also dipped to a greater degree than the national employment, suggesting that the demand for these services derive from local rather than national or global markets. Moreover, further analysis of the employment data suggest that these cities' steeper-than-national-average declines did not result from any unfortunate mix of industry subsectors in Chicago and Detroit. In particular, had Detroit's individual industries under the NAICS 54 category each grown at the national rate from 2001-2004, the larger sector's decline would have totalled only 2.1 percent rather than the actual 7.3 percent decline. And similarly for Chicago, rather than the actual 9.7 percent decline over the period, the NAICS 54 employment decline would have amounted to only .8 percent. And so, though the evidence is not definitive, it appears from this performance that the NAICS 54 sector in Chicago and Detroit continues to serve regional markets to some considerable degree.
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Professional and technical services continue to be important national growth sectors that merit a close watch by Midwest economic analysts. Nationally and regionally, these sectors continue to grow as goods producers and other businesses expand their use of such specialized services and as they outsource some business services that were previously conducted in-house. Regionally, given the slower pace of business expansion in the Midwest, the growth prospects for large Midwest cities, such as Detroit and Chicago, would probably be more robust should their business services firms expand their markets throughout the nation and the world.
Posted by Testa at 1:56 PM | Comments (0)
July 25, 2006
Mid-year jobs report
Looking west from Ohio to Iowa and Minnesota, there is a distinct falloff in economic growth, at least according to recent reports on payroll employoment. With only a three-week lag, the Bureau of Labor Statistics reports their estimates of payroll employment monthly for individual states. The reported monthly figures for June 2006, now complete the second quarter of this year.
The table below displays year-over-year payroll job growth in the seven Midwest states and the U.S. Note that job growth in all states except Iowa and Minnesota fell short of the U.S. growth of 1.4 percent.
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One reason that explains lagging job growth in many Midwest states is their heavy concentration in manufacturing industries. As the Chicago Fed’s Midwest Manufacturing Index suggests, real output growth in manufacturing has been growing strongly now for 3 years in both the nation and in the Midwest. In general, U.S. manufacturing growth has been buoyed by strong domestic demand for capital investment goods and by growth in U.S. exports. Some notable (and growing) Midwest capital goods sectors are mining and construction machinery, farm machinery and equipment, heavy trucks, and electrical equipment. However, strong output growth in manufacturing does not typically propel much payroll job growth because real output gains are generally being achieved through higher productivity rather than through more labor input.
With respect to total payroll employment, the three easternmost states of Ohio, Indiana, and Michigan show the weakest year-over-year growth. Further to the west, job growth in Illinois and Wisconsin have been stronger, with still stronger growth for Iowa and Minnesota.
For some states, such as Illinois, recent payroll job growth is especially encouraging since growth had been lagging since the last recession. Along with Indiana, Michigan, and Ohio, Illinois employment has not yet re-attained its previous peak which occurred in the year 2000.
Illinois' job gains are being led by growth in professional and business service industries even while manufacturing employment has been declining. The Chicago-area economy, which comprises the bulk of Illinois, has been shifting into business and financial services while moving away from manufacturing. Chicago’s business and financial services depend on customers in surrounding manufacturing-intensive states but they also serve some global and national markets.
At the other end of the spectrum, Michigan’s recent job performance remains very much in a league of its own, even when compared to other Midwest states. The chart below indexes total payroll jobs to the first quarter of 2001. While the rest of the region has almost re-attained its former employment peak, Michigan employment remains 6 percent to 7 percent below its previous peak.
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The troubles of domestic automakers Ford and GM, and their automotive parts suppliers, have been weighing down growth in Michigan. Since the year 2000, their combined share of U.S. light vehicle sales has declined from 51.1 percent to an average 41.3 percent year-to-date in 2006.
These companies are highly concentrated in Michigan. In addition to their global headquarters and many research facilities and part suppliers, for example, Ford and General Motors together maintain 12 of their 34 U.S. assembly plants (35%) in Michigan. For this reason, Michigan residents are closely following the strategic plans of these companies as they attempt to restore growth and profitability.
Posted by Testa at 7:26 AM | Comments (0)
July 6, 2006
Manufacturing exit tough on Midwest central cities
If current trends continue, manufacturing activity will soon become extinct as a part of central city economies. The reasons for this exodus are largely the result of shifts in the technology of many types of production activity. Central cities—especially in the Midwest and Northeast—are generally densely populated and somewhat congested. Such conditions are not ideal for production activity. Many central cities vigorously attempt public policies to preserve manufacturing jobs, but the opposing forces appear to be very strong.
At one time, many central cities were the preferred locale for manufacturers. The reasons can be boiled down to two, transportation of laborers and transportation of materials.
As for labor, factories were once teeming with laborers. But due to labor-saving productivity gains, today’s factories are sparsely populated even though they produce many times more output. Senior Business Economist Bill Strauss calculates that today it takes 200 U.S. manufacturing workers to produce the same amount of product as 1,000 workers in 1950. Accordingly, during those earlier labor-intensive times, the transportation of manufacturing workers to the job site figured much more heavily into the factory cost equation. Transportation efficiency once was served by factory neighborhoods in central cities where workers could more easily commute by walking, driving, or by public transportation. The higher living density of central cities also meant that public services such as education and sanitation could be delivered cheaply to workers. Of course, it is not only manufacturing technology that changed. Better highways and rising standards of living (translated into higher car ownership) have also contributed to the ability of factories to staff their factories with (fewer) workers who live farther away. In turn, this opens up factory sites in suburban and rural areas.
Better highways, road vehicles, and logistics technology have also made the transportation of production material to central cities less attractive in comparison to areas of lower population density. Economically, railroads once dominated long-haul truck transportation of materials and components used in manufacturing, as well as the shipment of finished goods to other final markets. The technology of rail favors convergence into a central location (i.e., central cities) rather than the dispersed locations that are served by the crisscross pattern of our now ubiquitous highways. Over time, construction of divided highways and the advent of trucks having features such as refrigeration, trailers, and easily transferred containers have facilitated factory sites served by roads rather than by rail. Accordingly, factory sites can now better take advantage of the low land costs of rural and suburban areas rather than being restricted to those of the central cities.
The City of Chicago exemplifies the central city experience with manufacturing jobs. The chart below shows that, by one reckoning, manufacturing jobs in the city have declined from 367,000 in 1976 to under 100,000 today—a loss of approximately 10,000 per year. In contrast, the employment experience of Chicago’s suburban areas has been much milder.
The experiences of other central cities has been somewhat similar to Chicago’s, even some of those cities located in the faster-growing Sunbelt regions. The table below, drawing on data from the Census of Manufactures, describes the manufacturing job changes from 1977–2002 of the 10 most populous U.S. cities (as of 1980). Over the period, manufacturing jobs in these 10 cities dropped by 62%, which is more than double the pace of manufacturing job loss in the overall U.S. Although the job gains of San Diego and the slight loss by Phoenix seem to be exceptions, they are not. Rather, their experience reflects the fact that the land area of those cities has expanded by 2.5 times and 4 times, respectively, through annexation since 1980. At the same time, Midwest city boundaries have remained essentially fixed.
So too, as shown by the table below, the city of Chicago’s experiences are mirrored closely by the central cities of the industrial Midwest. The high population density of places such as central city Milwaukee and Cleveland came about during a different era than the more recent growth of low-density (and expanding) cities of the West and Southwest.
Many central cities of the Midwest owe their original existence to manufacturing, so the steep loss of manufacturing jobs in central cities has typically been painful. In response, these cities often attempt to combat manufacturing decline through public policies. For example, some policy initiatives to make manufacturing activity more competitive in cities include clearing land, cleaning up environmental hazards, preserving or setting aside land exclusively for manufacturing purposes, or easing freight transportation congestion. However, so far, the allure of suburban and ex-urban manufacturing locales has been too strong to overcome.
Posted by Testa at 9:00 AM | Comments (0)
June 26, 2006
Chicago companies.....a changing town?
Lately, the Chicago business press has lamented the region’s loss of large company headquarters—for example, those of Amoco, Arthur Andersen, Borg-Warner, Quaker, Searle, and Zenith. The chart below numerically depicts the source of this local concern: The Chicago area is down 19 headquarters over the period from 1975 to 2005 as measured by Fortune magazine’s list of the largest nonfinancial companies. Has Chicago lost its vitality for building large companies and hosting their headquarters?
Taking a broader perspective, it appears that Chicago has held its own as a domicile for corporate headquarters. It consistently ranks second place among large metropolitan areas that host headquarters; only New York exceeds it. Looking farther afield, one can see that headquarters offices of the largest companies have spread out to other metropolises that have come into their own as business centers. A recent conference examined shifts in headquarters site decisions and motivation. Cities such as Houston, Atlanta, and San Francisco have developed a large scope of business support services, such as legal, accounting, and management consulting, that attract headquarters. All have large hub airports which are desirable in sending out and bringing in headquarters execs and their business associates.
In some ways, then, Chicago’s relative loss of headquarters reflects the filling in and development of the remainder of the U.S. rather than Chicago’s decline. To put it another way, why would we expect Chicago and New York to maintain the lion’s share of headquarters while the remainder of the U.S. economy grew more rapidly?
A different look reveals that Chicago’s headquarters companies have grown at a healthy rate—one that reflects a mature but healthy business service center. The following tables list the Chicago region’s top 50 companies from 1979 to 2005, again measured by Fortune magazine’s accounting of total company revenues. The companies’ revenues are quoted in comparable dollars, equivalent to spending power for gross domestic product (GDP) in 2005.
In examining individual companies among these rankings, we can see that, on average, the annual revenues of the top 50 companies in 2005 exceed those of the equivalently ranked companies in1979. In fact, the sum of the top 25 companies’ revenues in 2005 exceeded that of their counterparts’ in 1979 by 89 percent. For the top 50 companies, the revenue total of 2005 companies exceeded that of 1979 companies by 78 percent. Over this time period, the overall U.S. economy grew by 115 percent. Accordingly, in the context of the faster regional growth taking place in the Sun Belt and the West since 1979, Chicago has enjoyed healthy, though modestly lagging, success as the domicile of many of America’s largest and fast-growing companies.
In explaining Chicago’s continued role as a headquarters city, we can see that many large companies have survived and prospered from the 1979 list. These companies include Brunswick, Caterpillar, Deere, Kraft, Sears, United Airlines (UAL), and USG (United States Gypsum). Still others—such as Walgreen’s, Abbott, McDonalds, Archer Daniels Midland, and Illinois Tool Works—have survived and even experienced outsized growth. Walgreen’s revenues are up over 13 times since 1979. Illinois Tool Works Inc. ranked 17th in 2005, with $11.7 billion in revenue, although the company had not made the top 50 list of 1979.
Other companies have chosen Chicago as their headquarters’ domicile from outright relocations, during mergers, or through spinoffs. Boeing is the most notable relocation, choosing Chicago in 2000 over competitors Dallas and Denver. OfficeMax Inc. is another relocation to Chicago (from Boise, Idaho). Smurfit-Stone chose Chicago during its merger, and medical equipment maker Hospira Inc. was a recent spinoff of Abbott.
Other promising companies with headquarters in the Chicago region, such as Hewitt Inc., a human resource management company, have grown up here and have since emerged as public companies. Equity Office Properties Trust is another home-grown company with headquarters in the area, as is CDW, a computing equipment leasing company.
A comparison of the top 50 lists also reflects the shifting industry orientation of the Midwest away from manufacturing to services. In 1979, 33 of the top 50 companies could be classified as manufacturing versus 26 in 2005.
The Chicago region correctly stands up and takes notice at the loss of a large company headquarters. Hosting companies’ headquarters is an important specialization of Chicago’s economy. Over the long term, Chicago’s headquarters’ performance is a cause for interested concern though perhaps not for alarm.
Posted by Testa at 7:32 AM | Comments (0)
May 30, 2006
Hog Butchers No Longer?
In his description of Chicago, Carl Sandburg poetically referred to it as the “city of the big shoulders … stacker of wheat … tool maker … player with the railroads … hog butcher.” At the time, this description fit Chicago’s economy just right as a place of muscular blue-collar industries such as rail freight, steel making, and meat packing. But today, Chicago’s economy has morphed into a city of more genteel, white-collar professions and industries. Infrastructure, such as a global airport and a significant broadband communications capacity, have helped to develop industries that are knowledge-based rather than commodity-based.
The chart below compares the Chicago metropolitan area’s employment with the nation’s across broad industry sectors. The bars measure the share of total employment in a given industry so that, for example, the top maroon bar illustrates that 14 percent of U.S. employment can be found in government sectors, while 11 percent of the Chicago area employment can be found in government sectors (purple bar).
The purple bar that illustrates Chicago’s long suit is “professional services.” Most of these industries are business services, including accounting, management consulting, advertising, temporary services, legal, and research and development. To a large degree, these industries are staffed by educated professionals. In comparison to the overall nation (maroon bar), Chicago’s economy is more highly concentrated in these industries. The same can be said for the finance, insurance, and real estate (FIRE) sector comparison that can be found below professional services on the chart. The FIRE group includes Chicago’s world-leading risk exchanges and related businesses.
To staff its new economy, many young and educated workers are migrating to Chicago, especially from surrounding states. In addition to career opportunities, they are attracted by amenities such as lakefront parks, renovated neighborhoods, lively nightlife, operas, ballet, and orchestras. In a recent news article, journalist David Greising playfully rewrote Sandburg’s poetic ode to Chicago to reflect its new economy: “Hog belly trader for the World, Writ Writer, Consultee of Companies, Builder of Airports, and the Nation’s Intermodal Carrier, Prideful, Anxious, Hopeful, City of the Stringed Orchestra.”
The service orientation of Chicago’s economy has come about in a remarkably short time. It was not so long ago that Chicago’s employment concentration closely resembled the surrounding Midwest economy, especially its sharp concentration in manufacturing employment. The chart below tracks the manufacturing share of Chicago’s economy from 1969 onward and compares it to the overall U.S. As recently as 1969, both Chicago and the surrounding Midwest were significantly more concentrated in manufacturing jobs than the U.S. But steadily over time, Chicago’s concentration has converged with the U.S., while the Midwest as a whole has maintained a higher proportion of jobs in manufacturing.
What does Chicago’s divergence from the Midwest mean for its economic performance and prospects? For one, it means that Chicago may maintain a healthy pace of population and income growth although it is shedding manufacturing jobs at a rapid clip. In comparison, other Great Lakes manufacturing cities such as Buffalo, Cleveland, Detroit, and Milwaukee have not been as successful in replacing lost manufacturing jobs with high-end services.
But this performance does not necessarily mean that the Chicago region has cut loose its ties to the surrounding Midwest economy. During the 1990s, many observers hailed Chicago’s strong economic performance as an indication of its arrival as a global city rather than as a midwestern city, a city with strong trading linkages beyond the immediate region. However, over the past 5 years, Chicago’s employment growth has slipped to a tepid pace of approximately one-half the nation’s, which is much like the pace of the overall Midwest. Even the performance of its business service sector has been lagging. Could it be that Chicago’s service sectors continue to sell to surrounding Midwest businesses such as agriculture and manufacturing rather than to the nation and the world?
The answer to this question is important in assessing Chicago’s growth prospects. The answer is far from crystal clear. In part, Chicago remains and will remain the commercial center of the surrounding Midwest for many years to come. And so, the sagging fortunes of Michigan's automotive companies to Chicago’s east will likely be felt in the capital markets and consulting offices of Chicago. However, it is also the case that many Chicago business activities are now broadening out farther afield to global markets. For example, Chicago’s risk exchanges and its world-class universities are aggressively extending business lines and services to Asia.
So too, the recent slowing in Chicago’s economic performance may reflect some special developments that are not likely to be repeated. In particular, business travel is a key service activity of Chicago’s economy that was stiffly impacted by the national business slowdown in 2001-2004 and especially by the 9-11 air travel slowdown. At the same time, the national post-Y2K decline in computer and computer-system investment likely impacted business consulting companies in Chicago as well.
More generally, many business and professional services are purchased for the same reasons and with the same timing as capital investment. That is, as the capacity of firms begin to be stretched thin during times of ongoing economic expansion, firms once again purchase business services and capital equipment alike in order to expand production capacity and to find and serve expanding markets. In turn, the strong business investment that has been taking place in the U.S. economy should continue to be felt in the office buildings of the Chicago economy.
Posted by Testa at 11:57 AM | Comments (1)
May 23, 2006
Connecting to achieve tech commercialization
Several cities and metropolitan areas in the Midwest are actively encouraging startup technology companies. Not all of these cities are likely to succeed, but those that have a prodigious base of basic research activity have the best prospects. The Chicago metropolitan area has long been one place where the strong flow of both federally-funded and large-company R&D in the medical and life sciences suggests that there could be greater potential for technology startups as well.
A number of recent efforts in the Chicago region are specifically focussed on technology startups. These efforts include new technology parks, cooperative university R&D consortia, new venture funds, and entrepreneurial assistance. On May 15, technology leaders gathered at the Federal Reserve Bank to discuss the formation of a Chicago-based network that might better link and connect technology commercialization efforts to like-minded organizations in the metropolitan area. Places such as San Diego and Cambridge, England, are notable locations where such connecting organizations are reputed to have stimulated growth in technology startup companies. What can the Chicago area learn and adapt from such models?
The program began with the observations of a technology founder and business builder in both Seattle and in Chicago. Wilbur H. (Bill) Gantz, Chairman of the Board of Ovation Pharmaceuticals, Inc., in Deerfield, Illinois, emphasized how very difficult it is to successfully bring a new company to market. Raising funds is very difficult, but building a company with a profitable product is even tougher. As a result, life-sciences startups “can never get enough support.”
Life-science startups in the pharmaceuticals arena go through many distinct phases, each with unique support needs. University scientists may be needed early on. And in following stages, competent partners must be close at hand to assist with financing and protection of intellectual property. At later stages, product development, marketing, and manufacturing expertise may be crucial.
In Gantz’s Seattle startup, PathoGenesis Corporation, the University of Washington was a helpful partner in sharing university faculty in research and development. Local financing was also key to the startup there. However, the Seattle location presented challenges in local availability of pharmaceutical chemists. For that reason, such personnel were recruited from the Midwest and East Coast, and product marketing expertise needed to be outsourced to the Chicago area.
Gantz further emphasized that Chicago tends to be very strong in such basic business services as marketing, public relations, and intellectual property. Moreover, the metro area is rich in technical personnel that can be hired as necessary from the large life sciences companies Baxter and Abbott and local universities, or else recruited back to Chicago from former Searle employees who left the area when their facilities closed. Despite access to such personnel, recruitment of cutting-edge university scientists is more difficult; Chicago’s university scientists tend to be more adverse to risk and to commercial ventures than those in Seattle.
Nonetheless, Gantz sees the Chicago environment as strong and getting stronger. The real estate end has been expanding with the establishment of a research park at the Illinois Institute of Technology as well as one at the former Searle facility, along with expansion of the Chicago Technology Park. So too, Chicago’s early stage capital scene is now brighter as so-called angel investor networks are forming. Government support of an appropriate nature has also come around, as evidenced by the city’s competent hosting of the nation’s premier business conference in the life sciences, BIO2006.
The next conference speaker was Stuart Henderson, Partner and Biotechnology Practice Leader for Europe at Deloitte, UK, who offered his insight and experiences with Cambridge’s connecting organization, Cambridge Network. The initial conditions in the Cambridge area were not so different from Chicago, prodigious university research but comparatively less commercialization. Also similar to Chicago, there was no “burning platform” of general economic demise in the Cambridge area 20 years ago, but simply unfulfilled economic potential. Yet today, Henderson claims that there are 1,500 technology companies in a town of 200,000 people (though perhaps 6.5 million people reside in its labor market area), including global companies such as BP-Amoco, Schlumberger, 3M, Amgen, and Pfizer.
Henderson reported that a well-conceived organization called Cambridge Network was key to bringing about this success. The network was founded by a small group of highly passionate and committed leaders who put up only modest funding at the outset. He described it as “a simple meeting of minds.”
Henderson further described the Cambridge Network as serving as a window to the world into Cambridge technology capabilities and activity—a vehicle to showcase the Cambridge brand. Most importantly, the Network’s organization built a community of many other organizations who came to share information and to cooperate. The Network’s success depended on listening carefully to their members’ needs and responding quickly with appropriate services. These services included directories of who was who in technology, a continually-updated virtual (online) press room, training materials, benchmarking surveys of progress, open meetings, formation of special interest groups, and events to bring new and younger members into the mainstream.
Henderson cautioned on the pitfalls into which their organization sometimes stumbled along the way. His suggestions included being ruthless in keeping non-contributing government officials and other “hangers-on” away from discussions and events, along with entrepreneurs who had been “one-hit wonders” who monopolized discussions with poor advice for others. As always, the leadership of the network also needed to be constantly vigilant against turf-fighting behavior among membership organizations while promoting partnership and consensus instead.
San Diego’s over-arching organization, called CONNECT, is highly renowned as a prototype to facilitate interchange among technology interests leading to commercialization of technology. Unlike Cambridge’s motivation to build on untapped potential, the original impetus for San Diego’s actions was a rapidly-sagging economy in the mid-1980s that was impacted by the Savings & Loan crisis, military base closings, and reductions in national defense spending.
According to CONNECT's CEO, Duane Roth, CONNECT’s purpose is to facilitate the spawning of commercial enterprises from the region’s R&D base. Over the past 20 years, the region has experienced 1,000 company startups, a rate of about one per week. The public and quasi-public research base is now comprised of over 40 institutes and centers including Scripps Research Institute, Salk Institute, and the University of California, San Diego. Both major institutes and many companies are located close to each other in the San Diego area which Roth considers an important precondition for the continuous inter-personal communication and collaboration that ultimately gives rise to innovation and new ventures.
Duane Roth characterized the collaborative culture that has been achieved in San Diego by describing how local entrepreneurs first market themselves to visitors. Unlike most other places in which a company director will begin touting their own enterprise to visitors, Roth claims that San Diego companies will instead begin touting the San Diego cluster and working environment.
As a former Iowan, Roth also made a clear cultural distinction between the Midwest and the West Coast. Midwesterners are, on average, less likely to take the risks that lead to new enterprises. The reason is that, in places such as San Diego, failure is not a cause for personal condemnation, and so, entrepreneurs are willing to just try again after failure. To a greater extent, at least in Roth’s experience in Midwest agriculture, the fear of failure and the resulting shunning by the community tends to create a culture where people are afraid to take risks in the first place. In order to build and nurture a risk-taking culture, the community must also support entrepreneurs of well-crafted failures in the aftermath.
Roth also mused that, because changing an existing culture is so very difficult, it may be easier in the Midwest to “start a new one.” By this he meant that entrepreneurship should especially be pitched to the young and, more generally, to as many willing listeners as possible in order to generate the critical mass of people that are necessary.
In addition to the celebratory and risk-taking culture in San Diego, some of the key processes that give rise to new companies and enterprises are rigorous and intense. Of these, a “springboard” program sets up panels of critics before which would-be entrepreneurs vet their business plans in two-hour sessions. Review panels are comprised of volunteer “entrepreneurs in residence” along with financial company reps, professors, angel investors, and business professionals. To prepare for such rigorous reviews, CONNECT offers many short and intense educational programs on starting and bu