May 8, 2014

Is Something Ailing the Illinois Economy?

By Bill Testa

As the US economic recovery approaches the five-year mark, a look back shows that it has been far from a smooth and upward ride. Since the end of the Great Recession, the economy has grown at a generally disappointing pace with fits and starts due to repeated setbacks. Many parts of the U.S. economy are still working their way through the effects of the financial crisis that accompanied the recession. For instance, the labor market has been healing quite slowly. And many households and businesses are still repairing their balance sheets after having suffered steep losses in asset values. Also, the overhang in housing inventory has been slow to clear. Meanwhile, global economic recovery has faltered several times—first, in Europe and, most recently, in East Asia.

As the U.S. economy began to recover in mid-2009, Illinois and other states in the Great Lakes region bounced back at a quick pace, albeit from a very low point. The Great Lakes region’s strong industrial orientation—that is, its heavy involvement in durable goods production—translated into a steep economic recovery as the nation’s businesses sought to rebuild their depleted inventories of capital goods and equipment while households similarly began to replace automobiles and other consumer durable goods. Moreover, since the global recovery was quite strong back then, exports of machinery and foodstuffs from the Great Lakes region also contributed to the economic climb. However, the Great Lakes region’s pace of growth began to decelerate two years into the recovery. The aforementioned growth impetus of inventory rebuilding and exports abroad eased. Among the major sectors, only the automotive industry continued to grow quickly.

Following the Great Recession, Illinois began to recover and even gain ground on the nation, but its economic performance began to alarm many observers in 2011. As seen below, Illinois’s unemployment rate fell quickly in 2010 and into early 2011. However, the state’s unemployment rate then failed to show much improvement, even as the nation’s unemployment rate continued to fall more.

It could be that Illinois’s deviation from the national trend in unemployment is related to the economic performance of the broader Great Lakes region. The Illinois economy is highly integrated with the other industrial states of the Great Lakes region—Wisconsin, Indiana, Michigan, and Ohio. Accordingly, the Illinois economy regularly rises and falls along with the economies of these states. If Illinois’s performance differs from its neighbors, it would be a cause for concern—and the degree of concern would be higher as Illinois fell further behind its neighbors. As the chart below suggests, the aggregate unemployment rate of the Great Lakes states (less Illinois), has continued to decline since 2011; Illinois progress has been much less. In what follows, I discuss possible sources of the deviation, including Illinois tax structure and Illinois industrial structure. In addition, I examine an alternative measure of labor market performance, namely the growth in payroll jobs.

Illinois’s seemingly poor economic performance compared with that of its neighboring states has sparked a policy debate as to whether the state’s recent hikes in statewide income taxes may be deterring investment and hiring in the state. Beginning in January 2011, the state’s personal income tax rates were hiked from 3.0 percent to 5.0 percent for the period 2011–14; they are scheduled to go down to 3.75% for the period 2015–23 and then to 3.25% from 2024 onward. (Similar hikes were enacted to the state’s corporate income tax—also with a schedule of phasing out the higher rates). These tax hikes were enacted to help the state pay down a rising stack of short-term debt for operating expenditures and to make progress on a much larger amount of unfunded public employee obligations (such as pensions). To date, the state’s finances have improved only modestly with respect to both short-term debt obligations and its longer-term pension-related debt. For this reason, some observers believe that Illinois tax rates will not be allowed to (fully) phase out as planned.

Are tax rate hikes discouraging hiring and investment in Illinois? It may come as no surprise that the effects of state and local tax differences on state economic growth are far from a settled science. Among the difficulties for settling the debate are that states seldom allow their business climates to get very far out of line with those of their neighbors, thereby making it difficult to find the growth effects of tax differences. However, in the case of Illinois, there is ample cause for concern. The state and its local governments face the possibility of having to pay down very large debt obligations—on the order of $100 billion or more—for employees covered by statewide pension systems. Moreover, the City of Chicago and other overlapping units of local government within the city’s limits face similar amounts of liabilities when measured on a per capita basis, while other Illinois local governments also carry very large unfunded liabilities. As discussed previously, depending on how fast these liabilities are amortized, they could give rise to tax rate differences between Illinois and neighboring states that are very sizable.

In a recent analysis of Illinois’s economic performance since the beginning of the hike in its income tax rates, Andrew Crosby and David Merriman examine several labor market measures of performance of the state versus the rest of the Midwest region.[1] Similar to the charts above, the authors note that the unemployment rates diverge in a striking fashion right around the time that Illinois hiked its income tax rates. However, given the high variability of unemployment rate measurement at the state level, the authors think it best to consider other measurements. In examining payroll job growth, they show that growth in payroll employment displays a far less prominent deviation between Illinois and the rest of the Midwest region. In addition, the timing of the growth difference between Illinois and its neighbors does not develop until 2013—two years beyond the income tax hike.

While there is some evidence, then, that Illinois’s fiscal problems are weighing down its recovery, such problems are more of a long term concern. Illinois’s slow recovery may have more to do with its industrial structure. To further the analysis, I draw on data from the U.S. Bureau of Labor Statistics that are called the Quarterly Census of Employment and Wages (QCEW). These data are reported for states and the nation from the comprehensive reporting of those firms and establishments that are covered by the Federal-State Unemployment Insurance Program. One clear advantage of using such data is that specific industry employment data are reported by firms and establishments, which allows us to investigate the possible effects of differences in industry mix. On the downside, the data are compiled and released with a time lag of one half year or more.

The chart of the QCEW data for Illinois versus the four remaining Great Lakes states (Indiana, Michigan, Ohio, and Wisconsin) are shown below. Illinois’s employment outperformed the remaining states of the Great Lakes region in the years prior to the recession and during the recession. As a matter of interpretation, I would argue that Illinois’s relative superior performance prior to the recession likely reflected Michigan’s collapsing auto industry employment from 2003 onward, along with the unsustainable residential property construction boom that took place in the Chicago area prior to the onset of the recession in December, 2007. Illinois also outperformed the region during the recession, and this is somewhat typical. Illinois is the domicile of highly compensated professional and business service workers who are not as readily laid off during economic downturns.

However, the period following the recession—from mid-2009 onward—contrasts mildly but unfavorably from the previous periods. After the recession, the Great Lakes region’s employment recovers faster than Illinois’s in each year. This trend is again somewhat consistent with the possible pernicious effects of the 2011 tax hike. While Illinois’s employment performance lagged in the year prior to the tax hike, which seems counterintuitive, it is possible that firms began curtailing investment and hiring prior to the tax hike itself in anticipation of an inferior climate in which to do business.

That said, it is notable that, as opposed to the unemployment rate gap that was observed, the payroll job growth difference seen here is small.[2] More importantly, there are alternative possible causes for Illinois’s lagging payroll job growth. In particular, Illinois’s mix of industries, while similar in some respects to those of other Great Lakes states, differs as well. It is possible that the small differences in job growth between Illinois and its neighbors are due to its somewhat different industry mix rather from disinvestment and a reluctance to hire in the state.

To investigate further, I compiled the QCEW data covering the five Great Lakes states from third quarter of 2007 to the third quarter of 2013, with detailed counts of jobs for each of 88 private sector industries. In the table below, the first row displays the actual job growth in Illinois for three two-year periods, as well as the entire period 2007:Q3–2013:Q3. During 2007:Q3–2009:Q3, Illinois experienced a net loss of 377,000 private sector payroll jobs, and gained back all but 158,000 by the third quarter of 2013.

As an analytic exercise, I further ask how the Illinois economy would have fared 1) if it had the same industry composition as the four other Great Lakes states combined and 2) if its industries had the same job growth rates as those in the other states. The second row of the table reports the results of this exercise (based on the two hypothetical scenarios, as well as an interaction of the two); the final row is the difference in hypothetical growth from actual growth. As shown above, Illinois hypothetically outpaced the region by 89,300 jobs in the 2007:Q3–2009:Q3 period by having a different industry mix and employment growth performance, but it gave back those jobs (and more) in the four years afterward.

To examine the results of this exercise in a different way, I decompose the differences in actual and hypothetical job growth in the table below. The first component shows the effects of maintaining Illinois’s actual industry-by-industry rates of employment growth but then hypothetically imposing the Great Lakes mix of industries. In the first row of the table below, one can see that during 2007:Q3–2009:Q3, Illinois’s industry mix was favorable to that of the remaining Great Lakes region, because it accounted for a 40,300 hypothetical gain in jobs. Seemingly, there are noteworthy differences in Illinois’s mix of industries from its neighbors’ that account for some of the year-to-year performance differences that we observe.[3] For the subsequent two periods of the recovery, the mix of industries in Illinois (below) shows a hypothetical employment loss of 11,000 (from 2009 – 2011), and a further loss of 16,000 (2011 – 2013).

What are some of the industry mix differences that are notable between Illinois and other Great Lakes states? The large professional and financial services employment base in the Chicago area has already been noted. Further, in relation to other states, Illinois is now much more services oriented overall rather than goods producing. Manufacturing’s share of employment for 2013 clocks in at 11.4 percent of private sector payroll jobs in Illinois, versus 16.4 percent for the other four states. (See the appendix below for a more detailed illustration of Illinois employment base versus the GL region).

The schism in manufacturing employment share between Illinois and the Great Lakes region is wholly attributable to the Chicago area. As of 2013, the Chicago MSA employment base recorded only a 9.5 percent share in manufacturing, while the remainder of Illinois recorded 15.9 in manufacturing. From a geographic perspective, these differences may also explain part of the overall performance difference between Illinois and the remaining Great Lakes states. As the graphic below suggests, annual payroll employment growth in the Chicago MSA has kept pace with the remainder of the Great Lakes region while Illinois (non-Chicago) has fallen behind since 2011.

And within manufacturing, Illinois tends to lean more toward food processing and farm, construction, mining machinery relative to the other Great Lakes states. In contrast, while there are important auto assembly operations in the Bloomington–Normal and Rockford areas of Illinois, as well as important links to the automotive supply chain throughout the state, Illinois’s ties to the automotive industry are much less prominent than those of Michigan, Indiana, and Ohio.

Despite such industry differences between Illinois and the other Great Lakes states, an extension of the analysis suggests that the state’s competitive job performance did not kept pace during the recovery. For the same time periods, a second hypothetical component shows the effect of holding Illinois’s actual industry mix constant, but imposing the average job growth rates of the same industries from the neighboring Great Lakes states (second row below). Here, because the industries that make up Illinois’s mix tended to grow more rapidly (decline more slowly) than they did in the Great Lakes region, the state hypothetically gained another 44,100 during the 2007–09 period, but subtracted 63,000 and 50,000 jobs in the subsequent periods. (The final component is the interaction of two hypothetical effects).

As measured by labor market indicators, then, the Illinois economy has not fared as well as neighboring states during the economic recovery that began in mid-2009. Measurements of the state’s unemployment rate show Illinois in the least favorable light. In contrast, other labor market indicators, such as payroll employment growth, suggest that the state’s underperformance is much more mild. Nonetheless, even payroll employment trends suggest that Illinois is underperforming when examined on an industry-by-industry basis. Accordingly, recent changes in public policies that influence the investment climate, such as tax rate hikes, cannot be ruled out entirely,though such policy effects are unlikely to be exerting such a large and immediate effect.

In looking for alternative or contributing explanations, the state’s particular mix of industries is likely contributing to underperformance. For example, the state’s high concentration in construction and mining machinery stands out, as does its lower concentration in automotive as compared to Great Lakes states located to the east. The downstate Illinois economy is highly concentrated in manufacturing, and downstate areas have seen slower payroll employment growth than the Chicago area. And so, Illinois’s performance may yet converge with its neighbors as the automotive boom settles down, and as global economic recovery revives exports of machinery and equipment.

In considering other structural causes, the Chicago area experienced super-normal growth prior to the recession due to excessive home-building and related activities. Accordingly, part of Chicago’s recent performance may derive from a slow healing of residential real estate and related activity following the boom period.[4]

Appendix 1: More on Illinois employment base as compared to the remaining Great Lakes region
The table below constructs an “industry dissimilarity index” between Illinois and other Great Lakes states (using the QCEW database as above) for the year 2013. Illinois is dissimilar to Indiana, Michigan, and Wisconsin, more or less, to the same degree when all industries are accounted for. However, Illinois is more dissimilar to Indiana and Michigan—the two most auto-intensive states in the region—and less dissimilar to Wisconsin in the case when the index is constructed to account for manufacturing industries alone.

Appendix 2: Selected Illinois industries comparison (index based on wages)
Here, the indexes of concentration shown in columns two and three relate Illinois and the four remaining Great Lakes states to the nation. An index value of one indicates parity with the nation, for example, while an index value of two indicates that industry wages in Illinois (or the Great Lakes region) are twice the national average. For example, the first row indicates that Illinois payroll wages in the Agriculture, Construction, and Mining Machinery sector lies at 2.88 times the national average while, in the four remaining Great Lakes states, the sector’s payroll lies at less than the national average—80 percent.

Thank you to Wenfei Du and Thom Walstrum for assistance.
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[1]The authors use the U.S. Census definition of Midwest, which comprises Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, and Wisconsin. (Return to text)

[2]Some observers have questioned the veracity of Illinois’ high unemployment rates for the post-2011 period to date, citing concerns about measurement error and possible changes in survey methodology. However, some corroboration of the reported unemployment rates is offered by reported first-time claims for unemployment insurance. Over the period from 2011 to date, the annual average of Illinois claims as a share of the national total increased from 3.6 percent to 4.1 percent. At the same time, the Wisconsin share fell from 3.4 to under 3.2, while Ohio, Indiana, and Michigan also fell. Similarly, these same data on UI claims within Illinois corroborate local area unemployment patterns within the state. That is, over the two initial years the recovery, the Chicago area unemployment rate gave ground to the remainder of the state; while gaining ground during the latter half of the recovery.(Return to text)

[3]See the appendix table at end for examples of some of the large industry employment sectors that differ between Illinois and the remainder of the Great Lakes region.(Return to text)

[4]As measured by permits filed to construct residential units, the Chicago MSA recovery has been weaker than other large MSAs in the region including Detroit, Des Moines, and Indianapolis.(Return to text)

Posted by Testa at 2:57 PM | Comments (0)

August 12, 2009

City-Suburban Population and the Housing Bust

Demographer William H. Frey calls to our attention a striking turnaround in population growth in the central cities of metropolitan areas. Since the 2005-06 peak of the housing construction boom in the United States, the growth rates of central cities have begun to gain ground on surrounding suburban areas. Beginning with 2005 and ending with population estimates reported by the Census Bureau for mid-year 2008, Frey illustrates a convergent city-suburb trend for U.S. metropolitan areas having a population over one million. These trends hold for all four major U.S. regions—North, Midwest, South, and West. (The 12-state Midwest population performance is shown below).


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Similarly, Frey reports that these gains “are not confined to the very largest American cities. Among the 75 cities with populations exceeding 200,000, 41 grew faster in 2007-08 than in the preceding year, and 54 grew faster than in 2004-05.” We show the population trends for such cities by region below. Once, again, we can see that the turnaround has taken place, on average, in all Census regions of the U.S.


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Within the Seventh District states of Illinois, Indiana, Iowa, Michigan and Wisconsin, growth has also tended to rebound in cities over 200,000 in population (below). For the year ending in the middle of 2008, six of seven cities exhibited positive population growth. However, the City of Detroit is an outstanding exception with an accelerated decline in the mid-year ending 2008.

On average, Seventh District cities shifted from zero or negative growth in 2005 to an annual growth rate of 0.5 percent for 2008. The largest swings in performance were registered by Des Moines, with a swing from minus 1.3 percent in 2004 to plus 1.2 percent in 2008, and Chicago, with a swing from minus 0.7 in 2005 to plus 0.7 for 2008.



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At this point in time, the reasons for this shift toward central cities remain open to speculation. But given the timing, there are strong reasons to believe that the housing bust lies behind much, if not most, of the reversal. A general rise in demand for housing, such as that which occurred earlier in this decade, exerted a magnified impact on the fringe of urban areas. Given the lower price of land on the fringe and the ease with which larger single family homes can be constructed there (rather than tear-downs closer in), both population and housing generally shifted towards the periphery. Construction jobs related to fringe development likely bolstered the trend, as some households followed job opportunities to the suburbs. And now we may be seeing a reversal of such trends as home demand and employment have fallen off.

William Frey also attributes the urban population resurgence to the nature of the urban economies, citing “broad economic diversity at a time when smaller cities … are vulnerable to economic shocks” and the “resiliency of large urban centers that are economically and demographically diverse.” There may be some wisdom in thinking that this is so. In pursuing economic development, central cities have been trying to attract and grow “Eds and Meds,” (education and health care). As measured by George Erickcek and Tim Bartik of the Upjohn Institute, health care and hospitals, along with colleges and universities have been a bulwark of the economic base of many cities. These sectors of the U.S. economy have tended to grow and expand consistently, and cities have benefited. From the 2000 Census, Bartik and Erickcek report that earnings derived from the education sector are, on average, 36 percent more concentrated in the principal cities of the nation’s 283 metropolitan areas. Health care earnings are 12 percent more concentrated.

Nonetheless, with the release of the next mid-year Census estimates (for 2009), it will be interesting to see if central cities are able to sustain their momentum of population growth in relation to suburban areas. Beginning with 2009, the influences of the sharp U.S. recession and related job declines may become important. [1] Favoring central city economies, the education and health care sectors are steady performers even in recessions. So too, many central cities no longer host manufacturing production, which tends to be hit particularly hard during recessions. However, in many cities other elements of the economic base are both concentrated and highly sensitive to economic downturns. Such sectors include professional and business services, law, tourism/business travel, and especially the financial sector, which has been buffeted by the recent financial crisis.


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Little evidence is available so far concerning the differing impact of the two national recessions, 2001 and the current one, on city versus suburb. However, in a recent report by the Metropolitan Policy Program at Brookings, Elizabeth Kneebone and Emily Garr report on year-over-year unemployment rates for city versus suburbs in the nation’s 100 largest metropolitan areas. They find that “in contrast to the last recession,” when city unemployment rates rose more sharply versus their suburbs, “unemployment has increased at nearly equal rates in cities and suburbs.” [2] The table below excerpts the year-over-year rise in unemployment rates for cities and their suburbs for several Seventh District cities and their suburbs and for the four major regions of the United States.


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Note: Thank you to Emily Engel and Matt Olson for assistance.


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[1]To some degree, people tend to locate their residences in proximity to their jobs, so that job locations would tend to drive population growth as well.(Return to text)

[2]The difference in the gap between the two recessions is not large. Year over year changes in unemployment rates in cities rose by 1.9 percent in primary cities versus 1.4 percent in suburbs from May 2001 to May 2002. For May 2008 to May 2009, year-over-year rates rose by 3.9 and 3.7 percentage points, respectively, for cities and suburbs. However, city/suburb unemployment rate differences in level are wider currently than in the 2001-02 period.(Return to text)

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June 5, 2008

2007 Economic Growth in the Seventh District

For nations, gross domestic product (GDP) is the most widely used yardstick to measure economic activity and growth. Conceptually, GDP measures the value of output produced by the market economy within a year or other period. In addition, GDP is defined as output produced within a designated geographic area such as a nation’s boundaries.

There is one more major wrinkle in this measure; GDP is typically reported as “real” GDP, meaning that the dollar values of goods and services are adjusted to reflect price changes. Such adjustments are made so that, for example, output growth reflects real gains in both the quantity and quality of what a nation produces, and not merely dollars transacted.

GDP matters to people, workers, and households because what is produced gives rise to what is earned in wages, salaries, and earnings on capital and savings. Accordingly, in many economics textbooks, the GDP concept is presented alongside its equivalent yardstick, gross national income.

In the U.S., the Bureau of Economic Analysis (BEA) produces data on GDP so that the pace of overall economic activity and its many components can be tracked on a timely basis. More recently, BEA has begun to provide timely GDP estimates for states and regions. On June 5, for example, the BEA released preliminary estimates for states and regions covering the calendar year 2007.

BEA data on GDP growth by individual states for 2007 shows a general economic slowdown that mirrors the national slowdown from 3.1 percent in 2006 to 2.0 percent in 2007. In all, 36 states experienced slowing GDP growth in 2007 versus 2006, with weakness centered in finance and in construction—especially housing.

The BEA’s map, reproduced below, shows several features of GDP growth in the Seventh District states—Illinois, Indiana, Iowa, Michigan, and Wisconsin.


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GDP growth in all five states of the Seventh District fell short of the national level in 2007. Michigan recorded a decline of 1.2 percent, marking the state’s second year in a row of economic output decline and its third such year over the past four.

In contrast to Michigan’s ongoing slow growth, many previously high-growth states in other regions experienced sharp declines in growth for 2007 versus their 2006 pace of growth. In particular, Arizona’s growth pace slowed from a 6.7 percent pace in 2006 to 1.8 percent in 2007; California went from 3.8 percent to 1.5 percent, Florida from 3.6 percent to flat, and Nevada from 5.4 percent to 0.6 percent.

The overall pace of growth in the Seventh District states slowed much less dramatically—from a pace of 0.9 percent in 2006 to 0.6 percent in 2007. This can be attributed to two major developments. First, the size of the highly impacted residential construction industry is much larger in high-growth states such as Arizona, Nevada, and Florida. While Midwestern states have experienced similarly sharp declines in housing activity, the impact has been proportionately larger outside of the region.

Another factor is that the U.S. manufacturing sector did not decline to the same extent in 2007 as it has in previous economic slowdowns. The falloff in new home sales and construction has exerted a drag on certain manufacturing industries, such as building materials and home appliances. However, other industries, such as machinery and computing equipment, continue to be buoyed by rapid growth in exports abroad, while others, such as mining and farm machinery, are being lifted by the global surge in commodity demand. For the manufacturing-intensive Midwest, then, the pace of overall economic growth has not slowed as much as it has in most previous episodes.

Another notable trend can be seen from the differing pace of growth within the Seventh District (see map above). Starting from the eastern states of the Seventh District, GDP growth in Indiana and Michigan significantly underperformed the western states of Illinois, Wisconsin, and Iowa. By way of explanation, the sagging domestically domiciled U.S. automotive industry exerts a heavier influence on Indiana and Michigan (and Ohio, too).

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February 4, 2008

Housing Construction Developments

The nationwide falloff in residential investment activity is unfolding along various channels and to varying degrees across U.S. regions. Falling residential activity is being felt in consumer spending, manufacturing production (e.g. construction equipment, appliances, and materials), the financial sector (e.g. mortgage and development financing), real estate (sales) and, of course, in home building itself. In home building activity, slow-growing regions such as those in the Midwest may be somewhat advantaged. That is because construction activity does not comprise as large a share of total regional employment in comparison to fast-growing regions. And so, a proportionate decline in home building activity does not tend to slow the region’s overall economy as greatly.

The table below reports payroll employment for the overall construction sector in major U.S. regions and in the Seventh District. States in the West and in the South such as Nevada, Arizona, California, and Florida report construction employment as comprising 6–11 percent of the state’s total employment for the year 2006 (see column 3). In contrast, the District’s construction industry makes up 4-5 percent of total payroll jobs—a share which lies below the national average of 5.6 percent.


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The upshot of these differences is that a falloff in construction activity can be expected to be felt more keenly in those regions whose work forces are more concentrated in home building. At least this is true if construction activity declines are proportionate across regions. And if the rate of decline in construction activity were more rapid in regions outside of the Midwest, this would additionally contribute to some favorable convergence toward the Midwest pace of economic activity. By some reports, speculative home buying activity had been running very hot in many coastal states in recent years.

Data trends also indicate that the pace of recent declines in Seventh District home building activity have been on par with the U.S. Constructed square feet of residences from the McGraw-Hill Construction Dodge reports currently indicate that home-building has in fact been declining about the same as the remainder of the U.S. Since January 2006, the pace of home building has averaged declines of 25 percent year-over-year on a monthly basis in the Seventh District versus 26 percent in the overall U.S. over the same time period. Similarly, the pace of housing starts in the graphs below indicates that Seventh District declines have largely paralleled the U.S. since 2006, though the U.S. level of activity had climbed to a higher peak over the decade. Accordingly, though the construction sector covers more than residential activity alone, steeper-than-average job declines reported in the table above (column 6) are consistent with greater drops in home-building activity in the top construction-job states.


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On the flip side, however, in many parts of the Midwest lagging general economic growth has tended to limit home buying and associated construction activity. In particular, Michigan’s construction employment peaked long ago during the fourth quarter of 2004 (see table above, column 4) and has fallen by 16 percent since then. So, too, housing starts (above) have fallen more steeply in Michigan versus both the U.S. and other District states.

But aside from Michigan’s woes, the pace of national construction employment growth (decline) has been converging (on average) with that of the Seventh District over the 2006-2007 period. The chart below illustrates the year-over-year pace of construction employment growth in the Seventh District versus the nation.


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This convergence cannot be attributed to home building activity alone because construction employment includes the nonresidential sector as well. As measured by jobs, residential building and construction make up 43 percent of the total. However, available data on commercial construction activity also indicates a pace of growth in the Seventh District that is roughly coincident with that of the nation. Consequently, the fact that the Midwest economy has a lesser share of total jobs devoted to new housing construction is likely contributing in some small measure to convergence of District employment growth with the nation’s.

To be sure, this convergence of construction employment will not spare Midwest households from financial loss and dislocation associated with a slowing national economy. As economist Leslie McGranahan demonstrates in a recent analysis, local economic conditions are one of the primary determinants of home foreclosure in addition to a state's foreclosure procedures and the degree of subprime and FHA borrowing. Accordingly, because automotive industry structuring has been weighing heavily on the Midwest economy, home foreclosure rates in Seventh District states are now running ahead of national averages (see figure below). An expected slowing of national economic growth during the first half of 2008 will continue to pressure many Midwestern homeowners who are stretching to meet their mortgage obligations.


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Note: Emily Engel and Vanessa Haleco-Meyer assisted this blog.

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March 20, 2007

Manufacturing jobs, increasingly undercounted

As I described in my August 2006 entry, government statistics tend to significantly undercount manufacturing activity. The undercounting occurs because manufacturing companies increasingly outsource service activities that they formerly performed “inhouse,” such as accounting, payroll, design, R&D, and others. These activities are increasingly attributed to service industry sectors in the national statistics rather than to manufacturing. For the Midwest, where manufacturing plays an important part in its economy, the undercounting can seriously mislead us as we try to understand the source of our livelihood.

But, more than services are being outsourced. Susan Houseman of the Upjohn Institute and her co-authors Matthew Dey and Anne Polivka of the Bureau of Labor Statistics find that U.S. manufacturing companies have also increasingly outsourced their “blue-collar” and production roles. They do this in an indirect way; they use temporary and leased workers (usually on-site) who are technically counted as employees of “employment services agencies.” Because these workers remain technically employees of the employment services agencies, the statistical counts of the work force of the companies that use employment services appear light, and declines in employment may be illusory, merely reflecting this outsourcing.

The number and size of employment services workers in the U.S. economy has grown rapidly over the past 16 years, easily outstripping overall payroll employment growth by a factor of six. And behind this growth, worker occupations in the employment services industry have been shifting toward industrial workers at the expense of office and administrative occupations. According to a survey by the American Staffing Association, 58 percent of customers engage temporary or contract workers to fill needs in industrial occupations.

In their research, Houseman and her co-authors draw on public databases to estimate the rapidly growing use of temporary and contract workers by manufacturing companies in the United States. They find that “the number of employment services workers assigned to manufacturing grew by about 1 million, from about 419,000 in 1989 to over 1.4 million in 2000.”

How does this practice affect the size of the U.S. manufacturing work force? Per the Houseman research, the outsized growth of temporary and contract workers by manufacturing companies implies that, rather than falling as reported, manufacturing employment actually grew by 1.4 percent in the U.S. between 1989 and 2000.

In researching why manufacturing firms use temporary workers, research by Yukako Ono and Daniel Sullivan finds that growing firms tend to take on temporary workers rather than permanent employees when they expect that their output may fall in the near future. By doing so, firms are spared the high costs of firing workers when they must curtail their production.

Because of such company behaviors, temporary or contract workers tend to be first hired and fired by companies during swings in national economic activity. During the 2001 recession, for example, the Houseman research finds that job declines in the manufacturing sector tended to be sharper than reported. Similarly, post-2001, manufacturers were more likely to hire workers from employment services agencies than to hire permanent workers, thereby understating recovery in manufacturing.

The miscounting also wreaks havoc with official productivity statistics. Since many measures of productivity are constructed as “output per worker,” an increasing tendency to undercount workers employed by manufacturers tends to overstate productivity growth in the manufacturing sector in comparison to many other industry sectors.

What are the regional differences in undercounting of manufacturing? We do not know this yet. However, if Midwest manufacturing companies behave like their national counterparts with respect to outsourcing of staff, Houseman’s findings for the nation imply that employment-services workers add 8.7 percent to direct-hire employment in Midwest manufacturing.

While we do not know that Midwest manufacturers outsource from employment service firms to the same extent as the nation, we do know that the employment services industry is very prominent in the Midwest. As measured by annual revenue, the nation’s top employment services corporation, Manpower, is headquartered in Milwaukee; the number two corporation is Kelly Services near Detroit.

More broadly, the chart below tracks the growth in “employment services” employees for both the U.S. and the East North Central region since 1990. The top chart indicates that the growth in these outsourced jobs has grown equally rapidly in comparison to the nation. Indiana and Michigan, ranking number first and fourth nationally in relative manufacturing concentration in 2005, experienced especially strong growth in employment services.


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The second chart indicates that the Midwest’s concentration of employees of the employment services industry has grown in relation to the U.S. Michigan has led the way, with a concentration that is now more than one-third greater than the U.S.

In examining hiring patterns from the employment services sector, Susan Houseman and her co-researchers are on to an important avenue in assisting the nation and the regions to understand the composition of their economies.

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September 20, 2006

Midwest housing market update

Following unprecedented home price appreciation nationwide in recent years, homeowners are much concerned about price reversal. In their current Economic Perspectives article, Chicago Fed economists Jonas Fisher and Saad Quayyum find that, on average, much of the recent surge in housing can be attributed to fundamentals such as rising income and favorable demographics, as well as innovations in home lending markets that have allowed renters to become homeowners. (Many of these innovations—such as interest-only loans and adjustable rate mortgages—were discussed in detail at the Chicago Fed's Bank Structure Conference this spring. The proceedings of the conference were summarized in the September issue of the Chicago Fed Letter.)

While such arguments may provide some comfort to those who worry about the possibility of a bubble in average U.S. home prices, experiences and current conditions differ widely from place to place. Should Midwestern homeowners be more or less concerned about the cooling of residential real estate markets?

Senior Business Economist Mike Munley has been tracking home price developments in the Midwest. Mike reports that, on September 5, the Office of Federal Housing Enterprise Oversight (OFHEO) released its estimates for home price appreciation in the second quarter of 2006. The report included data on the national average of home price changes as well as state averages.

Home prices for the U.S. increased at a 4.8% annual rate between the first and second quarters, the slowest quarterly appreciation since the end of 1999 and just below the average since 1980. As measured year over year, U.S. home prices were up 10% from the second quarter of 2005, which was also slower than the rate of appreciation has been—it topped out at 14% in the middle of 2005.

Recent home price appreciation here in the Midwest has also slowed noticeably, and the long term back drop has been much less robust. For the most part, home prices in the Seventh District states have been increasing more slowly than the national average of home prices (see figure 1). On a year-over-year basis, price appreciation in every District state lagged behind the national average in the second quarter of 2006, and Michigan had the lowest appreciation of any state in the nation. In comparison to the first quarter, home values in Indiana and Michigan actually declined. (Maine, Massachusetts, and Ohio were the only other states with declines.) However, home values in Iowa managed to rise slightly faster than the national average.


Click to enlarge.

The city-level data told a similar story. Of the District MSAs (Metropolitan Statistical Areas) covered by OFHEO, only Michigan City-La Porte, IN, showed year-over-year appreciation (10.6%) faster than the national average. Of the bottom 20 MSAs in the U.S., 14 were in the Seventh District, and Ann Arbor, MI, was at the bottom with home prices, down 1.3% from a year ago.

The OFHEO home price data is only one of several sources of information about home prices for the U.S. and some cities. The National Association of Realtors (NAR) releases data on the median sale price of existing single-family homes. In general, the two data series tend to tell the same story—that is, the trends in both data series are similar over time. But, their results are often different in a given month (for regional and national data) or quarter (for city data). The NAR data tends to be more volatile. The NAR data set measures exactly what it sounds like: it is the price of the typical home sold during that quarter. Still, the median price depends on the mix of homes sold during that quarter. If, for example, a large number of inexpensive, starter homes were sold in the second quarter, this would lower the median sale price. By contrast, the OFHEO index is designed to track how the value of an individual home changes over time. OFHEO looks at the appraised value of homes each time a new mortgage is taken out—it is updated when a home gets sold or when the homeowner decides to refinance. OFHEO looks at the value of a large number of homes and is able to estimate the index quarterly. One drawback to the OFHEO index is that it only looks at home mortgages serviced by Fannie Mae and Freddie Mac, and those agencies only service mortgages that are less than $417,000—so the OFHEO index excludes most luxury housing.

The NAR publishes price breakdowns for regions and select metropolitan areas (but not states). In the second quarter of 2006, median home prices nationally were up 3.7% from a year earlier, while median sales prices in the Midwest (which includes the Seventh District, Ohio, and some plains states) were down 2.0%. Of the 24 District MSAs covered by the NAR, five (Chicago, Champaign, Milwaukee, Peoria, and Waterloo, IA) beat the national average, and 14 saw home sale prices down from a year ago. Although the NAR data are more volatile, this data series does confirm that home prices in the Midwest have been increasing more slowly than prices nationally.

There are a couple of reasons why home values have been rising more slowly in the Midwest than the rest of the country. Looking over the long term, the Midwest has generally seen slower home price appreciation since the early 1980s. As shown in figure 1, home values nationally have increased an average of 5.4% per year since then, whereas average appreciation in the District states has ranged from 3.5% in Iowa to 5.1% in Illinois. In part this difference reflects the slower population growth in the Midwest than in the rest of the nation. Since 1980, the U.S. population has increased an average of 1.1% per year, while population growth in Seventh District states has averaged only 0.4%. It follows that demand for housing in the District is not growing as rapidly, which in turn puts relatively less pressure on prices.

Regional differences in home prices also arise from the supply side of the market. In many metropolitan areas, available land for home building is limited by natural barriers such as mountains and waterways. In the face of rising demand for housing, such barriers to expanded supply tend to drive up land and home prices, especially for single-family homes. Further, some areas have chosen to place legal restrictions on home building by imposing growth boundaries or strict zoning requirements and building codes. In some cases where regulations are not well-crafted, evidence suggests that the effect is the same; rising demand for homes is met by rapidly rising prices rather than by expansion of the housing stock. A recent survey report of land use regulations verifies that the Midwest is not especially noted for manmade barriers to housing expansion. Over the long term, the elastic nature of home building in the Midwest region has likely contributed to less pressure on home prices.

More recently, much of the relative weakness in home prices can further be explained by the relatively sluggish economic growth in the region. As I discussed in my recent Mid-Year Jobs Report, job growth here has lagged behind national job growth. That limits income growth in the Midwest, which in turn restricts demand for housing. So while the U.S. has seen a sharp rise in home price appreciation in the past several years, the run-up in the District was less extensive or non-existent. (See figure 2.)


Click to enlarge.

Among states, home price appreciation has recently been running in direct relation to the pace of economic growth. In particular, appreciation has been lowest in Michigan and Indiana, the two states with economies weighed down by structural change in automotive industries.

The figure below illustrates home price appreciation over the past year among metropolitan areas. Those metro areas experiencing depreciation tend to be found in Michigan and in central Indiana. A look back at the metropolitan area map of auto industry job concentration in figure 1 of last week’s blog shows a fairly close correlation between auto-intensity and weak home price appreciation.


Click to enlarge.

The relative stability of home prices in some Midwest locations is a double-edged sword for the region. Homeowners in other parts of the country were able to cash in on the sharp increases in the value of their homes and use those funds to support their spending. Midwesterners weren't able to cash in as extensively, limiting growth in retail sales locally.

On the plus side, given all of the popular concerns about a home price bubble, steady appreciation helps abate those worries here. If a sharp run-up in prices is a warning sign of a potential bubble, that sign is largely absent in the Midwest. But this is not to say that the Midwest is immune from the risk of a slowdown in appreciation or price declines going forward. Certainly, overall economic conditions will feed into home prices, as they have in parts of Michigan.

Less appreciation in home prices can also be advantageous in that it keeps homes here more affordable. According to the NAR's affordability index, homes have historically been affordable in the Midwest in relation to other regions and recently this affordability advantage has improved. Midwestern cities can use this attribute to help attract new businesses and workers.

Posted by Testa at 10:24 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)

March 20, 2006

Chicago Survey

Chicago is arguably one of the most-studied places in the world. The origins of this examination likely began with the world’s interest in Chicago’s rapid growth following the Great Fire over 100 years ago, and the subsequent phoenix-like re-birth. Serious sociological study of neighborhoods began with Jane Addams’ documentation of immigrant enclaves here and with the venturing of the University of Chicago’s social scientists outward from Hyde Park. This tradition continues today by social scientists, political scientists, and economists of every stripe. At least two periodic conferences that I know of examine Chicago. Some one-time Chicago self-examinations coming up this year are in celebration of the 97th anniversary of the publication of the great Burnham Plan of Chicago.

And so, any journalist setting out to survey Chicago’s position and prospects is favored in having many people to interview and much source material to draw on. The downside is that, in drawing conclusions and implications, there are also many experts peering over the journalist’s shoulder prepared with well-informed critique. Such a journalist, then, will either be highly accomplished, or else should have a great store of hubris.

Journalist Johnny Grimond of The Economist has just written the first survey of Chicago and its surrounding area for that well-respected magazine since 1980. For the most part, the survey article is about all that could be hoped for by the denizens and students of Chicago. In some respects, it is a love letter to Chicagoans. The prism of comparison of Chicago today to the Chicago of 1980 reveals a city that has moved on from economic despair and survived a period of profound economic restructuring and political turmoil. In this perspective, its achievements are remarkable. Unlike other industrial belt cities, Chicago has survived the greater region’s manufacturing decline and replaced it with high-level service functions and urban livability. Moreover, in doing so, much of its success has emanated from a revived central core outward, rather than becoming solely a suburban ring economy.

Rather than further re-hash the survey article’s findings, I suggest you have a look at it and perhaps contribute your opinions about it here. In my opinion, it will be shame if The Economist’s survey does not provoke a broader dialog among Chicagoans about the future and what, if anything, to do about it. What do you think are Grimond’s errors of commission and omission in assessing Chicagoland and its prospects? Is Chicago poised for prosperity, or has it merely experienced a short-lived respite from long-term decline?

At the end, Johnny Grimond notes a few possibilities for further success, namely further development of its professional services sectors and better commercialization of its educational and technological assets. However, Grimond is somewhat pessimistic in observing that the Daley era may be coming to an end, with nastier politics ahead and no evident leadership handoff in sight. And like its counterparts, Chicago has not cracked the puzzle of easing inner-city poverty and upward mobility. And so, he concludes that “Chicago’s current success may be about as good as it gets.… Chicago, like almost all America’s older cities, still faces the prospect of decline, or at best stasis, unless it can find the elixir of urban life—how to grow richer without growing bigger.”

What do you think?

Posted by Testa at 10:39 AM | Comments (3)

September 28, 2005

Chicago — Regional capital or global business center?

The Chicago economy is expanding, but the pace of growth is disappointing compared with that experienced during the 1990s. This lagging performance raises some questions about the future. Will Chicago merely serve a supporting role as a services center for the surrounding Midwest, or can Chicago’s businesses expand their reach to more rapidly growing national and global markets?

Robust growth of jobs, income, and population during the 1990s left intact Chicago’s role as capital city of commerce for the broader Midwest, and then some. Some observers of the Chicago economy, including me (Global Chicago book), argued that Chicago was outgrowing its regional character. It was becoming a global city, with market ties and cultural recognition above and beyond the Midwest. This view boded well for the region’s long-term prospects, as the shrinkage in surrounding Midwest manufacturing and agriculture income would not hold Chicago back from a favorable performance among global cities.

However, those rosy predictions are somewhat at odds with the reality of Chicago’s performance over the past 4-5 years. The Chicago area is undoubtedly participating in the U.S. economy’s expansion. The airports are at capacity once again, hotel occupancy rates are climbing, some of the risk exchanges are swaggering a bit with profitability and outreach to foreign markets, and commercial office vacancy rates have leveled off. But the Chicago area economy continues to lag the U.S. economy. This follows a recession that hit the Chicago metropolitan area more severely than it hit the nation overall. Year over year (as of August), the Chicago area’s payroll employment grew just 0.8 percent, compared with 1.7 percent for the nation. The unemployment rate for August stood at 5.9 percent versus the nation’s 4.9 percent (figure 1). This extends a weak performance from year 2000. Annual data show that payroll employment declined -4.1 from 2000 to 2004, versus a -0.2 decline for the nation.

Figure 1

UR Chi US quater--2.jpg

So what accounts for the city’s strong performance in the 1990s and what has changed for Chicago in recent years? Business and professional services, finance, and legal soared in the late 1980s and especially during the 1990s. The chart below, or something like it, is a bragging point for the city’s premier marketing promoter, World Business Chicago. In the 1990s, the Chicago area created more absolute jobs than other U.S. metro areas in the business and professional service industries, such as advertising, management consulting, accounting and the like. Chicago’s pace of growth didn’t keep up with some Sun Belt cities such as Atlanta and Dallas, where population was also growing strongly, but its performance was still outstanding. Chicago business service jobs climbed by 38 percent from 1990 to 2000, versus 54 percent for the nation.

Figure 2




This performance is also notable because of the simultaneous upheaval in the region’s traditional manufacturing base. By the early 1990s, Chicago area jobs in business services, legal, and finance came to exceed manufacturing. The city re-invented itself as a professional and business services center and business meeting place, while manufacturing jobs gave way to labor-saving productivity gains and manufacturing companies moved to smaller towns and overseas. Chicago became a powerhouse in business service headquarters, growing and attracting firms with global reach and stature such as Arthur Andersen and Leo Burnett. During the 1990s, Chicago gained 13 large company headquarters (Chicago Fed Letter). Convention and business meeting attendance continued to climb, along with Chicago’s travel connections to foreign business capitals.

But the declines in the pace of Chicago’s economic growth during the early years of this new century cause us to ask how much progress Chicago has really made in moving beyond its regional role. From 2000 to 2002, the Midwest’s payroll employment decline was about double the nation’s, and Chicago’s job decline followed the region’s fortunes rather than taking a more independent course. This might be because Chicago’s service industries sell to local midwestern customers who manufacture and farm.

If we look at the recent performance of Chicago’s business service sector (below), the deviation from national performance is below par in this very arena where Chicago had been doing so well during the 1990s. Up until the last few months, year over year job gains had fallen well short of the nation over the past 3-4 years.

Figure 3

Prof Serv, Y-o-Y, Aug 05.jpg


At the tail end of the chart above, some observers will find hope in the evidence that professional/business service job growth in the metro area is showing renewed signs of life. A competing hypothesis to Chicago’s confining destiny as a regional capital would argue that Chicago has experienced some unique and transitory shocks to its business service economy during the early years of the new century. These might include the evaporation of Arthur Andersen, the post-September 11 decline in business travel, and the fallout from overinvestment and expansion in IT/tech-related goods and services in the 1990s that left Chicago’s burgeoning tech consulting businesses with excess payrolls. As the metro area economy works through these shocks, Chicago may rediscover its path to success as a global city—a city “with a head on its shoulders” rather than solely a “city of big shoulders.”

Indeed, it is this future that the City of Chicago is banking on as it launches plans for a $14.7 billion expansion and reconfiguration of Chicago O’Hare International Airport.

Posted by Testa at 4:24 PM | Comments (0)

September 16, 2005

Midwest Economy

Hello midwesterners and those interested in the Midwest’s economic growth and development. My name is Bill Testa, and this is an introduction to my Midwest Economy Blog.

In this blog, I will offer some current information on the Midwest economy, as well as analysis of important public policy issues and even an occasional prediction or two. In this effort, I will be looking for those of you who share my keen interest in the Midwest economy to contribute not only your attention and readership, but also your thoughts and information. Those of you who do respond, as well as those who only listen, will help us all to enrich our understanding and knowledge of this region. And as time passes, we will also have an extensive compilation of information and experts to draw on as the Midwest encounters new issues and economic challenges.

Unlike some economists who sponsor blogs, I am neither a Nobel prize winner nor a renowned media personality. However, I have been following and analyzing the Midwest economy for over 25 years, most recently as the director of Regional Programs in the Chicago Fed’s Economic Research Department. The most burning questions that keep me up at night include: Why do some regions grow faster than others? What are the prospects for the Midwest and other regions? What can we do to influence our economic destiny? What roles, if any, do state-local governments and public-private partnerships play, or should they play, in the growth and development process?

At the Chicago Fed, my interest in the Midwest economy is shared by a talented and varied group of economists. Some of them—such as Rick Mattoon, Thomas Klier, Yukako Ono, and Mike Munley—are part of my Regional Team, while some are in other areas of our Research Department, including our Chief Business Economist, Bill Strauss, and our agricultural/rural specialist, Dave Oppedahl.

And if you are a true Midwest economy buff—as I am—you will find your way here—to our newly launched Midwest Economy web page. This new page features content galore, including our own vast archive of published analysis organized by subject area. You can also access regional data to create your own analysis; or link to other related web sites. Also, the site features our many past conferences, along with the presentations of renowned experts on the Midwest economy, state-local finance, economic growth, and a host of special topics concerning economic growth and development.

“Ag Bio” Conference at the Chicago Fed

Last week, Dave Oppedahl, our agriculture and rural specialist, held a conference at the Bank addressing agricultural biotechnology and rural development prospects in the Midwest. The best-known of these technologies are so-called bio-fuels, such as ethanol (which is largely refined from corn in the U.S., but it is largely refined from sugar cane in other countries like Brazil), and GMOs or genetically modified organisms, such as pest-resistant and herbicide resistent grains. Dave’s chief interest in these technologies and their prospects are how they will affect the well being of Midwest agriculture and rural communities.

New biotech products linked to agriculture are but one of several avenues by which rural counties hope to revive their fortunes and sustain their populations. Historically, family incomes in rural counties were supported by agriculture, mining, and forestry—especially agriculture. The U.S. Bureau of Economic Analysis compiles figures on the shares of personal income that derive from various industry sectors, and they estimate that as recently as 1969, 935 “rural” or nonmetropolitan counties counted on agriculture for 20% or more of personal income. By 1999, the number had fallen to only 235.

The problem has not been so much a failure of sagging production, or vulnerability to foreign producers, as it has been rising productivity itself. Improved strains of agriculture and better/more mechanized farming methods have increased yields astronomically. Since 1947, U.S. real farm product is up over 3.5 times. But despite rising real product, prices for farm products have fallen steeply, because the demand for raw agricultural products has not kept pace with rising production and productivity. In 1950, corn in the U.S. cost five times its price today as measured by inflation-adjusted dollars. Falling prices (along with labor-saving productivity) have come to mean meager farm earnings and jobs in most nonmetropolitan counties. In 1870, over 50% of the U.S. work force could be found in agriculture, but this had dwindled to 13% by 1947, and to 2% today.

In our Seventh Federal Reserve District states of Iowa, Illinois, Michigan, Wisconsin, and Indiana, farm earnings comprised 13% of personal income in 1969, but had fallen to only 2.8% by 2002. Of course, such productivity gains, along with urbanization of population, have also created the world’s highest standard of living for the average American.

But in generating income and jobs, many rural communities have not found a sufficient replacement for agriculture. (Though some, of course, have become suburbanized by nearby metropolitan area expansion, while others have redeveloped toward service industries and manufacturing). Consequently, the decline of agriculture-related income in nonmetropolitan areas has often been accompanied by lagging population growth or even outright declines. In the U.S., nonmetropolitan population grew at around one-half the pace of metropolitan counties from 1969. With falling population, many rural towns have been challenged to sustain essential services such as health care, schools, and retail. And in relation to metropolitan standards of living, rural personal incomes have fallen. Per capita income in nonmetropolitan counties in the Seventh District, for example, declined from 85% of the nation’s average in 1969 to 80% in 2002.

What’s a rural area to do? In our part of the Midwest, two distinct avenues to re-development are most prominent—manufacturing/distribution and retirement/recreation.
What other development paths are you seeing around the Midwest? Please share your thoughts and observations with us.

Bright prospects as a haven for retirees and recreational visitors can be most commonly observed in our northern states of Michigan and Wisconsin. Places such as Walworth and Door Counties in Wisconsin, and the northwest coastline of Michigan are perhaps the best-known in this regard. The map below illustrates those nonmetropolitan counties that have experienced hikes in population since 1969 (shown in blue, declines shown in green), and the “north woods” pattern in Wisconsin and Michigan is quite evident. (A map of second homes from the 2000 Census would show much the same effect). In many such places, the choice to develop tourist or retirement centers is not without its downsides. Recreational and retirement homes, and attendant commercial activities, often change the very character of rural towns, sometimes to the consternation of its original residents. Many towns on the periphery of large and sprawling metropolitan areas also face many of the same difficult choices: How much to grow, and in what directions?
graph1.gif

For other rural places, manufacturing jobs have helped them survive and allowed many farm households to earn sufficient income off the farm to sustain their rural lifestyle. In fact, manufacturing jobs have actually been growing in the nonmetropolitan counties of the Seventh District, even while they have been shrinking fast in metropolitan areas. Compared with 1969, when the concentration of manufacturing jobs in the Seventh District nonmetro areas was about the same as the U.S., these counties are now, on average, 75% more concentrated in manufacturing than the national economy overall. Apparently, in the face of cost competition from abroad and from the American South, manufacturers have found the rural Midwest desirable in terms of land and labor costs, labor quality, and access to rail and roads.

As the map below shows, manufacturing has become a staple of the economic base of nonmetro counties throughout the Seventh District states. (Orange-colored counties have a manufacturing concentration above the U.S. average). It is surprising that the preponderance of nonmetro counties in Indiana are concentrated in manufacturing. Morton Marcus, Director Emeritus of Indiana University’s Business Research Center, describes the common confusion between manufacturing and farming in Indiana this way, “For a century, the state has been considered an agricultural state when its reality has been as a manufacturing state. Hoosiers and citizens of other states refer to Indiana as part of the Corn Belt ignoring the massive steel and automotive parts industries in the state. Local economies that have depended on manufacturing for decades are still thought of as farm-serving towns. Workers, who derive the bulk of their income from factory jobs, imagine themselves as independent farmers because they own some acreage and plow or harvest after working hours at the plant of some global firm.”
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This is not to say that life is a bed of roses in those nonmetropolitan areas that are oriented toward factories. Recent plant closings over the past five years in places such as Galesburg, Illinois (Maytag), and Thompson’s picture tube plant in Marion, Indiana, have been caused painful labor dislocations for the towns and their workers.

More troubling still, earnings per job in nonmetro counties have not kept pace with metropolitan earnings. Apparently, the search for lower costs and lower wages is responsible for some of the urban to rural shift of manufacturing jobs. Does this mean that these same jobs are those that are most vulnerable to foreign competition and labor-saving technological change? Some analysts believe that many rural manufacturing jobs are at the end of a geographic “product cycle,” meaning that well-paying jobs are spawned in urban areas, but outsourced first to U.S. nonmetropolitan areas as their technology and production methods become routinized and subject to competition from abroad. Recently, there is little evidence of a shift in favor of metropolitan areas in the Seventh District. Manufacturing employment declines since 2000 in the District’s nonmetro counties have given back most of what had been gained since 1970s, but the pace of decline has been the same as in metropolitan counties.

What about the economic development promise of so-called “ag biotech”? What has been its impact so far? And what is on the horizon? We learned a lot from Dave Oppedahl’s September 8 conference. Before I share some observations with you from that conference, think about your own impressions of this phenomenon… and tune in later this week to compare your theories and experience with the information delivered at the conference on September 8.

Later this week…

Further discussion from the Chicago Fed’s recent conference “Ag Bio and Rural Economic Development, and

The Chicago Area’s economic performance…

Posted by Bates at 12:38 PM | Comments (0)


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