September 24, 2014
Mid-year Export Trends
By Bill Testa
Recently released data on U.S. foreign trade for July from the U.S. Census Bureau and U.S. Bureau of Economic Analysis (BEA) show an improvement in exports of U.S. goods. On a month-over-month basis, exports increased $1.8 billion, to $138.6 billion. This rise in exports—which helps to narrow the trade deficit—points to a stronger pace of U.S. gross domestic product (GDP) growth for the third quarter of 2014 relative to earlier this year.
July’s improvement in trade performance also bodes well for the economy of the Seventh Federal Reserve District. As seen below, exported manufactured goods make up a greater percentage of District production than of national production. Moreover, each District state’s ratio of manufactured export value to annual state output meets or surpasses the nation’s ratio of manufactured export value to GDP (7.1%). Notably, by this measure, Indiana and Michigan significantly exceed the nation as a whole, owing to their strong industry concentrations in transportation equipment (cars and trucks).
Looking more closely at July’s performance, one can see that the composition of July’s U.S. export growth favored District industries. As the Census/BEA trade report states: “The June to July increase in exports of goods reflected increases in automotive vehicles, parts, and engines ($1.7 billion); industrial supplies and materials ($1.3 billion); and capital goods ($0.4 billion).” In addition to the District economy’s high concentration in the export of transportation equipment, several District states also export significant amounts of capital goods: machinery and equipment such as agriculture, construction, and mining equipment, as well as computers and electronic equipment (see below). Moreover, several District states export chemicals, including both industrial chemicals and pharmaceuticals.
According to measures of export growth in first half of the year as compared to a year ago, not all industry categories have been holding up in 2014 (see below). Of particular note, machinery exports from Illinois, Michigan, and Wisconsin have been lagging compared to last year’s first half. And while automotive sales and production have been generally growing, transportation equipment exports from Michigan, Wisconsin, and Illinois recorded declines in first six months of 2014 over last year.
And so, if continued export growth can be sustained for the rest of this year and beyond, it will be welcome news for the District economy. Following a surge in growth during 2010–11 (see below), District (and U.S.) manufactured exports slumped in tandem with slowing growth in eurozone countries, which are important buyers of District manufactured goods. District manufactured export growth has also faltered on account of slower economic growth in China and in other lesser developed countries. Since global economic growth slowed down, global demands for commodities such as minerals and energy have eased, depressing Midwest exports of mining and construction equipment.
Rising District manufactured exports in 2014 would be consistent with modestly stronger global economic growth as compared with 2013. As of its July forecast, the International Monetary Fund (IMF) expects global growth to be 3.4% this year, up from 3.2% in 2013 (see below). World economic growth is expected to further accelerate to 4.0% in 2015, according to the IMF. As our trading partners continue to experience faster economic growth, we can expect that their purchases of the District’s manufactured goods, such as machinery, transportation equipment, and industrial supplies, will begin to bolster the region’s manufacturing production.
Note: Thanks to Rebecca Friedman and Paul Traub for assistance.
 Year to date through June, the five District state total of manufactured exports has risen 1.4% from $91.2 billion to $92.6 billion, according to Chicago Fed Staff calculations using data from the US Census Bureau, the Bureau of Economic Analysis, and Haver Anlalytics. (Return to text)
June 19, 2013
Economic Growth in the Near Term for the Industrial Midwest
What are the near-term prospects for economic growth in the industrial Midwest? In part because the Midwest is steeped in the production of durable goods, such as automobiles and machinery, its economy has long experienced more-pronounced swings over the business cycle than the overall U.S. economy. The current expansion following the Great Recession has been no exception. Until last year, the Midwest economy was generally outperforming the national economy. But weakness in manufacturing exports due to slowing global economic growth emerged in 2012.This weakness is giving those of us tracking the Midwest’s economic progress a reason for pause.
In order to better track the pace of the Midwest’s economic growth, the Chicago Fed unveiled its very own Midwest Economy Index, or MEI, in early 2011. The MEI shows that for the most part, the region’s economic growth has been exceeding its own long-run trend since mid-2010 (blue line in the chart below). At the same time, the so-called relative MEI—which provides a picture of Midwest growth conditions relative to those of the nation—has been indicating that regional economic growth has mostly been outperforming U.S. economic growth over the same period (red line in the chart below). And because the Midwest economy (as well as the national economy) still has ample slack four years after the Great Recession’s conclusion in mid-2009, many are still hoping—and perhaps still expecting—that the Midwest economy’s robust performance will continue.
Alas, if the past year has been any indication, the economic trends do not look favorable for the Midwest’s near-term prospects. As shown above, concurrent with the economic slowdown of the United States during 2012, the pace of the Midwest’s economic growth fell back into line with both its own long-run trend and its long-run relation to the nation’s economic performance. The manufacturing sector—whose level of production had fallen by more than 20% during the Great Recession—was leading the recovery, increasing its pace of production rapidly since the end of the downturn in mid-2009 through the early part of 2012. From June 2009 through April 2012, manufacturing output grew at an annualized rate of 6.1%. However, from April 2012 through May 2013, manufacturing output expanded at an annualized rate of 1.8%—more than a percentage point lower than its historical growth rate. Is this trend likely to continue?
The pace of the U.S. economic recovery, as well as that of the Midwest recovery, will depend partly on the pace of economic growth abroad, especially that of our major trading partners. No small part of the of the 2010–11 Midwest resurgence stemmed from the revival in manufacturing production for export abroad. In particular, manufacturing goods continue to account for a majority of U.S. and Midwest exports.
Export levels dropped off precipitously during the Great Recession (which lasted from the beginning of 2008 through mid-2009) before surging during the subsequent economic recovery. However, the pace of global economic growth slowed markedly during 2012, bringing down U.S. exports and reducing the overall pace of U.S. economic growth. The European financial crisis was partly responsible for the recessionary or nearly recessionary conditions in that part of the world last year. Meanwhile, China and the other Asian nations continued to grow in 2012, but at a slower pace than in previous years. The weakening conditions abroad are not expected to reverse course dramatically this year—and perhaps we will not see them improve markedly over next few years.
The effects of slower global growth can be seen in the performance of the Midwest’s exports. As seen below, the growth of manufactured exports in the Seventh Federal Reserve District (which comprises all of Iowa and majors parts of Illinois, Indiana, Michigan, and Wisconsin) had been climbing since the recessionary year of 2009—and doing so at a faster pace than the overall United States. Since early last year, however, exports in both the Seventh District and the nation have leveled off, with the Seventh District’s pace giving back previous gains on the nation’s (see chart below).
The four largest manufacturing export sectors in the Seventh District—which account for over two-thirds of the total value of its manufacturing exports—are as follows: chemicals, machinery, computers/electronics, and transportation (see table below). The distribution of these four industries are not, however, uniform across the Seventh District states; there are notable differences from state to state. For example, the transportation equipment sector holds the lion’s share of exports from Michigan, although much of this trade is destined for nearby Canada, where it will ultimately be reexported to the United States. Machinery exports dominate Iowa, Illinois, and Wisconsin—much of it is made up of agricultural, manufacturing, and mining equipment that is destined for regions throughout the world.
Looking further at trends by individual industrial sector reveals sources of weakness and strength for the Seventh District’s export performance (see chart below). The effects of weakened demand for mined commodities (such as coal and metals) and slower global economic growth in general are evident in the sharp reduction of the machinery sector’s exports. In contrast, the transportation sector’s exports have continued to climb. This largely reflects continued strength in light vehicle sales (i.e., car and light truck sales) in North America (and South America) rather than demand for these vehicles in Europe and Asia.
Despite strength in the transportation sector, the outlook for renewed growth in exports of manufactured goods is not robust in the near term. For the remainder of the current year, forecasts of global economic growth are weak, and they have recently been revised downward (see chart below). In the International Monetary Fund’s (IMF) most recent twice-yearly forecast, it lowered its forecast of global growth to 3.3% from 3.5%. The IMF also cut its 2014 forecast for global growth to 4.0% from 4.1%. By contrast, the global pace of growth in 2006 (before the Great Recession) and 2010 (soon after the Great Recession) exceeded 5%.
For the Midwest region, then, hopes of improvements in its manufacturing output lie with countertrends in domestic spending. In addition to the automotive sector being on the upswing, home construction activity has begun to climb nationally, albeit from very low levels. U.S. home completions have risen by over 30% (200,000 units at a seasonally adjusted annual rate) in the first quarter of 2013 relative to both 2012 and 2011. Historically, new home construction tends to spur new light vehicle sales, especially those of pickup trucks. So, too, sales of home-building materials, such as gypsum board, cement, and prefab housing components, are pulled up by home construction. To these may be added sales of home fixtures and appliances, although a large share of such goods are now shipped into the Midwest from other U.S. regions and imported from abroad.
Declining federal defense procurement due to sequestration, as well as other sources of budget retrenchment (including state–local government financial stress), will also weigh on Midwest manufacturing. For the most part, however, the Seventh District states rank low in per capita spending amounts of federal government procurement, so that lower federal spending will not be felt to the same degree as in many other parts of the country. In the Seventh District, the largest manufacturing-related segment affected by reduced spending on federal defense procurements is trucks and military vehicles: Companies, including Oshkosh Truck Corporation (in Wisconsin), Navistar (in Illinois), and some automotive compaines are likely to be affected by reduced federal defense procurement spending.
Generally, those of us living in the Midwest do have reason for concern when national and global factors weigh on the domestic manufacturing outlook. Now is no exception.
For fiscal year 2010, all Seventh District states except Wisconsin ranked below 35th in per capita procurement spending from the federal government. Wisconsin ranked 14th that year. (Return to text)
June 13, 2013
Mexico’s Growing Role in the North American Auto Industry
Mexico’s auto industry has experienced tremendous growth since the mid-1980s. Last year, 19% of all light vehicles produced in North America originated in Mexico (see table 1). That is up sharply from 20 years ago and puts Mexico ahead of Canada in terms of the number of vehicles produced.
On May 30, a panel of distinguished experts gathered at an event hosted by the Detroit branch of the Chicago Fed to discuss factors behind Mexico’s growth as a vehicle producer.
Mexico has a long history of vehicle production; by the late-1930s Ford, GM, and Chrysler were producing vehicles in the country. Over the years, the Mexican auto industry was shaped by economic development policies put in place by the Mexican government. Starting in the mid-1960s, a policy of import substitution favored production of vehicles and parts within Mexico. A number of years later, the policy focus changed to export promotion, which encouraged Mexican producers to seek international markets for their products. In 1995, Mexico, the U.S., and Canada signed the North American Free Trade Agreement (Nafta). It established a framework and set out a timetable for boosting trade among the three countries. In the process, Mexico has become a very attractive export platform for North, Central, and South America (see table 2). In fact, the country has negotiated more than 40 free trade agreements, more than any other North American country. In addition, Mexico has benefited from a general improvement in its manufacturing competitiveness during the past few years. Its productivity-adjusted wages are the lowest among major manufacturing countries, it is an energy rich country, and it has a history of manufacturing (35% of the country’s GDP is represented by manufacturing).
Table 2: Light vehicle exports from Mexico by destination region
Source: Brendan Case, Alan Ohnsman, and Craig Trudell, 2012, “Automakers boost investing on vehicle factories in Mexico,” Bloomberg, November 13, available at www.bloomberg.com/news/2012-11-14/automakers-boost-investing-on-vehicle-factories-in-mexico.html.
In that context, it comes as no surprise that last year Mexico exported 83% of its light vehicle production. In fact, growing exports explain nearly all of the growth in Mexican light vehicle production during the last 30 years or so. Mexican light vehicle production is up by 2.4 million units since 1985. During the same time, its light vehicle exports rose by 2.3 million units. Lately it has been foreign-headquartered vehicle producers, such as Nissan, VW, Mazda, and Honda that have announced expansions of their Mexican production operations, continuing the upward trend of Mexican light vehicle exports.
Not as visible but at least as important is the ongoing growth of motor vehicle parts suppliers in Mexico. Companies large and small continue to invest in order to keep up with growing demand for parts in vehicle assembly in Mexico, as well as to feed the supply chain north of the border. Supply chain linkages, however, extend in both directions. Due to the integrated nature of the North American auto industry, growth in Mexico’s vehicle assembly has resulted in growing U.S. motor vehicle parts exports to our neighbor to the south.
February 14, 2013
New Issues in Immigration Research
By Maude Toussaint-Comeau
Over the past few decades, U.S. immigrant groups have abandoned a longstanding pattern of settling predominantly in major urban areas. Rather, their residential areas have expanded and diversified to rural locales and smaller metropolitan areas, along with the traditional settlement areas in big cities such as New York, Chicago, Los Angeles, Miami, and Boston. And within these big cities, immigrants are also now living in larger numbers in suburban communities.
In the 7th District, which includes most of Illinois, Indiana, Iowa, Michigan, and Wisconsin, immigrants are expanding their presence from the bigger cities to their peripheries and into rural areas. Immigrants are attracted by job growth, more affordable housing, better performing schools, and safer neighborhoods (Wilson and Singer, 2011). This demographic transformation has heightened racial, ethnic, and linguistic diversity throughout the Seventh District.
While the geographical expansion of the immigrant diaspora offers more employment opportunities and greater access to goods and services, immigrants also face greater uncertainties. Communities that are unaccustomed or unprepared for inflows of foreigners sometimes view newcomers as a drain on resources and a threat to native employment.
For economists, these changes raise questions about the effects of immigration on local communities. Traditionally, economists have largely focused on the impact of inflows of immigrants on labor markets. However, we now look at other socioeconomic outcomes and issues in receiving localities. The pressure on local housing prices is one such outcome. This issue has become all the more important in the aftermath of the recent housing crisis, the worst in U.S. history. Adverse effects of the crisis have been widespread but not evenly distributed, neither geographically nor across different racial and ethnic groups. Researchers are seeking to understand how the increasingly widespread immigrant communities are navigating the crisis, as well as the role of immigrant housing demand in the housing market overall.
In this blog, I discuss the changes in the foreign-born population in the Seventh District during the first decade of the 2000s and review new research on immigration from a workshop organized by the Journal of Regional Sciences (JRS) held at the Federal Reserve Bank of Chicago on November 7–8, 2011. The workshop brought together researchers to discuss new frontiers and directions for the study of immigration. A special issue of the JRS, to be published in February 2013, compiles selected contributions from the workshop.
Foreign-born in the Seventh District
The foreign-born demographic accounts for 13% of the U.S. population (Chart 1), and is expected to provide for most of the population gains in the coming decades (not shown) (Passel and Cohn, 2008). In our District, 8% of the population is foreign born. Illinois, in particular, has remained an exceptionally strong magnet for immigrants among District states, with 14% of its population foreign born.
With the Great Recession and accompanying high unemployment rates in the first decade of the current century, the growth rate in the immigrant population in the Seventh District slowed from the rapid influx seen in the 1990s, the largest on record (Chart 2). This reflected the slowing national trend. Chart 3 distinguishes the growth in foreign-born populations in each Seventh District state’s largest metropolitan area relative to the rest of the state. The slower growth in the foreign-born population in the Chicago metropolitan area relative to the rest of the state is consistent with research that has noted the ongoing outward sprawl of this metropolitan area (Johnson, 2007). In large metropolitan areas where economic growth has been lagging the state’s economic growth and where unemployment has been relatively high, the increase in the foreign-born population has tended to lag that for the remainder of the state. This is also the case for Milwaukee and Detroit (Chart 3).
Implications for localized markets: New research findings
Research areas such as those examined in the JRS offer useful insights into the potential roles of immigrants in local housing markets, neighborhood characteristics, and local businesses’ survival and growth.
Among other pertinent findings of the studies in the JRS, one article finds that in an area in Europe that experienced a housing boom during the 2000s, about one-third of the increase in house prices and in the available housing stock between 2000 and 2010 can be explained by immigration. (Saiz, 2007, estimated similar effects for the U.S). As the stock of housing is often owned by natives to a large degree, significant shifts in wealth are identified as a possible outcome of large-scale immigration.
Another article found that immigrants can have both positive and negative impacts on communities. On the one hand, the paper identified a positive effect of cultural diversity on average housing prices (e.g., ethnic food restaurants). But other costs associated with immigrant agglomeration may offset some of the positive effects.
Another article looks at whether a high population density of immigrants generates negative outcomes such as increased crime. The analysis reveals that the presence of a large population of immigrants, especially if from the same country, generates much lower crime rates. Accordingly, despite some public perception to the contrary, “enclaves” of immigrants may actually provide an effective way to reduce crime.
Impact on firms
The survival of firms and retention of employees are especially important during times of economic slowdown. One article examines whether businesses lay off native-born workers in response to an abundance of (potentially lower-cost) immigrant workers. The study shows that cities with large inflows of immigrants absorb them by significantly increasing the number of business establishments. The expansion of the number of firms is consistent with the lack of any negative effect of immigrants on wages identified in the literature (see, e.g., Card, 2009). Other research presented in the JRS uses a unique database of immigrants matched to firms in Georgia. It analyzes whether hiring “undocumented” workers increases the probability of survival of a firm. It shows that these firms save on costs (i.e., labor) and have a significantly lower probability of exiting the market, especially if they are in sectors that produce labor-intensive goods.
New approach to studying impact of immigration
The new approach to the study of immigration’s effects acknowledges the diversity (heterogeneity) of skills that immigrants bring. The picture emerging from the studies in the JRS is that the local amenities of cities may be significantly affected by the presence of immigrants. Immigrants bring to urban areas important dynamics of population growth which affect housing values, among other things, and which have wealth implications for the entire community.
The findings in the JRS articles on immigrants and firms are consistent with previous findings that immigration has the potential to stimulate investment and increase the size of the economy without crowding out native workers in some instances. The analysis of undocumented immigrants, their specific characteristics, and their impact on firms has only recently become possible with new and unique firm-level data and offers an interesting avenue of research to be developed.
Wilson, Jill H. and Audrey Singer (2011). “Immigrants in 2010 Metropolitan America: A Decade of Change,” Brookings, Metropolitan Policy Program at Brookings, State of Metropolitan America/Immigration, October 2011 (Return to text)
(e.g., for a study of Hispanic neighborhoods in Chicago and the foreclosure crisis see, Martinez, Martha A. (2009). “The Housing Crisis and Latino Home Ownership in Chicago,” Institute for Latino Studies, University of Notre Dame, October 2009. (Return to text)
Passel, J. and D’Vera Cohn (2008). U.S. Population Projections: 2005-2050,” Pew Research (Return to text)
Johnson, Kenneth M. (2007). “Demographic Trends in Metropolitan Chicago at Mid-Decade,” Working Papers on Recreation, Amenities, Forests and Demographic Change. No. 6. (Return to text)
For details on the ethnic and immigrant concentration in smaller geographies see University of Chicago Map Collection for Chicago Census Maps depicting neighborhood level data on the ethnic diversity and location concentration patterns in Chicago. For similar depiction of ethnic/immigrant neighborhoods in Detroit (e.g., Corktown/Irish; Greektown; Dearborn/Arab; and Mexican town), see here. (Return to text)
Saiz, Albert (2007). "Immigration and housing rents in American cities," Journal of Urban Economics, Elsevier, vol. 61(2), pages 345-371, March. (Return to text)
 Card, David (2009). “Immigration and Inequality,” American Economic Review, Papers and Proceedings, 99, 1--21. (Return to text)
May 22, 2012
Global Services and Midwest Prospects
Many have highlighted the importance of increasing foreign purchases of goods produced in the United States as a path to economic growth. In 2009, President Obama called for a doubling of U.S. exports of goods and services within five years, accompanied by the announcement of a National Export Initiative. So far, this goal remains reachable. Since the economic recovery began in mid-2009, U.S. exports have grown at a robust annualized average of 9.1 percent.
The economic recovery and accompanying export growth have been good news for the Midwest. As an important goods producer of both exported manufactured and agricultural products, the region has benefited from enhanced income and economic activity.
But goods are not the only possible exports from the United States. In a series of papers and a recent book, economist J. Bradford Jensen asserts that we should be emphasizing services rather than manufactured goods in assessing and promoting the nation’s export prospects. Further, the United States is particularly suited to export knowledge and skill-intensive services, much as it does manufactured goods of that nature. These would include business and professional services, such as accounting, software, management, public relations, advertising, R&D (research and development), construction, architecture, design, and specialized financial services.
As shown in the charts, the services share of U.S. exports has been growing—from 19.6 percent in 1980 to 29.3 percent in 2011. And the value of services exports has increased dramatically in the past several decades.
The extent of data available for specific segments of the services sector has been improving, but it remains inferior to the level of coverage for goods exports. The table illustrates the growth of the specific services exports that are reported by the U.S. Bureau of Economic Analysis.
Note: See link for footnote remarks
As shown here, many service exports have been growing very rapidly. For this reason, analysts like Jensen find the trends encouraging. The prospects for further export growth in these sectors seem bright, because the U.S. has tended to specialize in manufacturing industries that are also skill intensive, such as capital goods machinery and aerospace. As many developing countries continue to grow, they are likely to need just such skill-intensive services. Because many of these services segments need employees who are highly skilled, further expansion of their U.S. operations to serve growing global markets would create more high-paying jobs and income in the U.S.
Still, it is far from a foregone conclusion that robust export growth will materialize. That is largely because receiving countries have placed many restrictions on services imports, including cumbersome occupational standards and licensing, procurement favoritism by home governments, and limited or inadequate protections on intellectual property, such as patents and invention. As cited by this year’s Council of Economic Advisers, a recent study estimated that “the aggregate level of discrimination against services imports in important emerging markets such as China, India, and Indonesia is equivalent to a tariff on these imports of more than 60 percent.” Accordingly, the further opening of global trade in the services arena will require much more international negotiation and agreement.
If services exports do grow markedly in years to come, does the Midwest region have a stake in this growth? If so, it is most likely to be found in the region’s large urban economies. Typically, large city economies have come to specialize in business and professional services. For instance, the Chicago area has been celebrated as a “global city,” in part because of its strong position and linkages in business and professional services, its corporate headquarters of multinational companies, and its world-leading risk contract exchanges and clearing operations.
The still dominant position of Chicago in exchange-traded derivative products is easy to document. Per figures cited by World Business Chicago, for example, Chicago exchanges including the CME and Chicago Board Options Exchange, account for 16 percent of the exchange-traded derivatives activity that takes place around the world.
However, more generally, details on globally traded services are hard to come by. Since data on services exports by individual city are sparse, some researchers have taken an indirect approach to appraising the position of cities in global commercial services. For example, Peter J. Taylor and Robert E. Lang construct city-by-city indexes of global connectivity among the most prominent offices of multinational firms in key services sectors. These service sectors include accounting, advertising, banking/finance, insurance, law, and management consulting. City rankings are constructed by accumulating the size of offices of these prominent firms (if any) in each city. In “Global Network Connectivity,” Chicago is ranks seventh behind Singapore, Tokyo, Paris, Hong Kong, New York, and London. Detroit ranks 85th; and Indianapolis 114th.
In another study, J. Bradford Jensen and Lori Kletzer examine the extent to which specific service industry employment is more concentrated than total employment across metropolitan areas. The notion here is that if, for example, the Chicago area employs more per people (as a share of work force) than the national average, the city’s economy is likely exporting these services. That is, Chicago employs a disproportionate share of workers in financial services not because Chicago area residents consume more financial services, but rather because they work for firms that export financial services to other parts of the nation or the world.
Taking a similar approach, we constructed local area indexes of employment concentration for those service sectors that are reported by the BEA to be internationally traded. The next chart identifies major metropolitan areas of the Seventh District by their employment concentration in these industries. An index value greater than one indicates an employment concentration that exceeds the U.S. average. For example, an index value of 1.20 indicates that the city contains 20 percent more of employment in a particular industry than the U.S. average. In turn, the implication is that those index values greater than one suggest the extent that the metropolitan area exports the service to its surrounding region or elsewhere, nationally or internationally.
Employment data for the core Chicago area are reported with the greatest detail. We see that Chicago continues to be a city with many highly skilled industries, such as management consulting, education, and financial services, as well as its more traditional industries, freight transportation and warehousing.
Such industry detail is not available for other large metropolitan areas in the Seventh District. However, the following table, with data from aggregated employment categories, shows that these MSAs are also highly concentrated in exportable services.
However, such data give us little detail about which particular services are actually exported abroad rather than sold to neighboring cities, states or regions of the U.S. Accordingly, rather than employment concentration by industry, alternative data sources can give us better insights. Tourism is a case in point. During the course of their visits, foreigners spend on travel and local goods and services, which in turn give rise to domestic jobs and income. The table below ranks cities by their international visitors. As seen, visits are highly skewed toward New York City and a handful of other large MSAs. Chicago ranks 10th in 2001 by the number of visitors from abroad, with 4.3 percent of total visits. Still, this is roughly proportional to the Chicago area’s share of national population.
U.S. colleges and universities are a leading service sector on the world stage. In turn, students studying here from abroad generate income for domestic workers and households. Per below, all five District states rank highly in hosting international students. Such students give rise to local income in tuition payments, as well as in local living costs for themselves and sometimes for their family members. In examining the largest individual institutions, we see that these benefits accrue not just to the District’s large metropolitan areas, but also to a number of smaller cities.
In conclusion, the Midwest has long known of its global linkages through exports of manufactured goods and foodstuffs. Perhaps one day the region’s exports of services will challenge the importance of its traded goods. With this possibility in mind, the region will want a voice in U.S. negotiations of global agreements that open up services to trade and protect U.S. services exports from unreasonable obstacles abroad. Closer to home, service-oriented cities of the Midwest will continue re-shape their infrastructure and public services to complement emerging services trade.
Note: Thank you to Norman Wang for assistance.
March 15, 2012
Export Effects of a European Slowdown on the Midwest
By Britton Lombardi and Bill Testa
As the U.S. economy has shown signs of recovery, attention has shifted to the European sovereign debt crisis and its impact on European economic activity, along with its spillover effects on the rest of the world. In the Midwest, where the manufacturing sector has been leading the ongoing economic recovery, concern has arisen that another recession in Europe could dampen economic activity here too.
What effect might a European recession have on international trade and the manufacturing sector in the Midwest? What do we know from past experience about the sensitivity of trade to changes in economic activity? A recent paper from Chicago Fed economist Meredith Crowley studied the causes of recent trade collapses, especially the Great Trade Collapse during 2008 and 2009. Crowley tested three factors that could potentially affect international trade: declining aggregate demand, financing difficulties, and rising trade barriers. In the past five of six U.S. recessions, the U.S. and the world suffered trade declines as economic activity fell in the two to four quarters before the trough of these recessions. Crowley notes that the elasticity of imports for the U.S. ranged from 1.5 to slightly more than 2 , which implies that imports respond more than proportionally to changes in income and demand (an elasticity of 1 would indicate a proportional response). Based on her own and others’ research, she concludes that a drop in demand is the most important factor in determining trade declines. Trade financing exerts a more modest affect on trade, while rising trade barriers have not been an issue recently.
We might expect similar declines in European demand for imported goods from the U.S. and elsewhere in response to a recession there. How would such developments be felt outside of Europe? To get a sense of how the Midwest, specifically the Seventh District, might be affected, we can ask how exposed the region currently is to trade with Europe—since any drop-off in trade is likely to be somewhat in proportion to current trading patterns. The Seventh District comprises all of Iowa and most of Illinois, Indiana, Michigan and Wisconsin. As seen below in Chart 1, exports to Europe grew for both the U.S. and the Seventh District during the 2000s, but still accounted for less than 2% of GDP for the U.S. and of gross state product (GSP) for the Seventh District in 2010. Therefore, exports to Europe account for a relatively small portion of the region’s economic activity. For 2010, the region’s exports to Europe were worth $31.5 billion, including agriculture and livestock products, oil, gas, minerals, and ores, as well as manufactured goods.
Comparing U.S. regions (Chart 2), the Great Lakes region (which includes Illinois, Indiana, Michigan, and Wisconsin, but adds Ohio and excludes Iowa) lies close to the middle in terms of export exposure to Europe. The Seventh District’s export-to-GSP percentage is almost identical to that of the Great Lakes region, at 1.88% versus 1.91%. The Mideast has the greatest exposure to Europe, with exports accounting for 2.65% of GSP, while the Plains have the least exposure, with only about 1.4% of GSP going to Europe.
What do we export to Europe? As shown in Chart 3, chemicals, machinery and transportation equipment, and computer and electronics account for about 70% of all Seventh District exports to Europe. How does the District’s overall export mix compare with other U.S. regions’?
The Seventh District’s exports to Europe tend to be more heavily concentrated in three product categories—chemicals, nonelectrical machinery, and transportation equipment. Of our top 10 categories, we overlap with the rest of the U.S. in six of them (Table 1, non-overlapping categories highlighted in red).
More importantly, our top trade categories are in sectors (industrial goods, such as machinery and equipment, and industrial chemicals) whose sales tend to rise and fall disproportionately with swings in overall business activity. A recent National Bureau of Economic Research working paper noted the procyclical nature of traded goods, specifically durable manufactured goods, and again found that the majority of the decline in international trade was due to a decline in demand for manufactured goods. The authors also find that the decline in the trade of durable goods versus nondurable goods (soft goods like food and clothing) accounted for a larger portion of the decline in total manufactured goods demand in both the recent Great Trade Collapse and the 2001 recession. Therefore, the Seventh District’s reliance on nonelectrical machinery as a top export (21.1% of total exports) could make our region somewhat more susceptible to the negative effects of a European recession than the rest of the U.S., where nonelectrical machinery accounts for a smaller proportion of exports (7.4%).
So, although the Seventh District economy’s exposure to Europe through the export channel is somewhat limited, a slowdown in Europe may be expected to hurt our region’s exports more than those of other regions that export less sensitive products. Exports and imports have historically been sensitive to overall economic conditions. In some cases, such as the 2008–09 global recession, trade declines can be severe.
Export data is pulled from the International Trade Administration’s TradeStats Express. Of total Seventh District world manufacturing exports, Seventh District sends about 48% to North America (Mexico and Canada), 19% to Europe, 17% to Asia and 7% to South America. For information on the District’s major trading partners by individual nation, see this blog. (Return to text)
September 2, 2010
Rebalancing and exports
Exports of goods and services have garnered much attention in recent months. For one reason, export growth has been leading the economic recovery in the United States. As several Asian and Latin American economies have begun to recover recently and strongly, they have begun to buy U.S. goods and services. The figure below shows annualized quarterly rates of export growth from the United States. The global recession of 2008–09 resulted in plunging U.S. exports to the rest of the world. However, the economic recovery during 2009–10 has been accompanied by robust export growth and world trade. Though currency swings may have contributed to U.S. export volatility, global swings in overall economic growth were the dominant force behind this volatility. The second figure below illustrates that world economic growth rates plunged by more than half in 2009. The turnaround in global growth was equally sharp, spurring the recovery of U.S. exports abroad. A similar trend can be seen (below) in goods exports from the Seventh District states of Illinois, Indiana, Iowa, Michigan and Wisconsin.
Looking out over the longer term, many analysts foresee a fundamental reorientation of the U.S. economy toward production and exports—led by a shift in demand by developing nations for U.S. products and services. Over the past few decades, in the United States there has been strong growth in the consumption of goods and services, including imports from overseas, along with low household savings rates. Meanwhile, saving rates in nations such as China and other developing nations have been very high, while their consumption (and imports from the United States) have been relatively low. Given these fundamental misalignments, tomorrow’s realignments may include a U.S. economy that shifts its production capabilities toward serving overseas markets.
Assuming that these developments do materialize, how is the Seventh Federal Reserve District economy positioned to contribute to export growth? As it turns out, states of the Seventh District—Illinois, Indiana, Iowa, Michigan, and Wisconsin—are highly oriented toward goods production destined for overseas markets. In particular, the Seventh District economy is steeped in both manufactured goods and agricultural products that are sold abroad.
Before I illustrate the Seventh District’s export orientation, let me say a prior word about the available data. The U.S. Department of Commerce takes great effort in tracing manufactured exports back to their state of origin. In this way, an exported machine that is produced in Wisconsin, but shipped abroad from Seattle, will not be (mistakenly) attributed to the state of Washington. However, these procedures of tracing the origin of production can be somewhat misleading for raw agricultural exports from the Midwest. Agricultural products tend to be over-allocated to the port of shipment or last storage, rather than to their state of agricultural production. For this reason, the U.S. Department of Agriculture re-estimates the origin of agricultural commodities, assigning U.S. exports abroad back to the home state according to each state’s share of the commodity’s production. For example (and with simplification), total exports of corn from Iowa are estimated from Iowa’s share of U.S. corn production. Such adjustments can be very important for inland states, such as those of the Seventh District.
After making such state-of-origin adjustments for agricultural commodities, the Seventh District’s export orientation becomes more apparent. Agricultural exports make up 9.1 percent of the nation’s exports; and they make up 14.4 percent of the District’s exports.
As a share of annual production, or gross state product, the figure below reveals that the Seventh District is marginally more export-oriented overall than the nation. For both the nation and the Seventh District, manufactured goods account for the lion’s share of exports, and this holds true for individual states. Still, Iowa is the exception such that agricultural exports rival manufactured goods exports for that state.
Agricultural exports represent a larger share of output for each Seventh District state, save Michigan, relative to their share for the nation. For fiscal year 2008, the five states of the District accounted for 21 percent of the nation’s agricultural exports. All five states were significant contributors. Overall, Iowa and Illinois ranked second and third in the nation—Iowa by virtue of leading the nation in soybean, feed grain, and livestock/meat exports. Illinois’s exports in these same categories also ranked very high, as did Indiana in soybeans and feed grains (table below).
Agricultural exports from the District have expanded rapidly over the past decade. Continued economic growth in developing nations has led to richer diets in such countries, sharpening the demand for U.S. agricultural products (see table below). Because of the global recession, exports of agricultural products slowed in 2009, but they are now rising once again in 2010 as global economic recovery unfolds.
The Midwest and Seventh District manufacturing sectors are also major exporters. As set out in my previous blog entry, the District produces capital goods, heavy machinery, and transportation equipment needed by developing countries as they build their own economies. (See also the detailed tables at end of this article.) However, the data’s assignment of U.S. manufactured exports to individual states and localities should be viewed as suggestive only, rather than as definitive (with a high degree of accuracy). That is because exported goods are often composed of various components, which may be produced almost anywhere—their value often originates from many places. For example, a heavy truck exported from Wisconsin will contain manufactured parts and materials from other plants or production sites located in other states in the Midwest or in different regions of the country; such components for the truck may even originate from outside the United States. Moreover, the truck’s value is also composed of services such as research and development, design, and headquarters/administrative services—any of which may take place across a wide geography. For these reasons, the export orientation of the broad Seventh District (Midwest) economy, relative to that of any particular state, is the more important point to be taken from these data. Geoff Hewings and his co-authors have demonstrated that Midwest states (and their plants and businesses) trade intensively with one another in producing final output, such as global exports. Accordingly, we can be fairly sure that many of the manufactured exports from states in the region are made up of “value added” originating somewhere in the broader multistate region, if not the specific state to which its entire value is assigned.
The same point holds true for recent estimates that attribute exports to metropolitan areas. A current Brookings Institution study reports that ”metropolitan areas produce 84 percent of the nation’s exports, making them the points of leverage for scaling up trade with the wider world. The 100 largest metropolitan areas alone account for over 64 percent of the nation’s exports, including 75 percent of its service exports.” For Seventh District metropolitan areas, the table below extracts data from that report. According to these measures, four of the District’s metropolitan areas rank within the top 25 nationally: Chicago, Detroit, Indianapolis, and Milwaukee.
The ultimate destination of exports by metropolitan area is also reported (by the International Trade Administration). For example, in 2008, Canada remained Chicago’s and Indianapolis’s top export destination, but the number two and three destinations differed. For Indianapolis, France and Germany claimed the number two and three spots; for the Chicago area, Mexico and India claimed the next two spots.
As the nation moves beyond the profound economic disruptions of the past few years, it seems likely that the emergent economy will differ in important ways. Throughout the past decade, the Seventh District’s economic production has been shifting toward goods destined for overseas markets. Currently, the District’s export orientation in manufactured goods is at least on par with that of the nation—and even more so with respect to agricultural production. An accelerated shift in the United States toward producing goods for overseas markets would likely have a large impact on much of the Seventh District’s economic base. In addition to its agricultural prowess, the District’s manufacturers produce important capital goods that are in high demand as world trade and developing economies expand.
Click to enlarge.
 We also adjust manufactured exports using the U.S. Department of Agriculture’s agricultural estimates. Many food products, such as milled grain and oils, are otherwise counted as manufactured. (Return to text)
 Chicago Fed Research Department staff estimates.
January 26, 2009
Foreign Born, Educational Attainment, and Entrepreneurship
By Britton Lombardi and Bill Testa
Attracting immigrants to the Midwest may be an especially lucrative objective from a regional economic development standpoint. As discussed in previous blog entries, the growth performance of metropolitan regions has been strongly linked with the educational attainment of its work force, especially college level attainment.
Educational attainment of the immigrant population in the U.S. tends to be skewed toward the high end (though it is also bifurcated—skewing toward the lower end as well). The high educational attainment of immigrants owes much to the top-notch university system found in both the Midwest and the nation, which brings many of the world’s brightest to our doors. Afterward, our market-based economy provides ample opportunities and rewards to talent, hard work, and new ideas of immigrant workers and entrepreneurs.
So far, even as the nation has experienced an upswing in immigration, the foreign born population in the Midwest lags well behind that of the nation. As the chart below suggests, the region’s large metropolitan areas host a much smaller share of foreign born, with the exception of Chicago.
A closer look below reveals that the Chicago metropolitan area has attracted both the highly educated and the less educated. The share of Chicago’s foreign born who hold a college degree is below the U.S. average. In contrast, in the remaining metropolitan areas of the Midwest, the foreign born population includes a greater share holding at least a bachelor’s degree in 2007. According to sample data from the U.S. Census Bureau, an incredible 50 percent of Pittsburgh’s working age population who were foreign born hold at least bachelor’s degree. Detroit, Cincinnati, St. Louis, and Columbus are not far behind.
Overall, however, the foreign born tend to lift Chicago’s average college attainment due to the city’s high overall propensity to attract immigrants. The Detroit area also rates highly in this regard, coming close to the national average.
Metropolitan areas in the region may also prize the foreign born for their tendency to start new businesses. The foreign born are, on average, business owners and self-employed at about the same rate as native born, though their experiences and bahaviors are quite varied. In a recent study, Maude Toussaint-Comeau finds that self-employment of immigrants varies by country of origin and by differences in personal and human capital characteristics. Immigrant-owned small businesses often contribute importantly to urban revitalization and community development.
Many more of the (immigrant) college educated concentrate their studies in technical and scientific fields than their native-born counterparts. A report estimates that in 2005, 41 percent of science PhD workers in computer, mathematical, architectural, engineering, and science occupations were foreign born. As a result, many fast-growing scientific and technical firms in IT and software have been founded by foreign born (and often U.S. educated) entrepreneurs. Another study estimated that between 1995 and 2005, 52.4 percent of the engineering and technology start-ups in Silicon Valley had one or more foreign born key founders. For our region’s foundering metropolitan economies, such firms would be truly welcome.
Our reading of the same data source above shows that entrepreneurship of the foreign born in the region’s metropolitan areas lies close to national averages. This is true of both college-educated foreign born and overall foreign born. Again, these tendencies vary across metropolitan areas.
However, the overall paucity of foreign born in the region tends to depress their importance as entrepreneurs. As the chart below suggests, again only Chicago manages to climb above the national average in this regard. The Detroit metropolitan area comes in a respectable second place.
Competition in attracting technical and educated immigrants can be fierce. At a time when skilled and educated workers are most in demand in the U.S., our immigration policy focuses heavily on family re-unification rather than criteria related to occupation or skill. And, to the extent that we do allow immigration based on applicants’ job skills, we cap such visas at levels far below what employers require. In the past two years, the quota for H-1B (skill-based) visas was met quite quickly. For fiscal year 2007, the H-1B cap was met two months after the application process opened, and for fiscal 2008, the cap was met in just under one day.
Metropolitan areas in the region differ in their overt recruitment of the foreign born. One way involves enhancing the process of assimilation into the fabric of the area for recent immigrants and foreign born residents. Pittsburgh has created the Welcome Center for Immigrants and Internationals to create a welcoming environment and to provide necessary resources and information, such as advice for small business owners and career counseling services. Indianapolis organized the International Center of Indianapolis to provide relocation and training services to both attract and retain well-educated immigrants. Indianapolis, too, has developed a Welcoming Center that connects recent immigrants with well-established immigrants to facilitate community integration. In the Chicago area, the Chicago Council on Global Affairs organizes events, speakers, and task forces to raise international awareness and to expand Chicago’s perception as a top tier global city. One such program in the past included a Mexican American Task Force that provided recommendations to businesses, governments, and other interested parties of ways to utilize the strong Mexican community as an economic asset.
Metropolitan areas have also taken to outwardly promoting their international diversity and available opportunities. Many cities participate in “Sister Cities” programs to build relationships with foreign cities to increase their international profile and potentially attract foreign investment, as well as visitors. Just to list a few: Chicago has 27 sister cities spread out across the world, while Detroit has 7, Columbus 8, St. Louis 14, and Milwaukee 5. Additionally, metropolitan areas promote their diversity and opportunities through cultural festivals and events. For example, Pittsburgh held “Global Pittsburgh Celebration,” a month-long celebration that worked to raise awareness about Pittsburgh’s global assets and technology, as well as showcasing the abundant opportunities for foreign-born entrepreneurship and innovation in the area.
December 3, 2008
Exports and the 2008 Economic Slowdown
Back in the 1930s, policy makers perhaps contributed to the economic downturn by sharply lifting tariffs on imports into the U.S.—the infamous Smoot-Hawley legislation passed on June 17, 1930 that raised import tariffs on over 20,000 goods. In response to these policy actions, our trading partners raised tariffs (and nontariff barriers) on U.S. exports. If the U.S. intention was to keep jobs at home, the effect was probably to aggravate unemployment here and abroad.
In recent years, trading activity with other nations has been a definite engine of growth for the U.S. Exports are contributing much to an otherwise faltering pace of economic growth. Though exports comprise only 12.4 percent of U.S. output, export growth accounted for one-half of the nation’s (2.0) percent GDP growth in 2007; exports accounted for one-third of GDP growth over 2006 and 2007. Indeed, in every year since 2002, the growth of exports has added at least one-half percentage point to national output growth.
Per the graph below, export growth has similarly lifted incomes and output in the Seventh District. Overall, nominal export value climbed by $54.7 billion, or 58.7 percent, from 2003 through 2007, with every District state joining in the expansion. Per the table below, our NAFTA partners, Canada and Mexico continue to be our largest export destinations, with China growing rapidly over the 1997-2007 period.
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The strong role of our NAFTA partners as an export destination reminds us that growth in trade often comes about from the hard policy work involved in negotiating trade agreements with other countries. The graph below illustrates the growing number of countries that now receive exports from producers in Seventh District states. Each District state has added a fair number of trading partners since 1997.
Aside from avoiding the (past) mistake of squelching international trade, the U.S. also has the opportunity to expand its export opportunities in the years ahead. Awaiting enabling legislation from the U.S. Congress, bilateral or two-nation agreements have been negotiated with Panama, Columbia and South Korea. To learn more about these agreements and those that have preceded it, one source of information is TradeAgreements.gov (this web site is a joint effort between the Departments of Agriculture, Commerce, State, Treasury and the Office of the United States Trade Representative).
Note: Vanessa Haleco-Meyer contributed to this weblog.
May 15, 2008
Foreign Direct Investment in the Midwest--Update
Americans sometimes harbor mixed feelings about investment in enterprises on U.S. soil that are owned and directed by companies domiciled abroad. Yet for the most part, investment from overseas represents a validation of the productive business climate in the domestic economy. Here, our system of law and contracts, along with productive workers and well-conceived public infrastructure, offer conditions that are conducive to value creation. In turn, foreign direct investment (FDI) activities can benefit our workers and households. New investment and ownership often bring new technology and ideas to American shores, thereby boosting our own growth, wages, and standards of living.
In recent decades, FDI has grown rapidly to comprise a larger share of the U.S. economy. As documented in our recent article, the share of employees working for all companies that are U.S. affiliates (those in which a foreign investor owns at least 10%) grew from 1.8% in 1979 to 4.7% in 2000. According to more recent data, this share has remained fairly constant through the middle of the current decade—now 3.9% by that estimate.
Much of recent growth in inbound FDI has resulted from accelerated globalization and rapid world economic growth. Due to a greater ease of communication and lower cost of personal travel and goods shipment, global breadth of enterprises has expanded. General Electric employs 316,000 worldwide, 155,000 outside of the U.S. General Motors employs 335,000 worldwide, 193,000 abroad.
In addition, although the U.S. has maintained its economic prominence in the world economy, the U.S. economy now comprises a smaller share of global production (27% as of 2006). And so, without any countervailing forces, this simple arithmetic would suggest more inbound FDI as a share of the U.S. economy. By one estimate, the U.S. share of global outbound FDI outflows have in fact declined from its 1970 value of 54% of global FDI to 18% in 2006.
While global economic growth is the largest generator of inbound FDI to the U.S., the exchange value of the U.S. dollar versus other currencies can also be influential. The value of the dollar has fallen by 25% since 2002, measured against a basket of currencies weighted by our trade with other countries. For this reason, investment in productive capacity on U.S. soil may look increasingly attractive to foreign-domiciled companies. For one, for those foreign companies that hold their earnings and assets in foreign currencies, the purchase price of physical capital in the U.S. such as real estate, intellectual property, and factories will be cheaper. For companies that now sell into the U.S. market from production facilities abroad, the shifting of production to the U.S. may be advantageous in generating production costs in the same currency as their sales.
Further, for those companies that use their U.S. facilities as a platform from which to export to markets outside of the U.S., earnings on sales will likely be denominated in foreign currency rather than in U.S. dollars. Recent developments in FDI in the U.S. automotive sector may be reflective of these considerations. Several European carmakers are currently considering setting up production in North America, among them Volkswagen and Audi. And exports of U.S.-produced light vehicles have been rising, according to Chicago Fed economist Thomas Klier. From 2002 to 2007, the share of U.S. production that is exported to non-NAFTA countries alone has risen from 3.0% to 11.6%.
In recent years, the state of Indiana has done well by FDI in automotive and other (mostly manufacturing) investments from abroad. The Business Research Center at Indiana University (BRC) has recently issued an extensive report that reviews the global environment for FDI with an emphasis on Indiana and surrounding Midwest states. According to U.S. government data as of 2005, Indiana’s economy ranks 8th in the nation and first in the region as measured by the ratio of FDI to state economic output. (Michigan also exceeds the U.S. average.) As measured by jobs, the United Kingdom and Japan were virtually tied as the number one source of FDI into Indiana, each accounting for 32,000 jobs.
The U.S. government data on FDI for states does not necessarily reflect new investment or added jobs. Rather, most FDI transactions are mergers and acquisitions. For this reason, and because government data are not very timely, the BRC also gathered information from a private vendor on announcements of FDI expansions and new facilities. Since these are announcements rather than completed transactions, we cannot be certain these investments will actually take place. But according to BRC estimates, Indiana will gain nearly 5,000 jobs from 2007 announcements, mostly in the automotive industry. The implication is that Indiana will widen its lead among Midwestern states in the FDI category. An appendix to the BRC report proudly maps the specific FDI projects in which Indiana’s state development agency has completed or participated.
Competing state and local development agencies throughout the Midwest will surely take note.
March 17, 2008
Metropolitan area exports
Expanding export activity has taken on added importance in recent years. For example, the newly released Economic Report of the President (ERP) reports that export growth accounted for one-third of U.S. economic growth in 2006 and 2007. Looking ahead to 2008, this export importance will continue as the U.S. economy slows even while economic growth in many developing regions continues to be robust. Rising incomes abroad stimulate appetites for U.S.-made goods and services alike.
It is timely, then, that new information on goods exports for individual metropolitan areas has just been released by the International Trade Administration (ITA), based on U.S. Census Bureau data. Exports figure prominently in regional economies such as ours that are steeped in manufacturing and agricultural production. On a national scale, the ERP describes the many benefits of export activity. In addition to high-paying jobs and incomes, exports spur U.S. producers to innovate to compete with in global markets. So too, as U.S. producers expand to serve global markets, they can often achieve low-cost economies of scale, thereby reducing prices for consumers.
The new data series on metropolitan exports covers goods only. This means the importance of exports to metropolitan economies is understated in the data because exports of services such as medical, tourism, banking/finance, and transportation now account for 28% of U.S. exports. Moreover, metropolitan areas typically specialize in such services, with ongoing shifts toward service concentration now underway.
Despite our lack of data on service exports, a metropolitan area's rank order in goods exports very likely reflects its local service exports as well. In the production process, manufacturing companies purchase many services ranging from finance to management consulting, transportation, design, law, R&D, and advertising. The value of these services become part of the value of the final goods for export, and many of these services are purchased locally. Accordingly, in many instances, a host of value added products from surrounding service companies lies behind a metro area’s goods exports.
Given the Midwest region’s prowess in durable goods manufacturing, it comes as no surprise that metropolitan areas in the Seventh District originate considerable goods exports. The chart below shows export values for several metropolitan areas. The Detroit area leads with a reported $43.3 billion in exports in 2006, comprising 74 percent of Michigan’s exports abroad (see right axis). Detroit’s automotive trade with Canada remains considerable. Currently, the rising value of the Canadian dollar is pressuring production towards the U.S. side of the Michigan–Ontario corridor.
The Chicago area’s total goods exports approached $30 billion in 2006. In addition to traditional heavy manufacturing and food products, Chicago exports medical supplies and equipment and pharmaceuticals.
In order to gauge the relative importance of exports to metropolitan areas, we make use of recent BEA (Bureau of Economic Analysis) estimates of total metropolitan area product. Dividing a metropolitan area’s exports by its gross product yields a rough measure of each region’s income share that is earned by producing goods for export abroad. By this measure, we see in the chart below that Peoria, Illinois, home of construction equipment manufacturer Caterpillar, derives over 50% of its income from producing goods for export. While this is a useful indicator, it does overstate Peoria’s share somewhat because Caterpillar and other Peoria manufacturers assemble final goods using component parts and services from other parts of the Midwest, the nation, and the world. So part of the measured value of Peoria’s exports reflects the embedded value added of goods and services produced elsewhere. For larger regions, such measures tend to be more accurate since the intermediate components are more likely to be produced within the region.
Click to enlarge.
The next chart shows export intensity for all of the Seventh District metro areas. Most lie above the U.S. average in export intensity. Open markets abroad are an important part of the economic vitality of these communities.
Where do District metro areas export? The ITA provides the destination by both country and general region of the world. Canada and Mexico—our NAFTA partners—predominate as export destinations for metro areas (chart below). Europe also remains important, especially Germany, France, and the U.K. In Asia, Japan figures prominently, with China as the fastest growing export destination.
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Finally, the ITA data offer a finer breakdown, indicating both the specific industry categories of exported goods and their destination. As one example, the next chart displays export patterns for the Milwaukee metro area. True to its industry structure, the Milwaukee area exports durable goods such as electrical equipment (e.g., medical scanners and electronic controls) and nonelectrical machinery (e.g., small engines and construction equipment). All major regions of the world (and trading blocs) are destinations for Milwaukee exports.
The outlook for Midwest exports remains strong. As the 2008 ERP suggests, foreign income growth is likely the strongest impetus to U.S. export growth. As developing nations raise their standards of living, their appetite for manufactured goods rises sharply, as does their demand for food products.
The 2008 ERP also indicates that U.S. exports are very sensitive to income growth abroad. In part, that is because developing countries are investing heavily at home both to produce goods for export and to serve rising domestic demands. For that reason, they purchase capital goods—those that are needed to expand production capacity such as machinery and equipment. Since capital goods are needed to expand production capacity, a slowing economy ratchets down purchases of capital goods and an accelerating economy ratchets up purchases. The U.S. economy specializes in capital goods, such as those produced in Milwaukee and Peoria.
But what generates the income growth in developing countries that, in turn, propels their demand for U.S. exports of capital goods? In part, trade agreements allow developing countries to generate income (from sales abroad) and thereby raise living standards by lowering tariff and nontariff barriers to export sales abroad.
The ERP reports export sales from the U.S. to regions of the world with which the U.S. has recently signed trade agreements. In almost every instance, subsequent export growth to the trade agreement nations well exceeded overall export growth.
Of course, these agreements also make it easier for foreign nations to sell into U.S. markets. In many instances, such foreign competition displaces firms employing domestic workers. Though the overall process of expanding trade is vital to raising living standards both here and abroad, the related labor market upheaval often gives rise to anti-trade sentiment.
Estimates of import sensitivity by individual metropolitan area are problematic. Imports are counted and tracked at the U.S. border and no further. But in a 2003 article, I constructed some rough estimates of import sensitivity by examining a metro area’s industry mix and then weighting a metro area’s industry mix by the degree to which imports had penetrated U.S. markets. I found that large metropolitan areas were not experiencing growth in trade sensitivity to the same degree as smaller and medium-sized metro areas. However, this may be explained by the growing service orientation of large metro areas. Since many of these services do become embedded in the value of manufactured goods, the trade orientation of large metropolitan areas may be understated by my (goods-based) estimates.
Vanessa Haleco-Meyer contributed to this entry.
January 7, 2008
Exports: A Source of Strength
Public sentiment for trade between the U.S. and other countries has seemingly eroded in recent years because of concerns about domestic job upheaval from international trade. While some of these concerns about job displacement have validity, it is also true that U.S. exports abroad continue to pull along economic growth in the nation and in the Midwest, where manufacturing plays a large role. Globalization has helped boost economic growth rates and lift the standards of living in developing nations. In turn, peoples of the world are demanding U.S. and Midwest-produced goods such as food products and advanced machinery.
As seen in the chart above, exports have generally grown over the past few years and at an especially strong pace since 2004. Since then, exports for the western Seventh District states—Illinois, Iowa, and Wisconsin—have grown on average at a faster pace than those for the nation; the eastern Seventh District states—Indiana and Michigan—have had on average positive growth in exports, although at a slightly lower pace than the national average (see chart below). (A ranking of the Seventh District exporting industries can be found in a previous blog.) Exports from Michigan in particular are dominated by automotive trade in parts and vehicles with Canada. Such trade has grown slowly, in large part because of flat vehicle sales in North America.
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In contrast to Indiana and Michigan, each western Seventh District state hosts companies in particular sectors that have a strong export component. While export sales can be volatile, especially when observed at a specific state-industry level, these industries’ exports have been growing consistently over the past few years. Illinois’ electrical equipment (including machinery and computers), chemicals, transportation equipment, and food industries make up most of the manufacturing and exportable goods of the state—about three-quarters of Illinois’ exports. Chemical, machinery, and computer industries in Illinois have grown, on average, over 10% for the past three years, while the transportation equipment industry has grown about 40% over the same period. The transportation equipment industry’s major manufacturers in the state include Navistar and Tenneco Automotive—two companies listed in Industry Week's U.S. 500 top manufacturers. Other large companies in Illinois’ electrical, chemical, and food industries include Caterpillar, John Deere, Abbott, and, ADM (Archer Daniels Midland Company).
Similar to those of Illinois, Iowa’s food and machinery industries and Wisconsin’s machinery, computer, and transportation industries represent about 50% and 60% of each state’s exports, respectively. Iowa's top commodity exports are corn (except seed corn), pork, and tractors. Wisconsin has many major manufacturing companies, including Manitowoc, Briggs and Stratton, Plexus, Harley-Davidson, and Oshkosh Truck, that help boost exports.
As forecasts of U.S. economic growth for the year ahead are weakening, world economic growth is expected to remain robust. Although advanced economies have GDP projected growth of approximately 2% to 3%, this weakness is bolstered by the other developing regions with projected growth of more than 5% for the coming years. Accordingly, export growth will continue to be an important part of overall U.S. and Midwest growth in 2008.
Note: Vanessa Haleco-Meyer contributed to this blog.
March 5, 2007
Manufacturing exports continue to excel
Even as much of the Midwest’s automotive industry remains troubled, the region’s overall manufacturing exports continue to impress. In the Seventh District, manufactured exports make up around 7% of gross state product; this is on par with the nation’s economy (also discussed in a previous blog). While this share is not huge, the manufacturing sector’s rapid growth of exports in recent years translates into an outsized contribution to the region’s growth. Export growth of manufactured products will exceed 11% in 2006, which marks the third consecutive year of similar growth. By our reckoning, strong export growth from manufacturing made up roughly one-sixth of the Seventh District's overall output growth in 2006.
What’s propelling these exports? For the most part, it’s been due to continued strong global economic recovery and expansion. Following two years of weak growth in 2001 and 2002, the global economy began to recover. According to estimates gathered and reported by the IMF, the global economy grew by 5.1% in 2006. This followed three years of similarly strong expansion. As of early 2007, forecasts and expectations for this year are equally robust.
Among our major trading partners, Mainland China has exhibited the strongest growth; it has been reporting growth rates of 8% to10% over the past seven years. Accordingly, Seventh District manufacturing exports to China have been growing rapidly at an average annual pace of 9.3% per year since 1997.
The chart below illustrates that Midwestern exports to China have come to represent an increasing share of the region's overall exports to Asia. In 1997, overall goods exports to China, including agriculuture, mining, and manufacturing, accounted for only 13.7% of the Seventh District’s exports to Asia. By last year, however, China’s share almost reached 20 percent. (See black line).
Manufactured goods exports accounted for most of this expansion. Moreover, expanding manufactured exports were widespread across broad industry sectors including transportation equipment, machinery and metals.
The second chart below ranks manufactured exports to destination nations in 1997 and 2006. While Canada remains far and away the region’s predominant export destination, China now ranks fifth, behind Canada, Mexico, the U.K., and Japan. The Seventh District states exported $4.9 billion of manufactured goods to China-Hong Kong last year.
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The Seventh District’s manufacturing sector continues to be large and export oriented. This means that global economic growth will continue to figure prominently in the region’s growth. However, this assumes that U.S. policies of open world trade and investment will continue to be expanded. Agreements to open our trade across the globe help develop and stimulate the economies of our trading partners. In response, our trading partners turn to the industrial Midwest for many of their purchases.
June 7, 2006
The recent influx of foreign born into the United States has drawn attention on several public policy fronts. The U.S. Congress is currently considering a tighter border policy with Mexico, in part due to concerns of national security and the rule of law. In addition, the surge in foreign born (and their offspring) figures into debates over the sources of the widening wage and income disparities in the U.S. and in the slow growth of wage rates and income at the bottom of the income distribution.
On a more positive note, the foreign-born population is accounting for approximately one-third of U.S. population growth, somewhat more if the newborn children of recent immigrants are counted. The possible benefit of a more rapid population growth stems from the fact that the U.S. labor force market is already tightening rapidly and promises to tighten further as the “baby boom” generation retires. Slow growth of the work force can ultimately slow the overall pace of economic growth, especially if accompanied by slow growth of workers with specific skills. Indeed, for many regions, one key economic challenge and opportunity is to facilitate education and skills acquisition of the foreign born. As of 2005, the U.S. Department of Labor reports that 28 percent of the foreign born aged 25 years and older had not completed high school versus 7 percent for the native-born.
Prior to the 1990s, as shown by the chart below, the Seventh District region, which includes much or all of Illinois, Indiana, Iowa, Michigan and Wisconsin, had not attracted immigrants to the same extent as many other U.S. regions. Still, as shown by the second chart below, strong growth in immigration has taken place here in recent years. So too, the Chicago metropolitan statistical area (MSA) has remained an exceptionally strong magnet among metropolitan areas. Chicago ranked 5th in foreign-born population according to the 2000 Census of Population, with 17 percent to 18 percent of its population foreign born. And since that time, the Chicago metro area has ranked among the top 10 metro area gainers in numbers of both Asian and Hispanic population.
Recent immigrants (as well as members of other ethnic and minority groups) are, to a greater extent, relocating to new areas of opportunity and high growth. According to recent report by demographer William Frey, “Hispanic and Asian populations are spreading out from their traditional metropolitan centers” and expanding their presence in new destinations, including suburbs and rural areas. In part, this dispersion may be an added impetus to current public policy attention concerning U.S. immigration and border control policies.
The chart below confirms for the Seventh District the dispersion of immigrants and foreign born. All Seventh District states experienced healthy growth of foreign-born population. However, the two states with the lowest proportions of foreign-born population—Iowa and Indiana—experienced the largest population growth rates over the decade of the 1990s at 110 and 98 percent respectively.
The Seventh District experience also confirms that immigrants are now following opportunities in employment and housing to a greater extent rather than simply following their historic well-worn path to the largest U.S. metropolitan areas and their central cities.
The final chart (below) distinguishes the growth in foreign born in each state’s largest metropolitan area from the rest of the state. In those large metropolitan areas where economic growth has been leading state economic growth and where unemployment is generally low, growth in the foreign-born population has exceeded the remainder of the state. This experience has particularly characterized the picture in Des Moines, Iowa, Indianapolis, Indiana, and Chicago, Illinois. In contrast, the Milwaukee, Wisconsin, and Detroit, Michigan metro area economies have both lagged their respective states and so have their respective growth rates of foreign born population.
In choosing their nation of destination, immigrants have in the past, “voted with their feet” in search of greater freedom and economic opportunity. Within that destination, immigrants often tended to follow well-worn paths, disembarking in cities and communities where their fellow immigrants had preceded them. In contrast, immigrants to the U.S. are today choosing to disembark directly where economic opportunities are greatest. For this reason, the growth rate of the foreign-born population has become yet another indicator in gauging the success of metropolitan areas.
How well immigrants adapt to their new communities, and how well communities adapt to them, will be part of the future equation of success or failure of many U.S. regions.
May 5, 2006
Immigration and Chicago's Growth
In preparing for a presentation to be delivered before the ARS National Forum on Regional Stewardship this week, I was prepared to expound on the superior economic performance of Chicago in comparison to neighboring cities. After all, John Grimond’s recent review of Chicago for Economist magazine recently stated that “Chicago has come through deindustrialization looking shiny and confident.” I must admit that I, too, often characterize Chicago’s performance as robust, and I have observed that both Chicagoans and other Midwesterners believe this to be the case. Much to my surprise, however, in examining total payroll employment trends, I discovered that Chicago’s growth fell short of the neighboring East North Central (U.S. Census division) states region during the 1990s and since that time as well! And in comparison to the nation, Chicago’s per capita income has been flat to slightly declining. What gives?
I believe that part of the answer can be explained by the robust influx of immigrants to the Chicago area, along with the high birth rates of recent immigrants, which have made for a more complex story than the payroll employment and income trends suggest.
Owing to immigration, the Chicago area’s population growth has exceeded the surrounding region since the 1990s, as the chart below suggests. The Chicago metro area is now ranked fifth nationally in proportion of foreign-born population, adding 537,000 between 1990 and 2000—an expansion by over one-half. As of the 2000 U.S. Census, 17.5% of Chicago’s population were foreign born, many of them young families with children. And so, the rapid expansion of the region’s housing stock, revitalization of many older neighborhoods, and home appreciation have not been simply the figments of imagination or the heady boosterism by residents and observers of the Chicago region.
The growing immigrant composition of Chicago's work force, and the way we measure it, may also explain part of its tepid payroll employment growth. Owing partly to language barriers, immigrants are more likely to be self-employed rather than work for a firm as a "payroll" employee. So too, to some extent, immigrant payroll employment may also tend to be casual or uncounted by government payroll employment surveys. An alternative way to estimate employment is conducted by the U.S. Bureau of Economic Analysis (BEA) which takes some account of self-employed workers. In contrast to payroll employment, trends using BEA data (below) suggest that the Chicago area’s employment growth exceeded the East North Central states of Ohio, Indiana, Michigan, Illinois, and Wisconsin in the early years of this decade, and its performance during the 1990s also converges somewhat with the national average.
A moment’s reflection on the measurement of per capita income may also shed light on Chicago’s seeming lack of per capita income expansion during this period. Immigrant groups vary greatly by educational attainment. A recent paper prepared by Sapna Gupta prepared for Chicago Metropolis 2020 reports that almost two-thirds of working age adult immigrants to Chicago from India have college degrees versus only 3% to 4% of Mexican immigrants. Yet, Mexicans are the dominant immigrant group to Chicago in recent years. Accordingly, since education increasingly determines wage and salary income in our economy, Chicago’s immigrant influx has tended to pull down average income. Of course, immigrant household income, even of the least educated, is likely much higher for them than it would be had they remained in their home country. Accordingly, the attendant diminishment of average per capita income in Chicago does not really reflect falling standards of living of Chicago residents.
So, too, as illustrated below, the age of Chicago’s immigrant households, especially Hispanics, is much younger than the pre-existing population. This will also tend to diminish per capita income, since immigrant households will tend to have many more members who are too young to be earning income. Figures reported by the U.S. Census do show that the share of the Chicago area’s population younger than 25 years of age is greater than the U.S. for the year 2000. This gap between the area and the nation has widened since 1990. In contrast, the surrounding East North Central region reports an older population share than the nation, a gap which developed during the 1990s.
The Chicago area has become a different place in many respects over the past 20 years as the foreign-born population has expanded. Not everyone has benefited economically from change, but it is quite likely that, on average, Chicago area households have experienced climbing economic well-being. So, too, Chicago’s economic growth has likely exceeded what it otherwise would have been in the absence of immigration.
While the nation currently debates immigration and southern border reform in the U.S. Congress, Chicago’s primary challenges are of a different order. Many recent immigrants face the typical historic barriers to financial and economic assimilation into the Chicago mainstream: lower beginning levels of income, lesser work force skills, lesser knowledge of customs and procedures, and lower education and school readiness. At a time when much of the Midwest region’s existing population is shifting to Sun Belt locales, many foreign born continue to see opportunity here. To bolster the Chicago economy’s prospects, what actions can Chicago pursue to make the most of these immigrants’ energy, ambitions, ties to their countries of origin, and differing skills and culture?
One arena in which the Chicago area and other immigrant centers has been quite active is in facilitating immigrant access to financial channels. On May 4, the Federal Reserve Bank of Chicago and Brookings Institution issued a major study on enhancing the ability of the foreign born to access financial institutions for savings, wealth building and homeownership, payments transactions, and business creation. The study documents the state and progress of immigrant financial practices and access in the United States, along with many lessons learned from diverse perspectives.
April 10, 2006
Export Growth Propelling Seventh District
Some of the Seventh District’s slow economic growth earlier in this decade originated with softness in U.S. exports abroad. The manufacturing sector continues to account for the lion’s share of U.S. exports, especially capital goods such as high-tech electronics and computing machinery, as well as industrial machinery and equipment. As global economic growth has recovered, so have U.S. exports abroad. In turn, parts of the manufacturing-intensive Seventh District economy are being carried along.
Nominal U.S. exports abroad experienced rates of decline of 6.3% and 5.2% for 2001 and 2002. Since then, as the economic growth of our major trading partners has generally accelerated, U.S. export growth has responded, averaging 7.7% over the past three calendar years.
As a group, the Seventh District states of Illinois, Indiana, Iowa, Michigan, and Wisconsin are on par to slightly above the nation in export intensity. The chart below measures relative export intensity as the value of exports originating in Seventh District states as a share of total product.
Michigan and Indiana lead the group due to their sharp industry concentration in automotive activity. Automotive production in North America stretches from Ontario through the Midwest into the mid-South and Mexico, with extensive cross-shipment among NAFTA partners Canada, U.S., and Mexico in both auto parts and finished vehicles.
The table below ranks the principal export industries in each state. Transportation equipment ranks number one in Indiana and Michigan. Moving westward, however, Illinois, Iowa, and Wisconsin all have nonelectrical machinery as their number one export category. Here, products such as industrial equipment and machinery for farming, construction, and mining are dominant.
Strong export growth has led overall economic growth in the Seventh District over the past two years. As a whole, nominal exports rose 15.2% from 2003 to 2005, exceeding overall U.S. export growth of 10.5%.
The relative export performance of individual District states from 2003 through 2005 aligns with each state’s particular industry mix. As Thomas Klier indicated in a recent Chicago Fed Letter, weak performance by domestic auto companies is being reflected by flat automotive trade among NAFTA countries. Accordingly, the chart above shows that exports from Michigan have grown at only one-half the pace of the nation and at less than one-third the pace of the remainder of the Seventh District. At the same time, the more capital-goods intensive states of Illinois, Iowa, and Wisconsin are experiencing rapid export growth.
March 14, 2006
Global Chicago: Da Bulls, Da Bears, Diversity
Chicago United is a 38-year old group devoted to “Enriching the economic fabric of the Chicago region by building sustainable diversity in business leadership.” On March 10, I participated as a panelist at the first of a three-part series titled “Chicago: A Global City, A Global Perspective on Diversity.” Together with my co-panelists Paul O’Connor and Saskia Sassen, we addressed whether Chicago had become a global city and, more importantly to the Chicago United audience, whether Chicago was working effectively from the standpoint of diversity as a business imperative in the global marketplace.
Here are my thoughts, though I’d like to hear yours as well!
The Chicago metropolitan area (Chicago) lies on the razor’s edge with respect to its future. So-called globalization lies at the heart of what has brought Chicago to its critical crossroads. To put it simply, depending on both its own actions and on the fates, Chicago can possibly become a backwater business capital city of a shrinking and largely unimportant region of the United States. Alternatively, Chicago can become an independent city of global importance, a city that attracts the world’s most talent business makers, artists, policy makers, and idea-creators. As such, Chicago could even become the portal that helps revive a surrounding Midwest region which is sorely in need of revival and re-invention.
Globalization means that the world’s economy has become more integrated and intertwined, and its regions more subject to frequent and profound shifts and changes. This is so because communication costs and transportation costs have fallen dramatically. For example, costs of shipping a ton of cargo dropped by three-fold from 1920 to 1960, and containerization and transport by larger and larger ocean-going ships continue to pressure prices downward today. Air shipping costs have dropped by 80% since the mid-1950s. And while many of us complain about airline deregulation and recent security procedures, personal air travel is now much more affordable to average Americans.
Communications cost declines are even more dramatic. The cost of a three-minute phone call from New York to London was once the equivalent of $350 in 1930 in today’s terms. These same communications facilitate both cargo and personal logistics, as well as propelling traded services, information, and capital around the world.
On top of this, most of the world’s nations have agreed to lower barriers to the flow of goods, capital, intellectual property, and sometimes travel and immigration.
How has globalization impacted Chicago? The pressures and challenges are great. Chicago can be characterized as the business capital city of a shrinking economic region. Chicago was borne of the gathering of farm products and natural resources, the sorting and shipping of these products, the financing of these products, and the supply of business and legal services to farms and agri-businesses throughout the Midwest.
In parallel, Chicago became a great manufacturing city as result of its transportation/hauling capability and facilities. Chicago gathered Midwest resources and transformed them more productively than any place on earth. So did other Midwest cities, but Chicago also became the business capital of these lesser cities in supplying them business, financial, and legal services.
Without belaboring the point, these same activities are today shrinking as sources of household income and jobs for both Chicago and its surrounding Midwest. For the most part, technical progress has diminished the need for workers here in Chicago in these activities, even while the attendant productivity gains have raised standards of living both here and around the nation. Growing world trade and import competition have contributed to local pressures and shrinkage. Prices for commodities and routine manufactured goods have declined, too, as both farming and manufacturing have become hugely productive—victims of their own success. And so, income and job growth generated from these activities are now weaker.
Does Chicago have a bright future? Its future likely rests with its ability to grow and develop linkages beyond its immediate region. It must produce services—high valued and sophisticated services-- that are valued in markets far from the Midwest. In the process, it can possibly lead the surrounding region to new markets as well. This is Chicago’s vision of becoming a successful global city.
In re-inventing itself as a global city, Chicago must attract (and also grow locally) the world’s business makers and highly skilled occupations and entrepreneurs.
Thankfully, super large cities such as Chicago are favored in recruiting skilled workers and entrepreneurs, and developing them locally. That is because learning and the networking necessary for career advancment is more attractive in places with many and diverse skilled work force activities. So too, the U.S. work force has become more composed of two-earner families, mostly due to rising labor force participation of women over the past 35 years. Because large cities such as Chicago offer large and diverse work force opportunities, employers can more easily attract highly skilled and specialized workers. Urban amenities are also attractive to many highly skilled or educated workers, perhaps blunting the pull of warmer climates elsewhere.
Within the Midwest, Chicago and the Twin cities are the magnets for highly skilled young workers, ranking 11th and 5th respectively among U.S. metropolitan areas in the proportion of its population aged 25-34 having college degrees.
Chicago also continues to attract immigrant population. Arguably, the single most important indicator of a region’s future and prospects for success is whether people are “voting with their feet” in choosing it as a place of promise. Within the Midwest, thanks to ongoing in-migration of Hispanic, Asian, East European, and other peoples, Chicago’s 17 percent foreign born population far outdistances other Midwest metro areas in its proportion of foreign born. These are people who bring new ideas and new ambitions to the Chicago area.
What signs are there Chicago’s industry base is well-poised for the emerging global economy? Chicago’s economy can look at several promising aspects. Business and legal services were the growth engines of Chicago’s economy in the 1980s and 1990s, outdistancing the growth of such jobs in every other U.S. metropolitan area. Management consulting, accounting, public relations, and the like represent services that Chicago is now selling around the nation and the world. The combined number of jobs in finance, legal, and business services in Chicago surpassed those in manufacturing by the early 1990s.
So too, Chicago’s financial exchanges have shaken off their competitors in many regards along with their institutional sclerosis. They are once again healthy and growing, seeking global partners and markets.
Chicago’s world class universities can count among them the leading business, medical, and professional schools.
In bringing in customers for these businesses, and in sending out its agents, Chicago’s O’Hare airport has been a critical vehicle, replacing what the rail hub once was to Chicago. The early innovation of McCormick Place (and later expansions to it) has made the region a global meeting place for business, commerce, and culture. Rising tourism has followed from around the nation and the world.
But, what must Chicago do if it is to continue to re-invent itself for a global economy? Among other things, Chicago cannot attract the world’s most ambitious and talented people, it cannot grow the world’s innovative and globally expansive businesses, unless it works well on the inside. Part of this working well as a city requires key infrastructure such as highways and land use planning that allows circulation of people in getting around, as well as providing public services and goods to Chicago’s residents. Metropolis2020 and other efforts and trying to lead Chicago into successful resolution of these challenges. It also involves creating the type of amenities that are world class, such as Millennium Park and Lakefront park improvements.
But perhaps more importantly, Chicago must be recognized as an oasis of opportunity for persons of every color, culture, and sex to realize their dreams and ambitions. Otherwise, business builders such as John Johnson and Oprah Winfrey will emerge elsewhere. The new generation of idea makers such as those who were pre-cursors of Genetech and Netscape will continue to move elsewhere, as will the rising stars of sports and culture such as Daniel Barenboim and Donald Young.
How can we nurture a culture of openness and opportunity here? Recognizing and understanding the threats and opportunities are half the battle. Organizational initiatives such as those of Chicago United are helpful.
We might also do well to focus on our opportunities rather than on our problems. As President Eisenhower has been quoted as saying, “If a problem cannot be solved, enlarge it.” In this instance, it is perhaps easier for us to join together when we are all going forward, when we are growing economically, intellectually, and spiritually. Accordingly, ambitious economic growth agendas and initiatives for Chicago going forward should be considered.
At the same time, as we participate in Chicago’s life and economic growth, we must all stretch ourselves personally so that we include those of us who may not live next door, or who may not look or talk or act as we do. Growth and success will make it easier for us to do so.
Walt Disney once said “Change is inevitable, growth is optional.” In the context of greater diversity and inclusion, a corollary is that neither change nor growth are inevitable. Rather, we must push ourselves to make them both happen. In doing so, however, we will find that inclusion and growth are mutually re-enforcing.
February 7, 2006
Foreign Direct Investment in the Midwest
Recently, companies from China have begun to explore direct investments in the Midwest and elsewhere around the world(link). Direct investment differs from portfolio investment, such as investment in U.S. Treasuries, in that direct investors have an equity interest that allows them to have some hand in the operation of the enterprise and its assets. Though direct investment from China is miniscule so far, past experiences with other emerging nations, such as Japan, suggest that the growth prospects may be large. Beginning in the 1980s, Japanese companies began to heavily invest in the Midwest, especially in automotive assembly and parts operations. Many of these ventures brought new capital and new ideas to the region’s economy, thereby easing the region’s adjustment to competitive decline and import competition. Such investments continue today as in the case of Toyota, which is scouring the nation—including Michigan—in siting a planned engine production facility. Can investors and partners from China and other emerging countries play a similar role in the Midwest in the years ahead?
Part of the globalization phenomenon has occurred through the integration of capital markets, including direct ownership of companies by overseas parents. Data from the U.S. Bureau of Economic Analysis records foreign direct investment (FDI) transactions, along with characteristics by location of foreign-owned companies and their affiliated establishments in the United States. As a result, FDI in the U.S. may be either an acquisition of existing operations or a new investment, such as the building of a new manufacturing plant. The figure below displays wage and salary employment of FDI affiliates as a share of total employment in both the Midwest and in the rest of the U.S. It is telling us that this share has doubled in both the Midwest and the U.S. over the past 25 years.
By this measure, the Midwest has kept pace with the U.S. In one respect, this is surprising since the Midwest is far way from the coastal economies, where one might think that access to and linkage with global companies would be more intensive. On the other hand, most FDI takes place in the manufacturing sector, which is more concentrated in the Midwest relative to the rest of the U.S.
From which countries does our FDI originate? Inbound FDI has been taking place for a long, long time, back to our country’s founding when you stop to think about it. For this reason, it may not be surprising that most of our FDI is today domiciled in Europe (table below). As of 2000, Europe made up two-thirds of FDI employment at foreign-affiliated establishments in the Midwest, with over one-half of these domiciled in Germany or in the United Kingdom. The remaining one-third of FDI employment is equally split between Asia and the Americas. Almost all of the Americas’ FDI originates with Canadian companies, while almost all of Asia’s FDI originates with Japanese companies.
Over time, Japan’s FDI has been replacing Europe’s and Canada’s in the Midwest (table below). From 1980 to 2000, FDI employment at Japanese affiliates grew from 14,000 to 190,000 in number, thereby boosting Japan's share of the region's FDI from 3.4% to 15%. With this growth, Japan’s FDI displaced Canada’s for the number three spot behind those of Germany and the United Kingdom.
By now, the origin and legacy of Japanese FDI in the Midwest is well known. Japanese automotive assembly and parts plants in the U.S., such as Denso, Honda, and Toyota, demonstrated that their successful production and distribution technologies were not derived from location or cost advantages abroad. Rather, their affiliates' success proved that the quality and cost efficiencies of their products could be duplicated in the U.S. This lesson was not lost on other manufacturers in the U.S. or worldwide. Japanese methods were copied and often improved across many industries. For many companies based outside of Japan, successful imitation and adaptation, along with investment from Japanese companies themselves, eased the transition to global competition and helped revive local production activity.
The map below displays the location and number of foreign-affiliated automotive parts plants in the eastern United States. Clearly, the Midwest has held its own in attracting these plants, which in turn suggests that the Midwest continues to be a desirable location for manufacturing production.
(courtesy of Thomas Klier)
Click to enlarge.
Can inbound FDI from China serve the same purpose as FDI from Japan? To date, Chinese inbound FDI has been miniscule. As of the most recent tally, only 4,000 payroll workers in the entire U.S. were employees of Chinese affiliates versus almost 6 million from FDI affiliates from all nations combined.
So, too, the source of China’s emergence as a global producer differs greatly from those of Japanese and many European manufacturing companies. Although China is rapidly evolving its economy to integrate more sophisticated technology (link), China’s initial strength is as the low-cost producer for the world, not as the innovator. Unlike Japan, China’s rapid rise owes much to its openness to a huge influx of FDI into China by other Asian nations and the U.S. in search of low cost production there. Accordingly, Chinese companies’ interest in Midwest locales will probably be less focussed on production. Rather, these firms will more likely be interested in activities such as local product research and design for distribution to U.S. markets, with most of the production remaining in low-cost China.
A recent story by journalist Michael Oneal (link) documented one such instance, that of Chinese affiliate Wanxiang, which is headquartered in Elgin, Illinois. Wanxiang’s originator is reported to be scouring the Midwest for troubled manufacturing operations, including auto parts suppliers, to acquire or with which to partner. One such partnership has resulted in Wanxiang taking an equity interest in Rockford Powertrain Inc., a supplier of heavy-duty driveline components to U.S. off-road equipment makers. Thanks partly to the partnership, the operation is now on a sounder financial footing. However, as part of its restructuring, its nonassembly production has been outsourced to China, while the U.S. operation concentrates on design, engineering, customer relations, assembly, and distribution. Overall employment has declined so far, especially in production, although the company is looking to grow.
What are we to make of China’s initial (and thus far miniscule) FDI overtures in the Midwest? First, China’s character as low-cost producer rather than as innovator likely means that the volume of China’s overseas FDI interest will be limited, at least for a while. Second, much like all potential FDI opportunities, partnering with Chinese companies on operations in the U.S. can sometimes be a successful strategy for domestic companies in preserving or expanding jobs and income. However, in China’s instance, the resulting production employment prospects in the Midwest are not likely to be as expansive as they have been from FDI partnerships with Japanese and European companies.
If Midwest manufacturing companies are to succeed, they will need to find their own best pathways. In some instances, success will be achieved by partnering with foreign companies on U.S. soil; in others, it will mean investing abroad to serve emerging market opportunities (link). Above all, innovation will be key to the success of their organizational structure, management, process technology, distribution, and new products.
January 6, 2006
Midwest and the Global Economy Part I
From the slow progress being made on the Doha round of global trade liberalization, it would seem that globalization is slowing down. Yet, this is not the case at all. As the 2002 Economic Report of the President articulated, globalization continues to be enhanced by ever-falling costs and technical advancements in communication and transportation. Such developments are magnifying trade flows of merchandise and commodities and, more recently, services such as software, R&D, call services, and data processing. Springing from these developments in information technology and communication, global capital markets are deepening, which in turn further heightens trade in goods and services.
Regional economies, especially that of the Midwest, are being affected by globalization. Tradable goods such as manufacturing and agriculture products play a significant role in the upheavals of globalization. And so, Midwestern households and business would benefit from timely and appropriate adaptation to the globally induced upheavals taking place in industries, companies, and occupations in the region.
Since households continue to learn about globalization from the print media, The Global Chicago Center of the Chicago Council on Foreign Relations and the Ford Foundation are fashioning a project called the Midwest Media Project. The project intends to assist journalists throughout the region to help put local interests in the broader context of global economic developments and events. In this way, Midwesterners can become more attuned to globalization, especially as it relates to the region.
At the first meeting of the project on January 10, researchers and policy leaders are being asked to present globalization topics and information to the attending journalists. In turn, several senior journalists will lead discussions on ways in which global events and trends can be linked to local stories in engaging ways.
I was asked to deliver the overview on the Midwest economy, highlighting the linkages between our region and the world economy. And when I stop to think of the linkages, there are many. For one, given our sharp manufacturing concentration, the Midwest economy is about on par with the nation in terms of exports, and our region’s exports to the world are large and growing. Not surprisingly, it is our “capital goods” that stand out as prominent exports—construction and farm machinery, medical equipment, engines, and electrical equipment. Automotive exports are also prominent, with most of them destined for nearby Canada rather than for far-away locales. As Thomas Klier, automotive expert here at the Chicago Fed has said, “the binational region’s auto industry knows no boundaries.” (Chicago Fed Letter on border conference) Close to 40% of the considerable U.S.–Canada merchandise trade crosses the border in Michigan through the Detroit–Windsor corridor or over the bridge at nearby Huron-Sarnia, much of it being automotive parts and finished vehicles.
Partly owing to this tight automotive production integration, Great Lakes exports to Canada represent 50.4% of the region’s exports versus only 18.2% for the overall U.S. If we were to deduct U.S. exports to Canada from both the Great Lakes region and the U.S., the pattern of export destination by country would be nearly identical for both the region and the overall U.S., with a slight tilt of Midwestern exports to Europe rather than toward Asia.
So, too, without our outsized trade with Canada, the Midwest export propensity is significantly smaller in relation to the rest of the U.S. In addition to the region’s proximity to Ontario, landmark agreements to lower tariff barriers to trade between the U.S. and Canada, such as the AutoPact of 1965 and the Free Trade Agreement of 1989, have maintained the close trade linkages between Ontario and the Great Lakes states.
In assessing a region’s (or a nation’s) propensity to trade, should trade with nearby countries be counted equally as trade with faraway ones? In comparing trading intensities across countries or regions, it seems reasonable to at least keep in mind that national boundaries can be somewhat arbitrary. For example, if the boundaries separating states in the Midwest were national boundaries, the trade intensity between the Midwest states would be enormous (link link), easily dwarfing current international trade flows into and out of each state.
What do such trends suggest for the region’s economic development policy focus? Growing international trade would seem to support trade missions from the region to foreign countries, many of which are sponsored by state governments. However, the Hewings and Israilevich statistics (above) on the larger volume of intra-regional trade flows might alternatively suggest that public policies to enhance or support local commerce might deserve more emphasis. I see no conflict here; these policy arenas are complementary rather than in competition. We can metaphorically think of the highly integrated binational Great Lakes region as a single factory or service company. Our efforts to encourage free flowing and efficient commerce within the region will serve to strengthen our ability to produce goods and services for trade with the world, which in turn will result in more income for the region’s households and businesses.
One example of local policy of this nature is surely the continued attention to keeping our border-crossing infrastructure and procedures with Canada safe—but also fast and efficient (link). On the U.S. side, the Great Lakes economy will be more likely to prosper if it is the center and nexus of commercial trade flows rather than a peripheral player in the national economy.