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.

Source: U.S. Bureau of Economic Analysis.

Note: Export values adjusted by deflator for GDP.
Source: U.S. Bureau of Economic Analysis.

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[1] 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.[2] 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.

Source: BLS/Haver Analytics.

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.

*Categories include utilities sectors.
Source: U.S. Bureau of Labor Statistics/Haver Analytics.

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.

Source: Office of Travel and Tourism Industries.

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.

Source: Institute of International Education.

Source: Institute of International Education.

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.


[1]Hufbauer, Gary, Jeffrey Schott, and Woan Foong Wong, 2010. Figuring Out the Doha Round, Washington D.C., Peterson Institute for International Economics.(Return to text)

[2] These data are for the Chicago metropolitan division of the Chicago MSA.(Return to text)

Posted by Testa at 7:46 AM | Comments (0)

October 30, 2008

Chicago Business Cycles--Now and Then

Downturns in economic conditions often come as a surprise. In fact, time lags between statistical releases and the conditions that they reflect can mean that economic slowdowns are not known until months after they have begun. Statistical information covering individual reasons tends to be worse in this regard.

Today there is, however, a widely held view that the U.S. economy has slowed sharply and that economic conditions will not immediately improve. Broad-based measures of national economic activity, such as the Chicago Fed National Activity Index (CFNAI), indicate that U.S. economic growth is well below its historical trend. As a result, observers in regions such as the Chicago metropolitan area are preparing for hard times. And they are asking whether they are likely to feel the worse for this apparent slowdown—and how long it will last.

In the Chicago area, memories are becoming dim of those days when the pace of the local economy fell sharply in response to national economic downturns. However, the chart below should remind us or inform us anew of the fact that Chicago’s economy often experienced sharp swings in employment. In the past (especially before 1990), Chicago’s employment base had been steeped in durable goods manufacturing industries, such as machinery and steel, which experienced layoffs and downsizings when the national economy turned downward. Twice during the 1950s, Chicago area payroll job declines approached 5 percent on a year-over-year basis as national job declines reached 3 and 4 percent on those two occasions. Chicago fared little better during the recessions of 1970–71, 1974–75 and 1981–82.

Click to enlarge.

Given this track record, it may seem pointless to ask how the region’s economy will fare in the months ahead. However, the question is well considered both because the economic structure of our economy is always changing and because no two economic downturns are alike with respect to their causes and impacts on industries.

Chicago’s economy is continuing to restructure in several important ways. Most dramatically, the region’s employment structure no longer concentrates directly in manufacturing. As recently as 1969, 30% percent of the Chicago metropolitan statistical area’s employment could be found in manufacturing in comparison with 24% for the overall U.S. By 2005, manufacturing’s share of employment had fallen to 9% percent and it had converged with the U.S.’s percent share. At least this element of sensitivity to national business swings seems to have partly abated.

Click to enlarge.

At the same time that manufacturing has waned, the Chicago area has also restructured into higher-order professional services, business meeting and travel, and financial services. (The chart below indexes the Chicago area payroll employment by major industry sector. An index value greater than 1, for example, indicates that Chicago’s employment base in that sector exceeds the national average.) Especially during the 1990s, the metropolitan area experienced very rapid growth in these industry sectors. This expansion was thought to have been accompanied by geographic changes. In particular, while Chicago’s services industries had historically grown and developed through its local trade linkages with Midwest goods producers, business and financial services were now thought to have strengthened and lengthened their ties with international and U.S. cities and regions. If this were actually the case, the traditional patterns in which Midwest manufacturing production declines are strongly transmitted through Chicago’s services industries would have weakened.

Click to enlarge.

To the contrary, the subsequent experiences of the recessionary period of 2001 and its aftermath tend to suggest that Chicago’s restructuring into business and financial services has not buffered it from national business downturns. As measured by total payroll jobs, the Chicago area’s decline of 3 percent in 2001 was at twice the pace of the national average (see chart below). And if the professional and technical services sector has become Chicago’s new bellwether, its performance during the past downturn is not encouraging. From a year-over-year growth peak of 7 percent in 1999, Chicago jobs in the professional and technical sector fell by over 8 percent during 2002. Though we may not think of these services as being sensitive to the general level of business activity, their responsiveness to business swings is much like producers of investment goods and capital equipment. That is, firms tend to expand their purchases of professional services such as advertising, marketing, business meeting travel/convention, and management consulting when they are expanding their markets and investing, but they tend to retrench their purchases of such services when they are retreating.

Click to enlarge.

More generally, although Chicago has broadened and diversified its economy, many of its hallmark sectors remain sensitive to swings in the overall economy. According to the chart above, Chicago remains concentrated in manufacturing. So, too, Chicago remains a goods transport and distribution hub for manufactured goods that are both domestically produced and internationally traded. While many of the area’s services such as education and health are somewhat impervious to general slowdowns, many of its business services are volatile, depending on the fortunes of Midwest goods-producing sectors and, increasingly, on the prosperity of national and international customers.

Chicago also maintains high job concentration in financial and insurance sectors. Unlike the job bases of the New York and Los Angeles metropolitan areas, Chicago’s job base is not greatly exposed to the most adversely affected subsectors of financial services—namely, investment banking, securities dealers, and mortgage finance companies. That said, the remaining financial services subsectors are not expected to be sources of net job growth in the months ahead.

Note: Thanks to Emily Engel for assistance.

Posted by Testa at 8:03 AM | Comments (0)

April 13, 2007

Financial Services Employment Growth in Chicago

Financial and insurance activities have historically concentrated in cities. In large part, this location tendency follows from the deep and broad information that is needed in allocating capital to those endeavors of highest return. Owing to their intense human interaction, large cities are advantaged in gathering and processing information about potential investments, and in matching specialized financial market participants on both sides of financial transactions.

Although it might seem otherwise, the heightened ease of global trade and communication in recent years has done nothing to break loose the urban advantage in financial services. To be sure, technological advances in information technology have lowered the costs of transmitting information over long distances, thereby allowing some financial functions to disperse to less urban areas. For example, routinized activities such as the processing of insurance claims and billing invoices can now be more cheaply carried out in small U.S. cities or even overseas. However, to the contrary, the complexity of financial transactions has grown considerably, putting a high premium on the advantages of urban location as the domicile for many higher order financial transactions and for highly skilled financial workers and entrepreneurs.

As the fourth largest metropolitan area in the world, measured by total annual output, the Chicago area harbors some hopes for a strong and growing financial services sector. Chicago has long served as a significant regional financial capital for the Midwest, especially in banking and insurance. So too, its risk management exchanges and member firms have evolved these particular specialties into industries of global reach and employment. Accordingly, while Chicago’s economic roles in manufacturing and other activities have waned, Chicago’s stature in financial services remains highly important in supporting the region’s economy. For 2005, financial and insurance payroll jobs amounted to 246,000 in the metropolitan area, comprising 5.8 percent of the total job base.

The current industry classification system (NAICS) breaks down financial services into three parts: Credit intermediation (NAICS 522), Securities and Commodities Contract Brokerages & Other Financial Services (NAICS 523), and Insurance Carriers and Other Activities (NAICS 524). “Credit intermediation” includes commercial banking along with credit card issuing, consumer lending, sales financing and mortgage lending. NAICS 523 includes not only stocks, bonds, commodities brokerage and exchanges, but also investment banking, portfolio management, and investment advice.

Using payroll employment by industry as a measure, the graph below displays the relative concentration of large U.S. cities in these industries versus the overall U.S. economy. An index value of one indicates parity with the U.S. in the industry’s job concentration; a value exceeding one indicates that the city’s employment concentration exceeds the U.S. For example, a value of two indicates that a particular industry concentrates twice as much employment in the city as compared to the U.S.

Generally, Chicago and other large metropolitan areas are seen to concentrate more highly than the U.S. across major financial industries. The Chicago area’s payroll employment index registers a value of 1.33 for 2006, indicating a concentration over the entire 522-524 sectors that is 33 percent more concentrated than the U.S. (This concentration was approximately the same as back as 1990).

The Chicago area’s sharpest employment concentration lies in the NAICS 523 sector, securities and commodities brokerage etc. with an index value of 1.96. In large part, this derives from the city’s world-prominent risk exchanges and their member firms. In addition, however, concentrated sub-sectors also include investment banking, portfolio management, and investment advice.

In addition to these activities, Chicago’s economy also concentrates employment in insurance related sectors (NAICS 524, an index value of 1.15) and credit intermediation (NAICS 522, an index value of 1.30).

Click to enlarge.

Despite some ups and downs, Chicago’s financial sector employment has contributed to the city’s growth. As elsewhere in the U.S., the wave of banking deregulation led to profound consolidation during the 1990s. During the era, the Chicago area experienced employment declines in NAICS 522 concurrent with waves of bank acquisitions, mergers, and attendant consolidation. Since then, Chicago area employment in credit intermediation businesses has grown. For one reason, in a recent study, Tara Rice and Erin Davis document the proliferation of commercial bank branches in the Chicago region. Previously, severe legislative restrictions on the branching of banks in Illinois resulted in an underserved population.

Similar performance experiences befell Chicago’s risk exchange community during the late 1990s and early years of this decade. Prior to their recent structural re-organization and successful adaptation to electronic trading, Chicago’s risk exchanges stagnated as emerging exchanges around the world gathered market share from them. Since then, Chicago’s risk exchange and risk management community is once again expanding, including firm spinoffs into emerging business lines and technologies. One recent study entitled “Exploring Entrepreneurship: The Chicago Futures Trading Industry” documents the spawning of local economic ventures centered around “technologies developed to enhance the buy-side of trading as well as post-trading management and technologies that cope with the increasing volume of market data that is being generated through electronic trading.”

Through such upheavals, the graph below shows that finance-insurance employment growth has kept pace with overall job growth in the Chicago metropolitan area over the longer term. Employment in the insurance arena has declined 10 percent since 1990. However, these losses were made up for by growth in both remaining financial sectors. In particular, job growth in the securities and commodities sectors expanded by 30 percent since 1990, an increase of about 10,000 jobs.

In more recent times--since year 2000, all three finance and insurance sectors are helping to pull along the Chicago area’s labor market. On an annualized basis, in 2006 Chicago’s total payroll job levels across all sectors, financial and otherwise, remained 2-3 percent below the peak year 2000. Yet, financial and insurance sector payroll employment jobs has risen 5 percent over the period.

Click to enlarge.

How important is this financial service performance to the Chicago regional economy? In some measure, Chicago’s financial industries serve the surrounding Midwest region and its industries which would suggest some drag on Chicago’s financial sector activity. Yet, despite slow growth of the broader Midwest, Chicago’s financial and insurance sectors continue to expand payroll. Such growth bears watching. Averaged across all sectors, payroll jobs in the NAICS 522-524 sectors carry an average annual payroll that is 75 percent above the region’s average annual payroll per job, clocking in at more than $81,000 per payroll job in 2005.

Posted by Testa at 11:15 AM | Comments (0)

January 22, 2007

Chicago's Pursuit of the Global Prize

Policy and business leaders in Chicago continue to advance the metropolitan area’s prospects as a global hub for professional and financial services. This initiative arises from both necessity and opportunity. Chicago’s traditional markets, principally in the surrounding Midwest, are not growing rapidly. At the same time, however, the Chicago economy specializes in advanced producer service sectors that are increasingly traded more broadly and, in many cases, internationally.

As the business service center of the Midwest, serving regional markets and industries, Chicago companies’ prospects for growth are somewhat limited. That is so largely for two reasons. First, the Midwest economic base centers on agriculture and manufacturing. Since productivity growth is so very high in these industries, and competition keeps commodity prices low, income and revenue (and attendant jobs) grow slowly. The second reason is climate. As the U.S. economy restructures toward information industries and knowledge workers, service production is being pulled toward locations where workers prefer to live, often milder climes.

However, globalization of the economy has also brought new opportunities to populous information-based cities like Chicago. Large cities often have wonderful amenities that are not dependent on climate, such as sports, restaurants, museums, and cultural diversity. But more fundamentally, it is because expanding global trade in goods, services, and capital requires the complex and specialized functions and industry sectors that are concentrated in large cities, including legal services, logistics, distribution, finance, insurance, business meetings, R&D, and professional business services.

Chicago has been developing such sectors almost since its inception. Today, Chicago features world-leading risk exchanges, universities, business meeting and personal air travel firms, legal services, headquarters facilities, and management consultancies.

During the 1990s, the growth of Chicago’s professional services was robust. According to the data reported on payroll employment, the Chicago metropolitan area added a net 80,000 jobs in the sector from 1990 to 1999, more than the Los Angeles metropolitan area and more than New York City.

However, since then, job performance in Chicago has often been much weaker, raising doubts about whether the city’s economic structure has divorced itself from the surrounding region as much as previously believed. The chart below displays year-over-year growth in the professional, technical, and R&D sectors. Employment growth experienced year-over-year declines for most of the 2002-2004 period, before reviving in 2005.

Click to enlarge.

How much of Chicago’s business service economy has expanded to global markets or even to other large U.S. cities in the global network?

We know very little about the geography and changing geography of these hallmark industry sectors. However, one informative study by Peter J. Taylor and Robert E. Lang of the Metropolitan Policy Program at The Brookings Institution measures the prominence of major global service companies among large cities in the world.

Taylor and Lang examine 100 global companies drawn from the business or producer sectors of accounting, advertising, banking/finance, insurance, law, and management consulting. For each city, the sum presence of their offices (weighted by size and function) determines a score for a city’s commercial presence and ties to the global city service network.

According to the Taylor-Lang study, Chicago scores high in its global connectivity, both relative to other U.S. cities and relative to the world’s major cities. Among U.S. cities, Chicago ranks second only to New York. Among world cities, Chicago ranks seventh, behind London, New York, Hong Kong, Paris, Tokyo, and Singapore.

The Taylor-Lang study scores Chicago’s connections with domestic cities such as Atlanta and New York in the same way it scores connections with international cities such as Sydney. This seems correct. International borders can be arbitrary. And to otherwise score border-crossings might bias the results toward cities located on continents where national boundaries are near each other, such as Europe.

The study does provide a separate “hinterland” scale for each city, which tries to measure the degree to which a city’s global connectivity relies on nearby national trading relations. Here, with the exception of New York City, U.S. cities tend to be less international than those on other continents. However, Chicago again scores well. It places third among U.S. cities, behind New York and Miami.

How this relates to Chicago’s recent growth performance and prospects is not clear. The construction of the Taylor-Lang study is creative, clever, and somewhat revealing, but it provides more impressionistic than definitive evidence of global linkages among producer services. Those who would like to draw their own conclusions from the evidence should take a look at the authors’ map of each global city’s linkages, including Chicago. Outside of North America, for example, the map suggests that Chicago's economy links strongly with Zurich, Switzerland, and Sydney, Australia.

Chicago’s employment in business-professional services is once again growing strongly, at a 3% annual year-over-year pace. If the recent period of weak performance reflects some unusual and fleeting conditions such as a post 9-11 falloff in business travel and related business service activity, then perhaps Chicago’s march to global success will now continue.

Posted by Testa at 10:37 AM | Comments (2)

August 16, 2006

Business services as a growth sector for Great Lakes cities?

As manufacturing activity shrinks and relocates, large cities of the Midwest look to another staple of their economic base, business and professional services. Large cities everywhere typically serve as centers of finance, communication, governance, and varied business services. In the Midwest, business service specializations in cities originally derived from goods production, as surrounding farms and factories looked to cities for financing, advertising, management expertise, product design, legal services, and engineering, as well as computer systems advice, more recently.

In the past few decades, agriculture and manufacturing activity have been shrinking in the Midwest, at least in terms of nominal personal income arising from manufacturing firms. In the overall U.S., for example, personal income derived from manufacturing activity has fallen from 32.9 percent to 15.5 percent from 1969 to 2004. This falloff is especially prominent in large Midwest cities, where manufacturing once thrived due to urban freight transportation advantages and the intense workforce needs of mass production.

Can advanced business services help fill the void in Midwest cities’ economies? There are several reasons to focus attention on these industries. First, there is already a pronounced urban location propensity for business services, so prospects for this sector in large cities are perhaps better than for others; also, in the overall U.S. economy, the business services sector has recently been a growth leader. Finally, many business services employ highly skilled occupations, and they tend to generate high levels of wages and income that may directly and indirectly buoy large city economies.

On the latter point, as formally defined by the North American Industry Classification System (NAICS), the “professional and technical services sector,” NAICS sector 54, tends to employ an above-average share of highly-educated (and highly paid) workers. As described by federal government statistical agencies (Census and BLS), the sector’s industries employ many executive and technical occupations, namely those found in research and development, legal services, management consulting, accounting, advertising, engineering, public relations, and product design.

In the analysis that follows, a focus on the NAICS 54 sector is advantageous because its services are almost exclusively sold to other businesses rather than to households, and many of these services can be sold to customers located far away. In thinking about regional economies, such tradable services may offer a wide scope for possible growth and development. Moreover, data covering employment in the sector are available for geographic regions as small as metropolitan areas.

Rapid growth characterizes the business services sector. The chart below illustrates that as a share of total payroll employment, “professional and technical services” has expanded from 4.2% to 5.3% from 1990 to 2005. The sector’s average annual growth of 3.0% per year easily exceeds that of total payroll job growth (1.3%), adding 2.5 million jobs to the U.S. economy since 1990.

Click to enlarge image.

Business services’ urban orientation can be conveniently described by an index of employment. The concentration index is the ratio of two shares. For the ratio, the numerator is the business services sector’s share of total jobs in a particular region. The denominator is the business services sector’s share of total jobs in the overall U.S. And so, for example, if the sectoral share of total jobs in a particular region is equal to the sectoral share of jobs in the U.S., the index will take on a value of one. To the extent that a region’s share of jobs found in business services exceeds the nation’s, the index takes on a value greater than one, and so on.

Such a concentration index is constructed below for the most populous metropolitan areas in the U.S. The top five metropolitan statistical areas (MSAs)—New York, Los Angeles, Chicago, Washington, D.C., and San Francisco—are, taken as group, more than 50 percent more concentrated in business services jobs than the overall U.S. Moreover, an hierarchy of this concentration by city size is evident as we expand the index to include less populous metropolitan areas. Though still well above parity with the nation, the indexes of the top ten and top 20 most populous metropolitan areas lie below the concentration of the top five most populous metropolitan areas.

Click to enlarge image.

Time trends in business services employment also tell us some important economic features. Most prominently, the concentration of business services employment in large urban areas has been falling (i.e., business services jobs have been spreading out toward smaller cities) in the U.S. since 1990. Apparently, the greater ability and lower cost to communicate electronically over time has allowed smaller cities, as well as other nonurban settings, to win out over large, densely populated cities that more easily facilitate face-to-face interactions.

It has been observed that business services employment dipped more than the overall employment during the recessionary periods of the early 1990s and 2000–03. Such cyclical sensitivity to the general economy has long characterized so-called blue-collar and production employment, but its emergence for occupations in business services was somewhat novel during the recession of 1990–91 and its aftermath, when labor market restructuring of mid-level managers and other white-collar occupations took place. In the more recent recessionary period, white-collar employment declines in business services were associated somewhat with the slackening of investment in information equipment and associated services. More generally, many business services may be characterized as “investment goods” by companies, meaning that their purchase tends to slacken during recessionary and subsequent recovery periods, when firms no longer need to expand their own production capacity.

Midwestern metropolitan areas have generally followed these national trends and characteristics of NAICS 54 employment, although there have been some exceptions. For one, as shown below, some of the region’s large metropolitan areas are generally less concentrated in business services as measured against the national employment structure. In part, this follows from the higher manufacturing intensity of Midwest cities; by construction, if a region’s employment base is high in one sector, that concentration must be offset in the others. And so, although Des Moines, Milwaukee, and Indianapolis are centers of business services in relation to the surrounding Midwest areas, their employment base is less concentrated in business services (as narrowly defined) than is the U.S. employment base.

Click to enlarge image.

The Chicago and Detroit metropolitan areas register as the most concentrated in business services among large metropolitan areas in the Midwest, with Columbus, Pittsburgh, and Minneapolis–St. Paul also registering concentrations well above the national average.

Owing to its reputation for automotive manufacturing, it will surprise some to find that the Detroit metropolitan area claims the largest concentration in business services. In fact, in this regard, Detroit leads the Chicago area, which is generally renowned as the region’s services and financial capital.

A closer look at the employment structures within the general category of business services raises some interesting and serious questions about the growth prospects of business services for large metropolitan areas in the Midwest. The bar chart below displays the concentration indexes for each detailed business services category, comparing the Detroit MSA with the Chicago MSA.

Click to enlarge image.

Chicago and Detroit specialize in different sectors of business services. The Detroit MSA scored highest for “architectural and engineering services,” while Chicago scores lowest in this category. This specialization’s high score in Detroit reflects the product engineering completed for the automotive industry, much of which is driven by local demand by domestic automakers. However, some of Detroit's business services have evolved to serve global customers as well. Another one of Detroit’s employment concentrations, scientific research and development (R&D), also largely reflects Detroit’s reputation as a global research and design center for the world’s prominent automakers. Toyota, for example, has recently announced a new $150 million R&D facility to be built near Ann Arbor, Michigan.

The Chicago MSA’s most significant specialization is “management and technical consulting.” The Chicago area is the domicile of major offices of world-renowned management consulting firms, including Accenture, Booz Allen Hamilton, McKinsey & Company, and A.T. Kearney. Facilitated by the strong air travel connections at Chicago’s O’Hare International Airport, these firms’ consulting operations are able to serve clients throughout the region, the nation, and the world.

As the Midwest’s historic industry specializations decline in size, especially manufacturing, such business and professional services will be increasingly important in maintaining the region’s size and high household incomes. But to what degree are such industries derivative and dependent on local manufacturing itself? If sales to local firms dominate these sectors, then the prospects are possibly dimmer because productivity gains in goods production continues to shrink the nominal share of income derived from manufacturing and agriculture.

The recent employment performances in business services in Detroit and Chicago offer some clues regarding the degree to which business service firms in the Midwest have expanded their customer base beyond the immediate region. The evidence suggests that business services in these cities do continue to depend on midwestern customer demand in an important way. Midwest employment growth has been lagging significantly since the 2001 recession. At the same time, as the chart below suggests, local employment in the professional and technical services category has also dipped to a greater degree than the national employment, suggesting that the demand for these services derive from local rather than national or global markets. Moreover, further analysis of the employment data suggest that these cities' steeper-than-national-average declines did not result from any unfortunate mix of industry subsectors in Chicago and Detroit. In particular, had Detroit's individual industries under the NAICS 54 category each grown at the national rate from 2001-2004, the larger sector's decline would have totalled only 2.1 percent rather than the actual 7.3 percent decline. And similarly for Chicago, rather than the actual 9.7 percent decline over the period, the NAICS 54 employment decline would have amounted to only .8 percent. And so, though the evidence is not definitive, it appears from this performance that the NAICS 54 sector in Chicago and Detroit continues to serve regional markets to some considerable degree.

Click to enlarge image.

Professional and technical services continue to be important national growth sectors that merit a close watch by Midwest economic analysts. Nationally and regionally, these sectors continue to grow as goods producers and other businesses expand their use of such specialized services and as they outsource some business services that were previously conducted in-house. Regionally, given the slower pace of business expansion in the Midwest, the growth prospects for large Midwest cities, such as Detroit and Chicago, would probably be more robust should their business services firms expand their markets throughout the nation and the world.

Posted by Testa at 1:56 PM | Comments (0)

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