April 16, 2014

Seventh District Update

by Thom Walstrum and Scott Brave

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A summary of economic conditions in the Seventh District from the latest release of the Beige Book and from other indicators of regional business activity:

Overall conditions: Growth in economic activity in the Seventh District picked up in March, and contacts generally maintained their optimistic outlook for 2014.
Consumer spending: Growth in consumer spending increased slightly in March, but remained modest. Sales of winter-related items were stronger than normal, while other sales categories, in particular light vehicles, picked up as the weather improved.
Business Spending: Growth in business spending increased to a moderate pace in March. Growth in capital spending picked up. The pace of hiring increased, and while hiring plans decreased slightly, they remained positive.
Construction and Real Estate: Growth in construction and real estate activity was modest in March. Although conditions improved, residential construction and real estate contacts reported that adverse weather continued to restrain growth. Demand for nonresidential construction grew at a moderate pace and commercial real estate activity continued to expand.
Manufacturing: Growth in manufacturing production increased from a mild to moderate pace in March, with contacts from a number of industries reporting increased activity. The auto, aerospace, and energy industries remained a source of strength. Auto and steel production recovered from the weather-related slowdown, while demand for heavy machinery remained soft.
Banking and finance: Credit conditions were again little changed on balance over the reporting period. Corporate financing costs decreased slightly, as bond spreads narrowed. Banking contacts reported moderate growth in business loan demand and modest growth in consumer loan demand.
Prices and Costs: Cost pressures were mild. While energy and transportation costs remain elevated, they were lower than during the previous reporting period. Wage pressures were slightly lower and non-wage pressures moderated.
Agriculture: The slow arrival of spring-like weather delayed fieldwork, but farmers were generally not too worried about the delay. Soybean prices rose relative to corn. The livestock sector moved further into the black, as milk, hog, and cattle prices increased.

The Midwest Economy Index (MEI) decreased to –0.03 in February from +0.32 in January, falling below zero for the first time since June 2013. Moreover, the relative MEI moved down to –0.01 in February from +0.23 in the previous month. February’s value for the relative MEI indicates that the Midwest economy was growing at a rate consistent with national economic growth.

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April 3, 2014

Freight movement slows in January, while freight rates remain high—Is it the weather or something else?

By Paul Traub and Bill Testa

The severity of this winter season has had a noticeably negative impact on everything from retail sales to industrial production. Roadway freight operations are no exception.

The effects of the extreme cold and heavy snow, which started last December and has continued into March of this year, seem to be showing up in some recent economic data on freight services. Chart 1 below contains the Transportation Services Index (TSI)[1] for freight in the United States. The TSI contains freight data for most modes of freight transportation, including truck, rail, inland water, air, and pipeline. This index shows that on a seasonally adjusted basis, freight movement dropped in January by 2.8%. Since the data are adjusted for seasonality, the drop in January looks to be even more significant.

Though all modes of transportation have been affected by this winter’s weather, trucking arguably experienced the worst of it. Many firsthand reports (including my own) have indicated that ice and snow shut down routes in states that do not normally face such harsh wintry conditions. Extremely cold weather also made the loading and unloading of trucks more difficult, causing delays and disrupting normal schedules.

This winter’s disruptions to trucking operations were also accompanied by price spikes. According to DAT Solutions, spot rates (excluding long-term contractual prices) for dry vans, which account for the majority of long-haul freight, are up 17.6% from October 2014. These price spikes could be partially due to the severe winter weather and may only be temporary; however, some evidence points to shifting fundamentals that may be contributing to rising cost trends in the industry. Since the U.S. economy reached the bottom of the Great Recession (in mid-2009), the U.S. Bureau of Economic Analysis’s producer price index for long haul truck-borne freight has climbed at an average annual pace of 3.9%.

Many industry experts argue that tightening capacity together with rising costs in the trucking industry are driving up freight prices. As chart 2 shows, according to ACT Research, the so-called active population of heavy-duty (class 8) trucks has been declining steadily since 2007, even while the economic recovery has been ongoing.



ACT Research defines the active population of trucks as those trucks still in service that are 15 years of age or younger. The reason for this distinction is that once a vehicle reaches 15 years of age, it becomes much less likely to be used for hauling meaningful amounts of freight over long distances. So, at the same time the number of freight loads has been increasing on account of the recovering economy, the number of trucks available to carry those loads has been declining.

Another factor affecting freight rates has been the significant increase in truck prices. Truck prices started increasing in 2002 because of federally mandated diesel emission standards that required the costly development of new engine technologies. ACT Research analysts contend that since 2002 the cost of meeting these standards has added an estimated $30,000 to the cost of a new truck—a price increase of about 31%. Rising prices for new trucks have, in turn, made used trucks more attractive, causing their prices to go up as well. The average price for a used class 8 truck was higher in January of 2013 than ever before.[2]

There is yet another factor that is likely to drive up costs for the trucking industry: the projection for a severe shortage of qualified truck drivers. The effects of the shortage, which has been in the making for some time, were somewhat mitigated during the most recent economic downturn. Since then, as freight activity has recovered, the driver shortage has become a more serious problem. A shortage of drivers, coupled with fewer trucks on the road, has tightened freight utilization rates, which are said to be approaching uncharted territory: Some estimates now have capacity utilization rates in the trucking industry in excess of 95%.

If, as I would argue, the recent slowdown in freight activity is due primarily to the severe winter weather, then missed deliveries will need to be managed. But this will not be easy. In the trucking industry, backlogs can be difficult to make up because there is only so much the trucking industry as a whole can ship—and only so much any one truck can haul (due to legal weight limit restrictions on most highways). Making up for the backlogs will result in added demands on a truck fleet that is already running at near-full capacity.

Based on this analysis, it doesn’t look like freight rates will be coming back down any time soon, especially if the economy keeps improving. As businesses moved to optimize their supply chains with techniques such as just-in-time inventory,[3] freight has taken on an increasingly important role in their production processes. As a percent of total logistics expense for private business, trucking-related costs comprise 77.4% of transport costs and 48.6% of total logistics spending.[4] Accordingly, when real gross domestic product (GDP) increases by 1%, some analysts estimate that the truck transportation needed to bring this about increases by 2 to 3%.[5] Should the demand for hauling freight by truck grow dramatically, the trucking industry’s capacity would be strained under the current circumstances. When trucking capacity is strained, prices for those freight hauls that are not under long-term contract can jump. Given the changing fundamentals to the trucking industry discussed previously, some analysts argue that the recent price spikes for shipping freight via trucks will ultimately work their way into long-term contractual prices for hauling freight (which are predicted to reset throughout the year). Some estimates have the increase for contractual freight in the coming months to be in the range of 4% to 6%.

Rising capacity utilization for the trucking industry, increases in the costs of new trucking equipment, higher demand for qualified truck drivers, and a declining number of heavy-duty trucks in operation are some of the reasons that freight prices are on the rise. North American heavy-duty truck production is increasing to meet demand, but recently announced fuel economy standards will continue to add costs to the production of new vehicles—and, in turn, increase their sale prices. So while rising freight rates have historically been a good predictor of improved economic activity, there are other factors at work driving up rates at this time. It remains to be seen how all of this will affect consumer prices, but if these expected freight rate increases cannot be readily absorbed, they will have some impact on the consumer. For these reasons we will be keeping an eye on freight and freight rates in the months ahead—long after the snow has melted.
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[1]Truck transportation makes up a significant portion of the Transportation Services Index (TSI), accounting for 40% of the data used. (Return to text)

[2]Newscom Business Media Inc., 2014 “Used Trucks Cost More than Ever Before”, Today’s Trucking, February 27. (Return to text)

[3]Just-in-time inventory is an inventory strategy employed by firms to increase their efficiency and decrease waste by receiving goods only as they are needed in the production process; this strategy reduces costs associated with carrying large inventories (of raw materials or finished goods, such as cars). (Return to text)

[4]Dan Gilmore, 2013 “State of the Logistics Union 2013”, Supply Chain Digest, June, 20, 2013. (Return to text)

[5]Jeff Berman, 2014 “Truckload capacity trends in 2014 are worth watching, say industry stakeholders”, Logistics Management, Jan. 10, 2014. (Return to text)

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March 10, 2014

Seventh District Update

by Thom Walstrum and Scott Brave

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A summary of economic conditions in the Seventh District from the latest release of the Beige Book and from other indicators of regional business activity:

Overall conditions: Growth in economic activity in the Seventh District slowed in January and February, as severe winter weather affected activity in a number of sectors. The modest pace of growth to start the year tempered contacts' expectations only somewhat, as most generally maintained their optimistic outlook for 2014.
Consumer spending: Growth in consumer spending slowed to a modest pace in January and February. The poor winter weather initially benefitted some retail categories through increased sales of necessities, but eventually led to declining customer traffic and sales.
Business Spending: Growth in business spending also slowed to a modest pace in January and February. Growth in capital spending slowed somewhat, while plans for future capital expenditures edged higher. The pace of hiring slowed, as did expectations of future hiring, though expectations for the coming year remained positive.
Construction and Real Estate: Construction and real estate activity again increased modestly in January and February. While the weather affected the housing market, it continued to improve slowly, with home prices and residential rents rising modestly. Nonresidential construction grew slowly, and commercial real estate activity ticked up.
Manufacturing: Manufacturing production growth slowed to a modest pace in January and February, as unusually bad winter weather dampened demand. The auto industry remained a source of strength. Demand for steel dropped as weather interfered with transportation, and demand for heavy equipment remained soft.
Banking and finance: Credit conditions were little changed on balance over the reporting period. Equity market volatility increased and credit spreads widened some. Growth in business loan demand was slow but steady, and growth in consumer loan demand remained modest.
Prices and Costs: Cost pressures remained mild overall, though the weather pushed up prices for energy commodities. Contacts continued to report rising healthcare premiums.
Agriculture: The weather delayed shipments of agricultural products. Corn and soybean prices were up. Livestock producers’ bottom lines improved with higher prices for milk, hogs, and cattle combined with lower feed cost.

Led by improvements in the service sector and consumer spending indicators, the Midwest Economy Index (MEI) reached its highest value in December since May 2012, increasing to +0.48 from +0.33 in November. Moreover, the relative MEI increased to +0.15 in December from +0.13 in the previous month. December’s value for the relative MEI indicates that Midwest economic growth was higher than would typically be suggested by the growth rate of the national economy.

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February 14, 2014

District Unemployment Rates During this Expansion

By Bill Testa[1]

In assessing economic conditions among states and regions, we often pay a lot of attention to the current unemployment rate. The unemployment rate measures the share of the work force that is out of work and actively seeking employment. The release of the unemployment rate is timely; it is usually available during the third week following the end of the previous month. Accordingly, when the National Council of State Legislatures asked me to address their January meeting in Chicago and to discuss the economy in the Midwest states, the unemployment came to mind as an expected and known indicator.

The current unemployment rate alone, however, tells us little about how a state economy fares in relation to the current and past swings in economic activity—the so-called business cycle. In the states of the industrial Midwest, for example, unemployment rates often fall steeply during national economic downturns, but often recover rapidly afterward. To get a clearer picture of how these states are doing, I compared each one’s unemployment rate now, 18 quarters following the bottom of the national recession, with its rate 18 quarters following the trough of the past recessions of 1974-75, 1980-82, 1990-91, and 2001. In this way, I can control for demographic differences across states, while also creating a consistent benchmark for comparing unemployment rates at similar points in the national business cycle.

As an example, let’s take the interesting case of Illinois[2]. The chart below displays Illinois’s unemployment rate for the fourth quarter of 2013, 18 quarters following the trough of the 2007-09 recession. At 8.8%, it is historically very high for this point during an economic recovery and expansion. Clearly, work force conditions are not good. Only the period following the 1981-82 recession rivals this one.

The recession of 1981-82 and its aftermath were severe in both the nation and the Midwest. The nation’s unemployment rate also remained stubbornly high 18 quarters following the 1982 trough. Yet, 18 quarters following that trough, the Illinois unemployment rate still exceeded the nation’s. And in comparison, today’s gap between Illinois and the nation is larger than the 1980s, and indeed larger than in any subsequent period.

While this gives us a pretty good handle on the current unemployment situation, a look at the broader multi-state regional performance is also telling. Multi-state regions are highly interrelated, perhaps none so closely as the industrial Midwest. The line graph below compares the national unemployment rate with that of the East North Central (aka Great Lakes) region, the region with which Illinois is typically grouped. From the chart, one can see that the Great Lakes’ regional unemployment rate soared far above the nation’s during the 1981-82 recession. As many of us recall from that era, everything that could go wrong for the region’s economy did go wrong. In particular, the region’s hallmark manufacturing industries—including steel, machinery, and automotive—suffered steep declines in both domestic and international markets. At the same time, domestic agriculture contracted following rapid but unsustainable growth during the 1970s. Meanwhile, other U.S. regions enjoyed growth driven by rising defense spending and the emergence of high tech industries—principally in computing equipment and micro-electronics.

But the recovery from the 1981-82 recession was fast for both the region and the nation and, in the decade following, the Great Lakes region fared even better. Its unemployment rate(s) fell below the nation’s during the 1990s as low gasoline prices spurred the recovery of domestic automotive production and as a growing global economy boosted demand for the region’s capital goods machinery and equipment. Meanwhile, many other regions were held back by local financial (savings and loan) crises, as well as by sagging demand for defense-related goods and services.

As the line graph above indicates for our more recent expansionary years, the region’s unemployment rate fell quickly following the 2008-09 recession, so much so that parity was reached with the nation during 2011. Since that time, however, the region’s unemployment has flattened, while the national unemployment rate has continued to decline. As a result, a gap has opened up of more than 1 percentage point between the national unemployment rate and that of the region. By way of explanation, the pace of manufacturing growth eased following the bounce-back of the national and global recovery, which exerted an outsized effect on the industrial Midwest. Slowing global growth in Europe and parts of Asia have further dampened the sector’s growth. And so, in the multi-state regional context, Illinois’s recent unemployment gap with the nation is somewhat consistent with the experience of neighboring states. Yet, in comparing the Illinois-U.S. gap to that of the other Great Lakes states, and to neighboring Iowa (below), the Illinois' gap is large.
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[1]Thank you to Jacob Berman for research assistance.(Return to text)

[2]Charts for the remaining Great Lakes states (and Iowa) are below.(Return to text)
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Appendix - Charts for Indiana, Iowa, Michigan, Ohio, and Wisconsin

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January 15, 2014

Seventh District Update

by Thom Walstrum and Scott Brave

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A summary of economic conditions in the Seventh District from the latest release of the Beige Book and from other indicators of regional business activity:

Overall conditions: The rate of growth in economic activity in the Seventh District increased in late November and December, though the overall pace continued to be moderate. Contacts were more optimistic about 2014 than they were during the previous reporting period.
Consumer spending: Growth in consumer spending picked up to a moderate pace in late November and December, with holiday sales modestly exceeding expectations. Total holiday spending was generally lower this year, though contacts indicated that improving consumer confidence and falling unemployment boosted retail activity in some areas.
Business Spending: Business spending edged up in late November and December. Growth in capital expenditures increased slightly, led by spending on structures. The pace of hiring picked up, as did expectations of future hiring.
Construction and Real Estate: Construction and real estate activity increased modestly in late November and December. Demand for residential construction continued to expand and home sales, prices, and rents all rose. Demand for nonresidential construction remained modest, but picked up some, and commercial real estate activity also improved.
Manufacturing: Manufacturing production growth was solid in late November and December. The auto and aerospace industries were again a source of strength. Low steel service center inventories continued to lift the demand for steel, and demand for heavy equipment increased slightly.
Banking and finance: Credit conditions loosened slightly over the reporting period. Equity markets continued to rise, and credit spreads moved lower. Business loan demand improved, while household loan demand was more mixed.
Prices and Costs: Cost pressures increased slightly over the reporting period, but remained mild. Wage pressures were down slightly. Non-wage costs increased, with a number of contacts reporting higher healthcare premiums.
Agriculture: Corn and soybean prices moved a bit higher, but remained well below levels a year ago. Hog prices moved lower, cattle prices were little changed, and milk prices edged up.

The Midwest Economy Index (MEI) increased to +0.27 in November from +0.23 in October, and the relative MEI increased to +0.24 in November from +0.21 in October. November’s value for the relative MEI indicates that Midwest economic growth was higher than would typically be suggested by the growth rate of the national economy.

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December 12, 2013

Seventh District Economic Update

by Thom Walstrum and Scott Brave

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A summary of economic conditions in the Seventh District from the latest release of the Beige Book and from other indicators of regional business activity:

Overall conditions: The rate of growth in economic activity in the Seventh District continued to be modest, but slowed a bit in October and early November. Contacts remained hopeful for improvement in 2014, although they were slightly less optimistic than they were during the previous reporting period.
Consumer spending: Consumer spending growth remained modest in October and early November. Auto sales in the District slowed during the government shutdown, but subsequently picked up in late October and November. Non-auto retailers reported typical sales levels during the lull between the back-to-school and holiday season. They expected moderate growth in sales during the holiday season.
Business Spending: Growth in business spending flattened out in September. Growth in capital spending slowed slightly and inventories were at comfortable levels for most retailers and manufacturers. The pace of hiring edged lower and retailers indicated that seasonal hiring plans were about the same as last year.
Construction and Real Estate: Construction and real estate activity increased moderately over the reporting period. Demand for residential construction grew slightly and conditions in the residential real estate market continued to improve, but at a slower pace. Nonresidential construction grew modestly and commercial real estate activity continued to expand.
Manufacturing: Growth in manufacturing production remained moderate. The auto and aerospace industries were again a source of strength. Steel production fell slightly, as did demand for specialty metals. Demand was up for construction materials and heavy- and medium- duty trucks; demand for heavy equipment remained soft.
Banking and finance: Credit conditions changed little on balance over the reporting period. Volatility decreased significantly across several asset classes and equity markets saw significant improvements. Demand for commercial and industrial loans remained relatively unchanged. Contacts noted increased consumer borrowing, but saw declining residential mortgage activity as the increase in borrowing rates discouraged refinancing.
Prices and Costs: Cost pressures changed little since the last report. Overall, commodity prices were up slightly. Retailers noted that heavy promotional activity is planned for the holiday season. Wage pressures were up slightly and non-wage labor costs were steady.
Agriculture: Harvesting took longer this fall because of delays from precipitation and a larger crop. Pastures and winter wheat fields were in better shape than they were last year. Crop and hog prices fell; milk and cattle prices were a bit higher.

The Midwest Economy Index (MEI) decreased to +0.22 in October from +0.34 in September, and the relative MEI fell to +0.19 in October from +0.62 in September. October’s value for the relative MEI indicates that Midwest economic growth was higher than would typically be suggested by the growth rate of the national economy.

The Chicago Fed Midwest Manufacturing Index (CFMMI) increased 0.4% in October, to a seasonally adjusted level of 97.4 (2007 = 100). Revised data show the index was up 0.3% in September. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) moved up 0.3% in October. Regional output rose 5.7% in October from a year earlier, and national output increased 3.6%.

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October 21, 2013

Seventh District Update

by Thom Walstrum and Scott Brave

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A summary of economic conditions in the Seventh District from the latest release of the Beige Book and from other indicators of regional business activity:

Overall conditions: The rate of growth in economic activity in the Seventh District slowed a bit in September. Contacts remained generally optimistic, although several expressed concern about the potential impact of the federal government shutdown.
Consumer spending: Consumer spending grew modestly in September, falling short of retailers’ expectations. Auto sales increased at a slower pace and back-to-school spending was less than last year. Retailers expected holiday season spending to be similar to last year.
Business Spending: Growth in business spending flattened out in September. Growth in capital spending slowed slightly and inventories were at comfortable levels for most retailers and manufacturers. The pace of hiring edged lower and retailers indicated that seasonal hiring plans were about the same as last year.
Construction and Real Estate: Construction and real estate activity continued to increase in September. Demand for residential construction grew moderately, as did activity in the residential real estate market. Nonresidential construction grew modestly and commercial real estate activity continued to expand.
Manufacturing: Growth in manufacturing production decreased slightly in September. The auto and aerospace industries were again a source of strength. Steel production was steady, demand for specialty metals, construction materials, and household appliances declinedslightly, and demand for heavy equipment remained soft.
Banking and finance: Credit conditions changed little on balance over the reporting period. Banking contacts noted competitive pressures for commercial and industrial loans, with narrowing spreads and easing standards. Consumer loan demand was steady, with a decrease in mortgage lending and an increase in auto lending.
Prices and Costs: Cost pressures changed little in September. Overall, commodity prices were down slightly. Retailers again noted a slight increase in wholesale prices. Wage pressures remained mild and non-wage labor costs increased.
Agriculture: Although the year’s drought affected the harvest, corn and soybean yields in parts of the District were higher than expected in September though rains slowed harvesting. Corn, soybean, hog, and fruit prices decreased, while milk and cattle prices increased.

The Midwest Economy Index (MEI) increased to +0.41 in August from +0.22 in July, and the relative MEI rose to +0.73 in August from +0.45 in July. August’s value for the relative MEI indicates that Midwest economic growth was higher than would typically be suggested by the growth rate of the national economy.

The Chicago Fed Midwest Manufacturing Index (CFMMI) increased 1.5% in August, to a seasonally adjusted level of 96.7 (2007 = 100). Revised data show the index was down 0.7% in July. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) moved up 0.7% in August. Regional output rose 4.0% in August from a year earlier, and national output increased 2.8%.

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October 18, 2013

Bureau of Economic Analysis Event

By Jacob Berman

On Thursday, September 26, the Chicago Fed was pleased to host a presentation by Steve Landefeld, the Director of the Bureau of Economic Analysis (BEA), to the Chicago Area Business Economists (CABE). The BEA is the government agency responsible for producing key statistics such as gross domestic product, GDP, a measure of economic output, and the personal consumption expenditure price index (PCE), a measure of inflation. In his CABE presentation, Landefeld illustrated the importance of BEA’s statistical products to policy topics, such as changes in the U.S. distribution of household income. He also explained their role in illuminating features of the financial crisis and Great Recession. Landefeld then discussed planned cuts to existing statistical products due to budgetary pressures. Ideally, he said, these plans should be shared with users ahead of time so that they can adapt their data use accordingly.

However, the agency has also been working on some interesting new products. For example, the BEA recently released new measurements of real or price-adjusted personal income for states and metropolitan areas—Regional Price Parities (RPPs). Although the BEA has been estimating nominal income by state since the 1950s, the value of these data was limited by the fact that the price levels can vary considerably, both across states and over time. While the new products are still in the experimental stage, they have the potential to allow comparisons of personal income across both time and geography.

Up to now, the only available price indexes for household income have been the local area Consumer Price Indexes (CPI). The Bureau of Labor Statistics calculates CPI on a national level every month; estimates for major cities are released less frequently.

Figure 1 compares inflation measured by the CPI for the three major urban areas in the Seventh District with national CPI inflation. We see that CPI inflation does not vary much across cities, and it has closely followed the national trend in recent years.

The CPI measures changes in the price level within individual cities; it does not reflect price differences between cities at any one point in time. Additionally, these data exists for only 26 cities, so many states are entirely unrepresented.


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In contrast, the BEA’s new RPP data series provides estimates of the price levels that are comparable across states and time. These estimates are constructed by combining survey data from various sources, including the CPI and the PCE, and calculating an index such that national price levels in a given year are calibrated to 100. Figure 2 shows RPPs for selected states in 2011. The price level in Illinois is barely above the national average; price levels for all other states in our district are below the national average. The RPP also shows that South Dakota has the lowest cost of living in the nation and Hawaii has the highest.


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So far, the BEA has only released data in this series for 2007 to 2011. Figure 3 compares the RPP-derived price changes related to household income for Seventh District states with the national average. The series are almost indistinguishable. In fact, the variance across states is substantially lower than the CPI data would suggest. While Figure 2 shows that there is a large gap in the price level across states, Figure 3 suggests that this gap is persistent and has been largely invariant over this short period.


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New products from the BEA, such as the RPPs, present exciting new opportunities for economists and other analysts to improve our understanding of regional economic trends and structure.

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September 5, 2013

Seventh District Update, September 2013

by Thom Walstrum and Scott Brave

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A summary of economic conditions in the Seventh District from the latest release of the Beige Book and from other indicators of regional business activity:

Overall conditions: The pace of economic activity in the Seventh District improved in July and August, and contacts generally expected growth to remain moderate for the rest of the year.
Consumer spending: Growth in consumer spending picked up a bit in July and August. Auto sales rose, continuing to outpace growth in non-auto retail sales. Non-auto retail sales increased modestly, with sales of luxury and housing-related items improving.
Business Spending: Growth in business spending also picked up some in July and August. Contacts reported making moderate investments in equipment and software and structures, but inventory investment decreased. Labor market conditions also softened a bit.
Construction and Real Estate: Construction and real estate activity increased further in July and August. Demand for residential construction grew steadily, as did activity in the residential real estate market. Nonresidential construction grew at a more modest pace and commercial real estate conditions continued to improve.
Manufacturing: Growth in manufacturing production increased in July and August. The auto industry continued to be a source of strength and steel production again grew at a moderate pace. Demand for heavy equipment remained soft, although demand for construction equipment continued to strengthen.
Banking and finance: Credit conditions tightened some over the reporting period. Banking contacts cited a modest reduction in overall business loan demand, but noted continued steady growth for commercial and industrial loans in the middle market. Consumer loan demand continued to increase, particularly for auto lending, and mortgage lending rose.
Prices and Costs: Cost pressures were moderate in July and August. Contacts noted an increase in some commodity prices. Retailers again reported mostly modest increases in wholesale prices and wage pressures were mild.
Agriculture: Abnormal dryness affected much of the District during the reporting period, lowering expectations for crop yields. However, conditions remain much better than a year ago. Corn, soybean, wheat, hay, milk, hog, and cattle prices all decreased.

The Midwest Economy Index (MEI) increased to +0.25 in July from –0.11 in June, and the relative MEI rose to +0.45 in July from –0.16 in June. July’s value for the relative MEI indicates that Midwest economic growth was somewhat higher than would typically be suggested by the growth rate of the national economy.

The Chicago Fed Midwest Manufacturing Index (CFMMI) decreased 0.1% in July, to a seasonally adjusted level of 95.8 (2007 = 100). Revised data show the index was up 0.4% in June. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) moved down 0.1% in July. Regional output rose 1.6% in July from a year earlier, and national output increased 1.5%.

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August 9, 2013

Federal spending by state

Bill Testa and Jacob Berman

There are many important channels through which the actions of the federal government affect the national economy, with varied effects among the states.[1] Among these channels, the direct disbursement of federal funds is sizable, amounting to $3.76 trillion in calendar year 2012. These disbursements include direct federal government programmatic spending for payroll and procurement; payments to individuals and businesses, including Social Security and farm subsidies; and grants to state governments for service programs such as Medicaid, as well as for various education programs.[2]

The map below illustrates varied expenditure per capita by states for the last year in which such data were collected under a now-defunct statistical data program.[3] To a rough degree, this expenditure pattern reflects the geographic impact—the initial impact, that is—of any hypothetical across-the-board cuts or hikes in federal budgetary spending.[4] However, we should not take this pattern at face value. The allocation of federal funds to a given state may be misleading if the receiving authority “passes through” the allocation in spending to a subcontractor that is located in another state. And even if the funds are not passed through, the ultimate economic impacts of federal spending on households and firms in a state are likely to differ significantly following subsequent rounds of spending by firms and households. State economies are highly intertwined through diverse channels of trade, investment, and cross-state spending.


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With these caveats in mind, let’s look at recent budgetary cuts. Beginning in January 2013, a series of changes were enacted to future taxes and spending during the government budgetary crisis period that became known as the “fiscal cliff”. The lion’s share of these actions entailed tax increases for 2013 that will amount to almost $400 billion.[5] In addition, largely under provisions of the Budget Control Act of 2011 (BCA), mandatory cuts in federal spending authorization are also taking place. For fiscal year 2013, these cuts amount to almost $109 billion dollars.[6]

For several reasons, the state-by-state geographic pattern of sequestration cuts differs from the aforementioned pattern of federal spending (figure 1). For one, major portions of the federal budget such as Social Security and and Medicaid are excluded under the BCA. Similarly, the BCA requires that overall cuts are allocated equally between defense and non-defense categories of programs. Since the underlying defense/non defense split differs from state to state, we would expect the cuts to differ as well.

For much of the remainder of federal spending, however, the cuts are scheduled to take place proportionately across individual programs. This allows us to estimate the overall spending reduction that is taking place in each state. In doing so, one of our key assumptions is that program managers choose to cut program spending proportionately in each state. That is, we apply the relevant sequestration percentage to a given budget account and assume that the account’s manager allocates the same percentage cut across all states. For example, we assume the mandated 5% to federal housing vouchers is achieved by cutting each state’s existing housing vouchers funding by 5%.[7] To arrive at each state’s overall cut in spending, we sum across the program cuts for each state.

Table 1 shows the ten states facing the largest percentage cut from sequestration for 2013. Unsurprisingly, the District of Columbia, Virginia, and Maryland rank at the top of the list due to their proximity to the nation’s capital and relatively larger share of government-related economic activity.


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For the remaining states, the level of defense procurement and civilian defense employees there largely determine the size of the overall sequestration cuts.[8] These cuts are further scaled in relation to each state’s economy as measured by gross state product (column 4). We also calculate the size of funding cuts per capita (column 6).

Table 2 focuses on the five states in the Seventh District. Wisconsin ranks relatively highly due to its exposure to defense cuts. Despite low defense exposure, Illinois ranks near the middle of the list due to above-average levels of Medicare expenses and federal unemployment compensation. Cuts to funding available for various federal mortgage insurance programs also affect Illinois, though the actual economic effect of such cuts will depend on when and if claims are filed.


Click to enlarge.

The Congressional Budget Office has estimated that sequestration will reduce real GDP growth by 0.6 percentage points during this calendar year.[9] Our analysis illustrates that sequestration-mandated cuts will vary widely by region. Although the size of cuts varies largely according to the states’ exposure to the defense sector, other state-specific factors are important as well. States that receive above-average funding for programs like Medicare, federal mortgage insurance, unemployment compensation, Section 8 housing vouchers, research grants, or Head Start early education programs can expect to experience larger programmatic cuts overall.

The graphic below illustrates our findings for the 50 states.


Click to enlarge.
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[1] Among these channels are regulatory policy, tax structure, macro-economic policy, and spending programs. (Return to text)

[2] Subsidized federal insurance programs as well as other guarantees also play an important role. (Return to text)

[3] http://www.census.gov/govs/cffr/. (Return to text)

[4] Not all federal spending is allocated, the biggest item being interest on federal debt. For a discussion of coverage, see http://www.census.gov/govs/cffr/, pp. xv, xvi. (Return to text)

[5] Tax increases for 2013 and beyond included a rise in the Social Security payroll tax, a new Medicare surtax on high-income households, higher rates on income from capital gains, and higher tax rates on individual income (especially in higher income tax brackets). (Return to text)

[6] The fiscal year of the federal government begins on October 1. On March 1, 2013, spending cuts of approximately $85 billion took place equally to nonexempt defense and non-defense programs. Under current law, an additional $109 billion in cuts are required for each fiscal year from 2014 to 2021. Given a lag in timing between appropriations and actual expenditures, actual spending cuts are estimated to amount to somewhat less. Additional deficit reduction for the year derives from the expiration of federal unemployment benefits ($34 billion) and the expiration of scheduled hikes in reimbursement fees to physicians under Medicare ($10 billion). (Return to text)

[7] Data on federal transfers to states come from the U.S. Census Bureau’s 2010 Consolidated Federal Funds Report (CFFR). These are the latest available data. Detailed county-level data are available from the Census Bureau at http://www2.census.gov/pub/outgoing/govs/special60/. To arrive at estimated spending cuts, spending from CFFR categories by state are matched to the relevant programmatic percentage cuts as determined by OMB: http://www.whitehouse.gov/sites/default/files/omb/assets/legislative_reports/fy13ombjcsequestrationreport.pdf. Programs related specifically to the American Recovery and Reinvestment Act (ARRA) are omitted since the majority of these funds are assumed to have been spent before March 2013. Specific exceptions to cuts are checked against analysis prepared by the Congressional Research Service http://www.fas.org/sgp/crs/misc/R42050.pdf. In the interest of tractability, the bottom 5% of total spending is omitted from our geographic allocation since these are distributed across a very large number of small accounts. (Return to text)

[8] President Obama has exercised his authority to exempt active-duty military personnel. (Return to text)

[9] http://www.cbo.gov/publication/43961. (Return to text)

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July 17, 2013

Seventh District Update July, 2013

by Norman Wang and Scott Brave

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A summary of economic conditions in the Seventh District from the latest release of the Beige Book and from other indicators of regional business activity:

Overall conditions: Economic activity in the Seventh District expanded at a moderate pace in June, and contacts remained cautiously optimistic about growth prospects in the second half of the year.
Consumer spending: Growth in consumer spending increased in June. Auto sales increased at a faster rate than non-auto retail sales. For non-auto retail sales, contacts noted that high-end retailers and discount stores both continued to fare better than middle market retailers.
Business Spending: Growth in business spending also picked up in June. Spending on equipment and software increased slightly, as did spending on structures. Labor market conditions continued to improve slowly.
Construction and Real Estate: Construction and real estate activity continued to increase gradually in June. Demand for residential construction grew steadily, as multifamily construction remained strong and single-family construction continued to improve. Nonresidential construction grew at a modest pace.
Manufacturing: Manufacturing production increased in June. The auto industry continued to be a source of strength and steel production again grew at a moderate pace. In contrast, demand for heavy equipment remained soft, although contacts anticipated a slight improvement in the remaining months of the year.
Banking and finance: Credit conditions tightened moderately over the reporting period. Banking contacts cited less demand among their larger clients for leveraged financing, and continued uneven growth in the middle market driven mostly by refinancing of existing debt. In contrast, consumer loan demand increased over the reporting period, particularly for auto lending.
Prices and Costs: Cost pressures remained mild in June. Commodity prices continued to trend lower. Wage pressures remained moderate, although many contacts again noted rising healthcare and other benefit costs. Some of these higher costs were being passed on to employees.
Agriculture: Crop conditions improved over the course of the reporting period, with the crop ending the period in better shape than a year ago. Corn, soybean, and hog prices rose, while cattle prices decreased and milk prices were roughly unchanged.

The Midwest Economy Index (MEI) decreased to –0.18 in May from +0.03 in April, and the relative MEI declined to –0.51 in May from –0.10 in April. May’s value for the relative MEI indicates that Midwest economic growth was moderately lower than would typically be suggested by the growth rate of the national economy.

The Chicago Fed Midwest Manufacturing Index (CFMMI) decreased 0.4% in May, to a seasonally adjusted level of 95.8 (2007 = 100). Revised data show the index was down 0.2% in April. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) moved up 0.2% in May. Regional output rose 4.2% in May from a year earlier, and national output increased 2.2%.

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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).


Source: U.S. Census Bureau/Haver Analytics.


Source: U.S. Census Bureau/Haver Analytics.

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.


Source: Haver Analytics.

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.[1] 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.

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[1]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)

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June 6, 2013

Seventh District Update

by Norman Wang and Scott Brave

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A summary of economic conditions in the Seventh District from the latest release of the Beige Book and from other indicators of regional business activity:

Overall conditions: Economic activity in the Seventh District again expanded at a modest pace.
Consumer spending: Growth in consumer spending increased slightly. Auto sales were moderately higher. New vehicle sales fell short relative to expectations, but used vehicle sales increased at a faster pace.
Business Spending: Growth in business spending slowed. Inventory investment decreased. Capital expenditures were limited by uncertainty over the economic outlook, but labor market conditions continued to improve slowly.
Construction and Real Estate: Growth in construction and real estate activity picked up. Demand for residential construction grew steadily, as multifamily construction remained strong and conditions for single-family construction continued to improve. Nonresidential construction increased at a modest pace.
Manufacturing: The decline in manufacturing production growth flattened out. Although the auto industry remained a source of strength, it too grew at a more moderate pace. Specialty metal manufacturers reported small increases in new orders, noting that their customers had become more cautious.
Banking and finance: Credit conditions eased some over the reporting period. Corporate borrowing costs declined and demand increased in corporate debt markets. Banking contacts reported modest growth in business loan demand, with greater competition for high quality assets among larger banks.
Prices and Costs: Cost pressures were steady. Commodity prices were generally somewhat lower. Wage pressures were again moderate, although many contacts noted rising healthcare costs and uncertainty about future employee healthcare obligations associated with the Affordable Care Act.
Agriculture: Heavy precipitation in the District aided the recovery from last year’s drought. Corn, soybean, milk, and hog prices rose, while cattle prices were flat.

The Midwest Economy Index (MEI) decreased to +0.03 in April from +0.25 in March, and the relative MEI declined to –0.21 in April from +0.10 in March. Significantly lower contributions from the Midwest’s service sector led to declines in both indexes. April’s value for the relative MEI indicates that Midwest economic growth was somewhat lower than would typically be suggested by the growth rate of the national economy.

The Chicago Fed Midwest Manufacturing Index (CFMMI) decreased 0.5% in April, to a seasonally adjusted level of 95.9 (2007 = 100). Revised data show the index was up 0.3% in March. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) moved down 0.4% in April. Regional output rose 3.3% in April from a year earlier, and national output increased 1.7%.

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April 17, 2013

Seventh District Update

by Norman Wang and Scott Brave

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A summary of economic conditions in the Seventh District from the latest release of the Beige Book and from other indicators of regional business activity:

Overall conditions: Economic activity in the Seventh District expanded at a modest pace.
Consumer spending: Growth in consumer spending edged lower. Some contacts indicated that the end of the payroll tax credit was having an increasingly negative effect on retail sales. Auto sales leveled off but dealers are still optimistic that sales will rise further this year than last year.
Business Spending:Growth in business spending picked up. Inventory levels increased slightly, and spending on equipment and software and on structures picked up. Labor market conditions improved slightly.
Construction and Real Estate: Construction and real estate activity increased. Demand for residential construction rose, reflecting both continued strength in multifamily construction and an improving single-family housing market. Growth in nonresidential construction, particularly for smaller retail stores and in the industrial sector, continued to be moderate.
Manufacturing: Growth in manufacturing production slowed. Mining activity continued to decline. However, contacts indicated that construction equipment distributors and rental companies remain optimistic, pointing to the ongoing recovery in the housing market as a potential source of strength in the second half of the year.
Banking and finance: Credit conditions remained favorable over the reporting period. Credit spreads and financial market volatility continued to be low. Banking contacts reported moderate growth in business lending, especially to small businesses and for the purposes of expanding and upgrading of facilities.
Prices and Costs: Cost pressures were roughly unchanged, on balance. Commodity prices were down slightly, and energy prices remained elevated. Wage pressures remained moderate, although several contacts indicated increasing concern over the rising cost of healthcare.
Agriculture: Cold weather delayed field work during the reporting period, but there was little concern expressed by contacts that planting would be seriously delayed. Corn, soybean, milk, and hog prices decreased while cattle prices moved sideways.

The Midwest Economy Index (MEI) increased to +0.04 in January from –0.10 in December, marking its first positive value since June 2012. The relative MEI, however, decreased to –0.24 in January from –0.18 in December, remaining negative for the second straight month. Estimates of annual growth in gross state product for the five Seventh District states were updated through the fourth quarter of 2012 in this release. The estimate for Indiana was higher than the national rate of growth, while the estimates for Wisconsin, Illinois, Iowa, and Michigan were lower.

The Chicago Fed Midwest Manufacturing Index (CFMMI) increased 0.8% in February, to a seasonally adjusted level of 96.3 (2007 = 100). Revised data show the index was up 0.4% in January. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) moved up 0.6% in February. Regional output rose 5.9% in February from a year earlier, and national output increased 2.4%.

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March 29, 2013

An Update on 2012 GSP Growth Forecasts

Norman Wang and Scott Brave

In 2011, the Chicago Fed began providing quarterly estimates of annual GSP growth for each of the five states in the Seventh District in its Midwest Economy Index (MEI) releases. In this blog, we present what we’ve forecasted for each state in 2012 along with an explanation of the factors behind our projections.

Background on the Midwest Economy Index

The MEI is a weighted average of 129 state and regional indicators that measure growth in nonfarm business activity. Two separate index values are constructed, the MEI (absolute value), which captures both national and regional factors driving Midwest economic growth, and the relative MEI (relative value), which provides a picture of the Midwest’s economic conditions relative to the nation’s.

MEI values correspond to deviations of growth in Midwest economic activity around its historical trend. Values above zero indicate growth above its historical trend, and values below zero indicate growth below trend. For the relative MEI, a positive value indicates that regional growth is further above its trend than would typically be suggested based on the current deviation of national growth from its trend, while a negative value indicates the opposite.

Together, the MEI and relative MEI provide a picture of the Seventh District’s state economies that is closer to being in real time than does the BEA’s annual GSP data. By exploiting the historical correlation between annual GSP growth in each of the five states and the MEI, we are able to produce quarterly estimates of annual GSP growth ahead of the annual BEA release of GSP data.

Forecasting GSP Growth

The statistical model we use to explain the annual growth in GSP for each Seventh District state is as follows:

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The model succinctly summarizes the historical relationships between national (real GDP growth), regional (MEI and Relative MEI), and state-specific (lagged GSP and state real Personal Income growth) factors driving each Seventh District state’s GSP growth since 1979.

The regression coefficients estimated for our model using data through 2011 are listed in the table below. Each coefficient represents the “effect” of an input on GSP growth. For example, a 1% increase in real GDP growth leads to about a 0.5% increase in GSP growth across the Seventh District states, with the effect slightly higher for Illinois and Iowa and slightly lower for Indiana and Michigan (second row of the table).

By plugging the latest data for real GDP growth, the MEI and relative MEI, state real Personal Income growth, and lagged GSP growth into the above equation, we can use the estimated regression coefficients from our model to obtain a GSP growth projection for 2012.

2012 Forecast

Projections for annual GSP growth for each of the five Seventh District states are displayed below. Coming into 2012, Iowa and Michigan stood out as having significantly higher GSP growth rates than the other three District states. In 2012, our growth projections suggest that GSP growth in Indiana outpaced the remaining District states and also exceeded the 2.2% annual growth in national GDP. GSP growth rates for Wisconsin, Illinois, Iowa, and Michigan are projected to be below the national growth rate.

Looking at the inputs into our projection, state real Personal Income growth data similarly suggest that Indiana experienced stronger growth than the other four District states in 2012, with Illinois showing the weakest growth in real personal income. In the region, growth in economic activity weakened last year with the MEI falling to an annual average of 0.14 compared to 0.41 in 2011. Growth relative to the nation also declined, decreasing to 0.21 from 0.62 in 2011; while 2012 US annual GDP growth edged up to 2.2% from 1.8% in the previous year.

Factors Behind Our Projections

As we’ve seen from the regression coefficients above, each state’s forecast is affected differently by the five inputs to our model. To further illustrate this point, we’ve broken down in the table below each state’s projected GSP growth into the expected contributions from national, regional, and state factors.


Note: State Factors include the regression constant for each state

This decomposition of growth makes clear what contributed to the diversity in GSP forecasts across the District states in 2012. For instance, Michigan’s relatively weaker forecast among the five states stems primarily from its much lower expected contribution to growth from national factors. In contrast, national factors benefit Illinois and Iowa’s projections. Indiana and Wisconsin’s relatively robust forecasts, on the other hand, come primarily from state growth factors. Regional growth factors contributed about the same to each state’s 2012 projection.

Conclusion

Our quarterly estimates of GSP growth can be found as part of the press release for the MEI following the third release of national GDP data for each quarter. The 2013 release schedule for the MEI and the GSP growth forecasts can be found here.

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January 16, 2013

Seventh District Update

by Norman Wang and Scott Brave

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A summary of economic conditions in the Seventh District from the latest release of the Beige Book and from other indicators of regional business activity:

Overall conditions: Economic activity in the Seventh District continued to expand at a slow pace in late November and December.
Consumer spending: Consumer spending increased somewhat. Multiple retailers reported that store traffic volumes fluctuated more throughout the holiday season than in recent years. Auto sales in the District lagged the national pace, with several dealers indicating that lower consumer confidence hurt year-end sales.
Business Spending: Growth in business spending remained tepid. Inventory investment was little changed while spending on equipment and structures continued to slowly increase. Labor market conditions were unchanged.
Construction and Real Estate: Construction and real estate activity was mixed. Residential construction continued to rise. Demand for nonresidential construction remained weak, but some improvement was noted in the light industrial and office markets.
Manufacturing: Growth in manufacturing production continued to be moderate over the reporting period. Capacity utilization in the steel industry increased slightly, the auto sector remained a source of strength, and activity in the energy industry appeared to slow.
Banking and finance: Credit conditions continued to gradually ease. Credit spreads and financial market volatility remained low, and asset quality continued to improve. Banking contacts also reported moderate growth in demand for small business loans and consumer loan demand continued to increase.
Prices and Costs: Cost pressures eased in late November and December. Most raw material prices moved lower and wage pressures remained moderate.
Agriculture: Although drought conditions eased, depleted soil moisture remained a concern in much of the District. Corn, soybean, and milk prices slid during the reporting period while cattle and hog prices increased.

The Midwest Economy Index (MEI) improved to –0.21 in November from –0.47 in October, but remained negative for the fifth consecutive month. The relative MEI jumped to +0.63 in November from –0.09 in October. Estimates of annual growth in gross state product for the five Seventh District states were updated through the third quarter of 2012 in this release. Estimates for Illinois, Iowa, and Michigan were lower than the national rate of growth, while those for Indiana and Wisconsin were higher.

The Chicago Fed Midwest Manufacturing Index (CFMMI) increased 1.6% in November, to a seasonally adjusted level of 93.7 (2007 = 100). Revised data show the index was down 1.1% in October. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) moved up 1.1% in November. Regional output rose 7.3% in November from a year earlier, and national output increased 3.1%.

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December 3, 2012

Seventh District Update

by Norman Wang and Scott Brave

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A summary of economic conditions in the Seventh District from the latest release of the Beige Book and from other indicators of regional business activity:

Overall conditions: Economic activity in the Seventh District continued to expand at a slow pace in October and early November.
Consumer spending: The pace of consumer spending, while still moderate, increased slightly. Overall, retail sales surpassed expectations, which contacts attributed to promotions and generally improving consumer confidence.
Business Spending: Growth in business spending moderated further. Inventory investment continued to slow along with capital spending on equipment and structures. Labor market conditions improved slightly from the previous reporting period.
Construction and Real Estate: Construction activity continued to increase at a slow, but steady pace. For the first time in several years, homebuilders reported new land development projects were underway and contacts also noted some signs of improvement in commercial real estate conditions.
Manufacturing: Manufacturing production decelerated. Capacity utilization in the steel industry decreased and specialty metal manufacturers also reported weaker orders. The heavy equipment and auto industries however, remained sources of strength.
Banking and finance: Credit conditions continued to gradually ease. Credit spreads and financial market volatility remained low, and asset quality steadily improved. Banking contacts reported modest growth in small business loan demand.
Prices and Costs: Cost pressures were little changed. Retail food prices eased, on balance, and retailers indicated that discounting and promotions for non-food items increased some. Wage pressures remained moderate, but nonwage costs increased as many contacts again cited higher healthcare costs.
Agriculture: Much of the District reported higher yields than had been expected during the previous reporting period, reflecting in part timely local rains, later planting, and irrigation. Nonetheless, the drought still cut the District’s output of corn and soybeans substantially relative to last year.

Although the Midwest Economy Index (MEI) improved to –0.43 in October from –0.55 in September, it remained negative for the fourth consecutive month. The relative MEI decreased to –0.14 in October from –0.05 in September, primarily on account of declines in the Midwest’s manufacturing sector.

The Chicago Fed Midwest Manufacturing Index (CFMMI) decreased 1.2% in October, to a seasonally adjusted level of 92.1 (2007 = 100). Revised data show the index was down 0.6% in September. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) moved down 0.8% in October. Regional output rose 5.9% in October from a year earlier, and national output increased 2.0%.

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October 10, 2012

Seventh District Update

by Norman Wang and Scott Brave

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A summary of economic conditions in the Seventh District from the latest release of the Beige Book and from other indicators of regional business activity:

Overall conditions: Economic activity in the Seventh District continued to expand in late August and early September, but again at a slow pace.
Consumer spending: Growth in consumer spending was little changed. Contacts noted that the rise in gasoline prices had further deterred consumers from increasing discretionary spending and retailers lowered their expectations for the holiday shopping season.
Business Spending: Business spending continued to increase slowly. Capital expenditures were proceeding as planned and inventories were generally indicated to be at comfortable levels.
Construction and Real Estate: Growth in construction moderated some. Single-family construction continued to rise at a slow but steady pace, while multi-family construction was stronger and nonresidential construction weaker by comparison.
Manufacturing: Manufacturing production edged lower, with contacts reporting that new orders had slowed considerably. Nonetheless, a number of contacts also indicated that quoting activity for next year had picked up.
Banking and finance: Credit conditions continued to improve, with both credit spreads and market volatility decreasing. Banking contacts reported continued weak demand for business loans.
Prices and Costs: Cost pressures increased some, primarily due to a rise in food and energy prices. Prices for construction materials also increased while most metal prices were steady. Wage pressures remained moderate.
Agriculture: The corn and soybean harvest began a few weeks earlier than normal, as plants were dry due to the drought. In some areas, late rains helped produce higher-than anticipated yields, but these made only a small dent in the large drought-related losses. Crop quality was also an issue in parts of the District.

The Midwest Economy Index (MEI) decreased to –0.38 in August from –0.11 in July, reaching its lowest value since December 2009. The relative MEI declined from +0.05 in July to –0.30 in August—its lowest value since August 2011. Estimates of annual growth in gross state product for the five Seventh District states were updated through the second quarter of 2012 in this release. Estimates for Illinois, Iowa, and Michigan were slightly below the national rate of growth, while those for Indiana and Wisconsin were higher.

The Chicago Fed Midwest Manufacturing Index (CFMMI) decreased 1.2% in August, to a seasonally adjusted level of 94.1 (2007 = 100). Revised data show the index was up 1.5% in July. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) decreased 0.7% in August. Regional output rose 10.1% in August from a year earlier, and national output increased 4.0%.

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August 30, 2012

Seventh District Update

by Norman Wang and Scott Brave

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A summary of economic conditions in the Seventh District from the latest release of the Beige Book and from other indicators of regional business activity:

Overall conditions: Economic activity in the Seventh District expanded at a moderate pace in July and early August, with the pace of growth once again slowing.
Consumer spending: Growth in consumer spending increased slightly due in large part to heavy discounting by retailers to clear inventory space for back-to-school items. Auto sales were, however, little changed from the prior reporting period.
Business Spending: Growth in business spending slowed. Capital expenditures were proceeding as planned, but contacts noted a greater degree of restraint in new spending and inventory accumulation.
Construction and Real Estate: Construction activity continued to increase at a slow pace. Multi-family construction remained an area of strength and demand for nonresidential construction continued to gradually improve.
Manufacturing: Growth in manufacturing production slowed further, with contacts expecting this slower rate of growth to persist throughout the second half of the year. Exporters noted weaker demand from Europe and Asia.
Banking and finance: Credit conditions continued to gradually improve. Banking contacts reported that many of their customers are waiting to assess the impact of the upcoming election on tax and healthcare policies before accessing credit.
Prices and Costs: Cost pressures were mixed. Prices fell for a number of commodities but rose for materials like steel and lumber. Wage pressures continued to be moderate.
Agriculture: The drought has substantially reduced expected yields for corn and soybeans. Livestock pastures are in poor shape as well, and fields with low corn yields were being chopped for silage to feed livestock.

The Midwest Economy Index (MEI) decreased to –0.10 in July from +0.22 in June, marking the first time in nine months that the index has indicated below-average Midwest growth. The relative MEI declined from +0.61 in June to –0.01 in July—its lowest value since October 2011.

Led by strong growth in the automotive sector, the Chicago Fed Midwest Manufacturing Index (CFMMI) increased 1.8% in July, to a seasonally adjusted level of 95.6 (2007 = 100). Revised data show the index was up 0.9% in June. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) increased 0.5% in July. Regional output rose 12.5% in July from a year earlier, and national output increased 5.2%.

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August 8, 2012

First-Half Seventh District Manufacturing Performance

By Martin Lavelle

While manufacturing activity has been slowing over the past couple of months, its performance over the first half of 2012 would definitely be scored as a positive for the region. Seventh District manufacturing activity built on its momentum from last year and continued to grow through the first half of 2012. Growth occurred at rates fast enough to virtually eliminate the output deficit that the Seventh District had developed relative to the U.S. during the Great Recession. Chart 1 shows the performance of the Federal Reserve Bank of Chicago’s Midwest Manufacturing Index versus the Federal Reserve System’s Manufacturing Production Index, which is part of its Industrial Production release. The Seventh District’s output deficit narrowed quickly in the early months of 2012, as growth in the Midwest manufacturing sector accelerated.

Chart 1: Chicago Fed Midwest Manufacturing Index vs. U.S. Manufacturing Production Index

Source: Federal Reserve Bank of Chicago

In an earlier blog, I noted that, based on purchasing managers’ index (PMI) reports throughout the Seventh District, manufacturing was expanding at a faster rate in the Midwest than in the U.S., most likely leading to faster economic growth for the region than the U.S. as a whole during last year and into this year. Over the first half of 2012, PMI reports for the Seventh District indicate this trend is continuing. However, recent individual PMI reports suggest the nationwide slowing of manufacturing has spread into some parts of the Seventh District.

Chart 2 shows PMI readings from Seventh District locations since the beginning of 2011.[1] Since January 2012, manufacturing activity in Iowa and Southeast Michigan (metro Detroit) has continued to expand at a fairly steady pace. Meanwhile, Western Michigan, and Milwaukee have seen some slowing in the rate of increase in manufacturing activity—especially in Western Michigan, where office furniture production has slowed somewhat due to a softening expansion in U.S. business fixed investment spending and automotive suppliers have slowed production because of increasing national and global economic uncertainty.

Chart 2: U.S. and Seventh District PMIs: Total

Source: Haver Analytics, ISM

Despite an overall slowing of the pace of growth in some areas, manufacturers continue to add modestly to their payroll employment. Indeed, according to PMI reports, employment gains have accelerated in Chicago and Southeast Michigan. Using data on payroll employment from the Bureau of Labor Statistics, Chart 3 compares manufacturing employment growth rates in the U.S., Seventh District, and Michigan. Manufacturing employment has grown at faster rates in the District thus far in 2012, and especially in Michigan, than in the nation, thanks in large part to a rebound in auto-related production, spurred by rising national demand for light vehicles.

Chart 3: U.S., Seventh District, Michigan Employment: Year/Year Change in Manufacturing Employment Growth

Source: Bureau of Labor Statistics

However, employment gains haven’t been limited to auto-related manufacturing sectors. Chart 4 compares job growth in manufacturing sectors excluding auto-related manufacturing. Other manufacturing sectors in the Seventh District and Michigan have also added jobs at faster rates than the U.S. Agriculture continues to be a boon for the Seventh District economy, translating into job growth in food manufacturing and machinery. Employment levels among Seventh District food manufacturers are 1.8% higher than a year ago, compared with just 0.4% growth nationally. In Iowa, food manufacturing employment has grown 2.2% over the last year. Iowa has also seen robust hiring from machinery manufacturers, specifically agriculture, construction, and mining machinery. Machinery sector employment in Iowa has increased 16% from the previous year.

Chart 4: U.S., Seventh District, Michigan Employment: Year/Year Change in Manufacturing Employment Growth Excluding Autos

Source: Bureau of Labor Statistics

The District has recorded significant employment growth in agriculture, machinery, printing, plastic, rubber, metal, and furniture-related industries. With improving employment and output growth across such a wide range of sectors, the region continues to outperform the nation to a modest degree.
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[1]These PMI readings have been smoothed with a 12-month moving average as they are not seasonally adjusted (so that all locations can be compared). (Return to text)

Posted by Testa at 2:48 PM | Comments (0)

July 18, 2012

Seventh District Economy Update

by Norman Wang and Scott Brave

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A summary of economic conditions in the Seventh District from the latest release of the Beige Book and from other indicators of regional business activity:

Overall conditions: Economic activity in the Seventh District continued to expand at a moderate pace in June and early July, although the pace of growth slowed.
Consumer spending: Growth in consumer spending further moderated. Retailers cited lower consumer confidence, a weaker customer response to promotions, and extreme summer heat as the main contributors to the lower sales pace.
Business Spending: Business spending continued at a steady pace. However, many contacts had become more cautious about future spending decisions, pointing to the heightened uncertainty surrounding the federal fiscal environment and the upcoming November elections.
Construction and Real Estate: Construction activity increased. Demand continued to be strong for multi-family construction, especially apartments, but also increased for single-family homes. Contacts also noted an increase in commercial construction projects.
Manufacturing: Manufacturing production increased at a slower pace. The auto industry remained a source of strength, but activity softened in the steel and heavy equipment sectors. Exports to Canada and Mexico continued to increase, but exporters noted a decline in demand from Europe and China.
Banking and finance: Credit conditions improved slightly on balance. Refinancing and lending for capital replacement expanded, but with little loan growth for other purposes.
Prices and Costs: Cost pressures weakened as energy prices were noticeably lower while other commodity prices also decreased. Wage pressures continued to be moderate.
Agriculture: Extreme heat and drought conditions spread across most of the District, stressing both crops and livestock. Corn and soybean prices moved sharply higher, and wheat prices also rose.

The Midwest Economy Index (MEI) decreased to +0.51 in May from +0.76 in April, but indicated that Midwest economic growth was above its historical trend for the seventh consecutive month. Midwest growth also continued to outperform its historical deviation with respect to national growth, although the relative MEI decreased to +0.57 in May from +0.71 in April. Estimates of annual growth in gross state product for the five Seventh District states were generally at or slightly above the national rate of growth through the first quarter of 2012.

The Chicago Fed Midwest Manufacturing Index (CFMMI) decreased 1.0% in May, to a seasonally adjusted level of 93.4 (2007 = 100). Revised data show the index was up 2.5% in April. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) decreased 0.4% in May. Regional output rose 10.5% in May from a year earlier, and national output increased 5.4%.

Posted by Testa at 4:33 PM | Comments (0)

June 20, 2012

What does real gross state product tell us about Seventh District economic growth?

By Martin Lavelle

Real gross state product (GSP) is the state analogue of real gross domestic product (GDP), which measures national economic activity.[1] That is, real GSP is the most comprehensive measure of state economic activity. Although the release of other state economic indicators like employment figures are timelier, they exclude developments such as productivity enhancements and the application of capital and machinery to manufacturing processes that make real GSP a more complete measure of economic activity. Real GSP is also preferred because its values are adjusted for inflation, making comparison across time more informative.[2]

Additionally, real GSP is informative in describing how much value a particular industry adds to a state’s economy. For example, in 2011, 12.8% of Michigan’s nonfarm payroll employees worked in manufacturing, while this industry constituted 16.6% of Michigan’s economic activity. In contrast, 15.7% of Michigan’s nonfarm payroll employees worked in the government sector, which only constituted 11.2% of Michigan’s economic activity.

Recent GSP growth and revisions

Initial estimates of GSP are later revised on an annual schedule as new data and information become available. Table 1 details the real GSP growth revisions. In the most recent release, significant revisions were made to the data going back to 2008.

Source: BEA
Click to enlarge.

Chart 1 (below) shows the currently available time series of real GSP growth for each of the five states in the Seventh Federal Reserve District. The Seventh District and U.S. economies grew at a rate of 1.5% in 2011, slower than in 2010. Seventh District economic growth was revised upward in 2010 from 2.8% to 4.2%, and U.S. economic growth was revised from 2.6% to 3.1%.[3] The data also revealed the Great Recession was more severe than previously thought for the U.S. and the Seventh District. When averaging economic growth in 2008 and 2009, the U.S. economy grew at a rate of –2.2%, revised from –1.4%. The Seventh District underwent a more significant revision for the same period, with average annual growth reported now as –4.2% versus the –2.6% value reported the previous year.


Click to enlarge.

Among the Seventh District states, Michigan’s economy grew at the fastest rate in 2011, increasing at a pace of 2.3%. Michigan’s growth rate in 2011 ranked sixth among all 50 states, and it was ranked in the top ten in both 2010 and 2011—a welcome change from its last place ranking in 2008 and 2009. The other Seventh District states all grew at rates faster than 1%: Iowa, 1.9% (12th among all states); Illinois, 1.3% (20th); Indiana, 1.1%, (25th); and Wisconsin, 1.1% (26th).


Explaining Seventh District GSP growth

Durable goods manufacturing was the largest contributor to growth for each Seventh District state, leading the manufacturing rebound seen nationally. Because of the way state economic data are collected, subsector data won’t be available until later this year. However, some inferences can be gathered from the 2010 data as to the origination of manufacturing’s strength. The majority of Indiana’s and Michigan’s manufacturing expansion stems from the rebound in light vehicle production and sales. Motor vehicle, body, trailer, and parts manufacturing contributed 6.21 and 5.01 percentage points to Indiana’s and Michigan’s economic growth in 2010, respectively The auto industry’s significant role in Indiana’s and Michigan’s economic expansion supports Thomas Klier and James Rubenstein’s writing that the industry is concentrating further in Automotive Alley, which is along north–south Highways I-65 and I-75 between the Great Lakes and the Gulf of Mexico.

Other Seventh District states contain strong nonautomotive durable goods manufacturing subsectors. Illinois’s and Iowa’s strongest growth contributions in 2010 were from machinery manufacturing, specifically heavy agriculture and capital equipment. Wisconsin’s post-recession durable goods manufacturing growth has come from fabricated metal, computer and electronic products manufacturing, and machinery manufacturing.

With the exception of Illinois, the share of Seventh District economic activity due to durable goods manufacturing is considerably larger relative to its share of overall U.S. economic activity. Chart 2 shows that as a percentage of total economic activity, durable goods manufacturing is at or near pre-recession levels for each Seventh District state. This affirms the assertion that durable goods manufacturing has rebounded quite well since the end of the recession. However, it may also indicate the approaching conclusion of the rebound and flatter growth in durable goods manufacturing going forward.


Click to enlarge.

Most of the major sectors within the Seventh District grew at rates in 2011 slower than those reported for 2010; the exceptions were construction, information, professional and technical services, and management. The construction sector experienced growth in Illinois, Iowa, and Michigan and hence made a positive contribution to Seventh District economic growth for the first time since 2000.

Growth in wholesale trade could at least partially be traced back to the growth seen in manufacturing and retail trade, whose share of Seventh District economic activity is currently above 1998 levels. Retail trade’s increased influence suggests two things. Consumers may be feeling the positive effects of the manufacturing sector’s robustness in the Seventh District economy and consequently spending more. However, with overall growth flattening out and retail trade now making up its largest share of Seventh District economic activity in 14 years, it is unclear whether retail trade expansion is now slowing or on the verge of slowing.

The sectors that had the largest negative impact on Seventh District growth were financial activities and government. After rebounding in 2010, finance and insurance slightly decreased in 2011; real estate and other financial activities were still searching for a bottom, continuing to decrease albeit at a slower rate in 2011 than in 2010. The government sector contracted for the second straight year, with the decline picking up in 2011, reflecting the continued cutbacks taking place in state and local government employment. Relative to the nation, the Seventh District experienced faster rates of decline for the finance and insurance sector and government sector.

In response to the region’s broad economic growth, real per capita income in 2011 increased in each Seventh District state at solid rates. Moreover, in 2011, real per capita income growth in each Seventh District state was higher compared with national real per capita income growth. Michigan saw the most rapid real per capita income growth at 2.3%, which ranked fourth among all 50 states. It was Michigan’s first annual increase in real per capita income since 2007. The other Seventh District states’ growth rates for 2011 were as follows: Iowa, 1.5% (eighth among all states); Illinois, 1.1% (12th); Wisconsin, 0.8% (18th); and Indiana, 0.7% (20th). Real per capita income growth accelerated in Michigan, Illinois, and Iowa, but decelerated in Wisconsin and Indiana. In terms of real per capita income levels, only Illinois’ is higher than that of the U.S.

Forecasting GSP growth

While GSP is a comprehensive measure of state economic activity, the frequency of its being reported can be a limiting feature. Because it is constructed from many disparate data sources, it is an annual measure rather than a quarterly one. Similarly, because some of its underlying components are available only with long lags, GSP continues to be revised for years following its initial release. For example, GSP for 2011 was released this past June, but it will be revised again next year.

Because of the long lag and volatility present in the revisions, the Federal Reserve Bank of Chicago has begun to forecast real GSP growth for the Seventh District states using other key economic indicators. Table 2 compares the Federal Reserve Bank of Chicago’s predicted values for 2011 real GSP growth and the actual values in the U.S. Bureau of Economic Analysis’s latest report. The Chicago Fed forecasts are based largely on the Midwest Economy Index (MEI), which is a district-wide measure of nonfarm business activity that relies on monthly and quarterly indicators of employment, unemployment, per capita personal income, home and retail sales, and production.


Click to enlarge.

Before taking into account the BEA’s recent GSP revisions, the Chicago Fed forecasts for Seventh District state GSP growth in 2011 were nearly on the mark for Illinois and Michigan but about 1 percentage point above the reported values for Indiana and Wisconsin and below by about that same amount for Iowa. Iowa’s sizable agricultural economy and its strong economic performance in 2011 largely explained the forecast error. When the Chicago Fed forecasts are compared with the BEA’s recently revised GSP data, there is clearly an improvement in fit for every state but Michigan. This is because the Chicago Fed forecast for Michigan’s GSP growth incorporates a substantial degree of mean reversion based on its past growth patterns, which have not been very robust. The fact that Michigan’s actual GSP growth remains a Seventh District and national standout is thus a remarkable turn of fortune.

Conclusion

The Seventh District continues to enjoy a rebound in manufacturing, especially in durable goods manufacturing. Increased demand for light vehicles, capital equipment, software, and other advanced, value-added manufacturing goods continues to bode well for the Seventh District (relative to other Federal Reserve Districts). Seventh District economic growth will gain extra support once the financial activities and government sectors start strengthening and the construction sector’s rebound becomes sustained, further boosting consumer spending. The Federal Reserve Bank of Chicago’s forecast of real GSP growth for the first quarter of 2012 will be released in conjunction with the release of the May MEI on June 29, 2012.

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[1]Real GSP is calculated as the sum of incomes earned by labor and capital and the costs incurred in the production of goods and services, which includes workers’ compensation, corporate profits, and business taxes that count as business expenses. Real GDP is measured by summing all final expenditures, while real GSP uses an income-based approach, creating a statistical discrepancy between the two data sets.(Return to text)

[2] Real GSP data, or real GDP by state data, are prepared in chained (2005) dollars. National chain-type price indexes are applied to nominal GDP by state values. Real GDP by state doesn’t capture geographical differences in the prices of goods and services that are produced and sold locally.(Return to text)

[3] U.S. real GDP growth in chart 1 is the sum of real GSP growth of each state deflated by a national price measure.(Return to text)

Posted by Testa at 12:45 PM | Comments (0)

June 6, 2012

Seventh District Update

by Norman Wang and Scott Brave

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A summary of economic conditions in the Seventh District from the latest release of the Beige Book and from other indicators of regional business activity:

Overall conditions: Economic activity in the Seventh District continued to expand at a moderate pace in April and May.
Consumer spending: Consumer spending increased at a slower rate, due in large part to the unseasonably warm temperatures that boosted activity in the early spring.
Business Spending: Business spending continued at a steady pace and inventories were generally indicated to be at comfortable levels. Labor market conditions were little changed, and hiring remained selective in many industries.
Construction and Real Estate: Construction activity increased as demand continued to be strong for multi-family construction, especially apartments, but also increased for single-family homes. Residential and commercial real estate conditions continued to slowly improve.
Manufacturing: Manufacturing production increased at a steady pace. Capacity utilization in the steel industry reached its highest level since the end of the recession, and the auto industry remained a source of strength.
Banking and finance: Credit conditions were little changed on balance. Credit availability improved for commercial real estate and consumer auto loans, while lending standards for residential mortgages remained tight.
Prices and Costs: Cost pressures leveled off. Wage pressures continued to be moderate and retailers indicated that they were largely absorbing higher transportation costs and continued to heavily discount items such as clothing.
Agriculture: District corn and soybean planting were well ahead of last year’s pace. Corn, soybean, and milk prices fell during the reporting period, while wheat, hog, and cattle prices rose.

The Midwest Economy Index (MEI) edged down to +0.76 in April from +0.82 in March, marking the sixth consecutive month that Midwest economic growth was above its historical trend. In addition, Midwest growth continued to outperform its historical deviation with respect to national growth, as the relative MEI increased to +0.64 in April from +0.20 in March, recording its largest month-to-month increase since March 2010.

The Chicago Fed Midwest Manufacturing Index (CFMMI) increased 2.4% in April, to a seasonally adjusted level of 94.2 (2007 = 100). Revised data show the index was down 0.3% in March. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) increased 0.6% in April. Regional output rose 12.0% in April from a year earlier, and national output increased 5.8%.

Posted by Testa at 2:13 PM | Comments (0)

April 11, 2012

Seventh District Update

by Norman Wang and Scott Brave

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A summary of economic conditions in the Seventh District from the latest release of the Beige Book:

Overall conditions:Economic activity in the Seventh District continued to expand at a moderate pace in late February and March.
Consumer spending: Consumer spending increased significantly, as retailers reported unseasonably warm temperatures boosted sales.
Business Spending: Business spending continued to increase and inventories were generally indicated to be at comfortable levels. Labor market conditions continued to improve, although hiring remained selective in many industries.
Construction and Real Estate: Construction activity increased as demand continued to be strong for multi-family construction and single-family construction edged up some from its depressed levels.
Manufacturing: Growth in manufacturing production leveled off, but activity continued to increase. The auto industry remained a source of strength, and demand for heavy equipment was boosted by the need to replace ageing equipment.
Banking and finance: Credit conditions were slightly improved. Volatility and risk premia edged lower, and credit availability for households improved, particularly for auto loans and credit cards.
Prices and Costs: Cost pressures increased, particularly for energy. Wage pressures also increased, but continued to be moderate. Contacts indicated difficulties in passing on higher costs to customers.
Agriculture: Unseasonably warm weather jumpstarted field work and corn planting and soybean and cattle prices increased while corn, milk, and hog prices decreased.

The Midwest Economy Index (MEI) increased to +0.36 in January from +0.20 in December, reaching its highest level since May 2011. Midwest growth continued to outperform its historical deviation with respect to national growth, but the relative MEI decreased to +0.31 in January from +0.45 in December.

The Chicago Fed Midwest Manufacturing Index (CFMMI) increased 1.0% in February, to a seasonally adjusted level of 91.7 (2007 = 100). Revised data show the index was up 2.1% in January. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) increased 0.4% in February. Regional output in February rose 10.1% from a year earlier, and national output increased 5.4 %.

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March 29, 2012

Updated Estimates of Gross State Product Growth for the Seventh District

by Scott Brave and Norman Wang

This blog serves to expand on our December 2011 Chicago Fed Letter (CFL) by further detailing the estimation process used to produce estimates of annual Gross State Product (GSP) growth on a quarterly basis for the five Seventh Federal Reserve District states. In addition, we preview the estimates of GSP growth for 2011 that will be included as part of tomorrow’s Midwest Economy Index (MEI) release.

Background

Last year, the Chicago Fed began releasing the MEI, a weighted average of 134 state and regional indicators that measures growth in nonfarm business activity. Two separate index values are constructed, the MEI (absolute value), which captures both national and regional factors driving Midwest economic growth, and the relative MEI (relative value), which provides a picture of the Midwest’s economic conditions relative to the nation’s.

MEI values correspond to deviations of growth in Midwest economic activity around its historical trend. Values above zero indicate growth above its historical trend, and values below zero indicate growth below trend. For the relative MEI, a positive value indicates that regional growth is further above its trend than would typically be suggested based on the current deviation of national growth from its trend, while a negative value indicates the opposite.

Together, the MEI and relative MEI provide a picture of the Seventh District’s state economies that is closer to being in real time than does the BEA’s GSP data. By exploiting the historical correlation between GSP growth in each of the five states and the MEI, we are able to produce quarterly estimates of GSP growth ahead of the annual BEA release of GSP data.

Methodology

The statistical model we use to explain the annual growth in GSP for each Seventh District state is as follows:

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The model succinctly summarizes the historical relationships between national (real GDP growth), regional (MEI and Relative MEI), and state-specific (lagged GSP and state real Personal Income growth) factors driving each Seventh District state’s GSP growth since 1979.

State-specific growth factors dominate in explaining Indiana’s, Iowa’s, and Michigan’s GSP growth, while national factors dominate in explaining Illinois’s and Wisconsin’s. Regional growth factors, on the other hand, vary in importance from 11% in Michigan to 39% in Wisconsin and are above 20% of the explained variance for Illinois, Indiana, and Wisconsin.

The regression coefficients estimated for our model are listed in the table below. Each coefficient represents the “effect” of each input on GSP growth. For example, a 1% increase in GDP growth leads to about a 0.5% increase in GSP growth across the Seventh District states, with the effect slightly higher for Illinois and Iowa and slightly lower for Indiana and Michigan (second row).

By plugging the latest data for GDP, MEI and relative MEI, state Personal Income, and GSP into the above equation, we can use the regression coefficients above to obtain a GSP growth projection for the current year. The remainder of the blog details how this process works in practice.

Data

To make our out-of-sample predictions of GSP growth using the above model, we need current year values for all the inputs in our regression. Lagged GSP growth is available, but in the first three quarters of a year quarterly GDP growth, state Personal Income, and the monthly MEI and relative MEI only cover part of the year.

To obtain the annual growth rate in state Personal Income and national GDP in the first three quarters of the year, we average the quarterly values available in the current year and take the log first difference from the quarterly average of the prior year. In this respect, once every quarter we are able to make a prediction of annual GSP growth for each state based on year-to-date growth in these measures.

The MEI and relative MEI predictions are similarly constructed using the March, June, September, and December MEI values. Since the MEI and relative MEI represent three-month moving averages, the March MEI number captures the first quarter of activity, the average of the March and June MEI numbers captures the first two quarters of activity, and so forth.

Shown below are the regional (left-hand scale) and national (right-hand scale) growth factors described above. Both the MEI and relative MEI began the year nearly one standard deviation above their historical averages, suggesting that the Midwest Economy experienced rates of growth that were both above-average and higher-than-normal given the level of national growth. During this same period GDP growth was very weak; but over the course of the year, the national economy strengthened while the Midwest economy expanded at a slower rate.

Coming into 2011, there was considerable variation in state-specific growth factors with Indiana standing out as having by far the highest GSP growth rate in 2010 among the five Seventh District states and with Illinois having the lowest. In 2011, however, the state Personal Income data suggest Iowa experienced stronger growth than the other four District states, and Indiana and Illinois were instead clustered closely together with the remaining two District states.

Forecasts

Projections for annual GSP growth made through the second quarter, third quarter, and for all of 2011 in each of the five Seventh District states are displayed below. The growth projections for Iowa, Indiana, Michigan, and Wisconsin exceeded national GDP growth in 2011, while Illinois is projected to be slightly below the national growth rate.

The diversity we see across states is a direct consequence of the results for national, regional and state-specific growth factors mentioned earlier. For instance, Illinois’ relative weakness among the five states stems primarily from modest GDP growth in 2011, on which its forecast heavily depends. Weaker national growth is also responsible for the lower rate of GSP growth for Wisconsin in 2011.

On the other hand, the lower rate of GSP growth for Michigan in 2011 can be traced back to expected mean reversion offsetting the positive contributions of the MEI and personal income growth. Strong regional and state-specific growth factors boost GSP growth in Indiana above Illinois and Michigan, whereas state-specific growth factors, particularly high personal income growth in 2011, keep Iowa’s GSP growth rate steady from 2010 and much higher than the other states in the District.

The variation over the course of the year in our forecasts is also informative. Illinois’ GSP growth forecast strengthened throughout the year as national GDP growth increased. Wisconsin’s GSP growth forecast was also strongly influenced by national factors; but being more affected by regional factors than Illinois, increased only slightly over the course of the year. GSP forecasts for Iowa, Indiana, and Michigan all rebounded in the fourth quarter after weakening in the third quarter, closely mirroring the pattern of the Personal Income data for each state.

Conclusion

Our quarterly estimates of GSP growth can be found as part of the press release for the MEI following the third release of national GDP data for each quarter. The 2012 release schedule for the MEI can be found at www.chicagofed.org/mei.

Posted by Testa at 9:34 AM | Comments (0)

March 1, 2012

Seventh District Update

by Norman Wang and Scott Brave

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A summary of economic conditions in the Seventh District from the latest release of the Beige Book and from other indicators of regional business activity:

Overall conditions: Economic activity in the Seventh District continued to expand at a moderate pace in January and early February.
Consumer spending: Growth in consumer spending slowed in January and early February. Contacts indicated that activity was boosted by clearance sales and also some isolated improvement in the luxury segment. Auto sales were up in January, but down slightly in early February.
Business Spending: Business spending increased in January and early February and inventories were indicated to be at comfortable levels. Labor market conditions improved, although hiring remained selective.
Construction and Real Estate: Construction activity was up slightly in January and early February as multi-family construction remained an area of strength and nonresidential construction continued to trend up moderately. Commercial real estate conditions improved with vacancy rates edging lower.
Manufacturing: Manufacturing production increased further in January and early February. Demand for heavy equipment remained strong and the auto industry also continued to be a source of strength. Manufacturers of specialty metals reported solid order books.
Banking and finance: Credit conditions were slightly improved from the previous reporting period. Financial market volatility declined and risk premia moved lower across a number of asset classes. Banking contacts indicated that loan growth continued at a moderate pace with demand from larger businesses being stronger than that from small to mid-sized companies.
Prices and Costs: Cost pressures were largely unchanged in January and early February, but the volatility of commodity prices remained a concern for many contacts. Wage pressures continued to be moderate.
Agriculture: Corn, soybean, wheat, hog, and cattle prices rose during January and early February. Input costs for agriculture continued to increase, led by sharply higher rental rates for cropland.

The Midwest Economy Index (MEI) increased to +0.09 in December from –0.13 in November, rising above its historical trend for the first time in five months. Midwest growth also outperformed its historical deviation with respect to national growth, as the relative MEI increased to +0.31 in December from –0.06 in November.

The Chicago Fed Midwest Manufacturing Index (CFMMI) increased 1.7% in December, to a seasonally adjusted level of 87.4 (2007 = 100). December’s growth was broad-based; all four major industry sectors of the index indicated growth in production activity. Revised data show the index was unchanged in November. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) increased 1.5% in December. Regional output in December rose 8.4% from a year earlier, and national output increased 4.6%.

Posted by Testa at 9:58 AM | Comments (0)

January 11, 2012

Midwest Economy Update

by Norman Wang and Scott Brave

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A summary of economic conditions in the Seventh District from the latest release of the Beige Book:

Overall conditions: Economic activity in the Seventh District picked up in late November and December. Seventh District business contacts were generally optimistic about the economic outlook for 2012, but many also expressed concern about potential weakness in demand from abroad, particularly from China and Europe.
Consumer spending: Compared to last year’s holiday season, store traffic volumes were up significantly in December. Auto sales also increased since the last reporting period. Contacts expected sales to continue to improve in 2012, citing a boost from replacement demand in light of the record high average age of vehicles in the U.S.
Business Spending: Business spending was steady in late November and December and inventory levels were reported to be generally in-line with sales. Hiring remained selective, but the majority of contacts indicated plans to increase employment next year.
Construction and Real Estate: Construction activity was subdued in late November and early December, but there was some improvement in overall real estate conditions as multi-family construction remained an area of strength and nonresidential construction increased moderately.
Manufacturing: Manufacturing production growth increased in late November and December. Demand for heavy equipment remained strong and auto production increased over the reporting period. In the steel sector, inventories at service centers remain near desired levels.
Banking and finance: Credit conditions were little changed during the reporting period. Corporate funding costs, while variable, were largely unchanged on balance. Business loan demand continued to be subdued, and business utilization of credit lines was only up a bit.
Prices and Costs: Cost pressures eased in late November and December. While pressure on costs remained from commodities such as steel and food, it moderated significantly for cotton and energy goods. Wage pressures remained moderate.
Agriculture: Prices for corn and soybean rose in the last half of December, though crop prices generally fell during the harvest period. Milk and hog prices fell during the reporting period, while cattle prices increased.

The Midwest Economy Index (MEI) increased to –0.15 in November from –0.30 in October and remained below its historical trend for the fourth consecutive month. However, Midwest growth outperformed its historical deviation with respect to national growth, as the relative MEI increased to +0.04 in November from –0.32 in October largely on the basis of sizeable gains in consumer spending indicators. Estimates of annual growth in gross state product for the five Seventh District states were at or above the national rate of growth through the third quarter of 2011.

The Chicago Fed Midwest Manufacturing Index (CFMMI) decreased 0.1% in November, to a seasonally adjusted level of 85.8 (2007 = 100). Revised data show the index increased 1.0% in October. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) decreased 0.3% in November. Regional output in November rose 7.1% from a year earlier, and national output increased 4.2%.

Posted by Testa at 11:47 AM | Comments (0)

December 6, 2011

Understanding the Seventh District and U.S. Economies with Purchasing Managers’ Surveys

By Martin Lavelle

Purchasing managers’ surveys—often referred to as purchasing managers’ index (PMI) reports—provide timely information about the economy. In these monthly surveys, manufacturers are asked about their own purchases and their company’s supply chain. More specifically, manufacturing purchasing managers are asked about the directional heading of their businesses’ key indicators, such as new orders, prices, inventory levels, employment, and delivery time. In constructing the PMI, a survey response of “up” is given a value of 1; an answer of “no change” is worth 0.5; and a reply of “down” is worth 0. Once all the surveys have been taken into account, an index value greater than 50 equates to expansion of the manufacturing sector, a value of 50 means there was no change, and anything less than 50 is associated with a contraction in manufacturing. The further a reading is from 50, the more significant the increase or decrease in manufacturing.

Purchasing managers’ surveys cover manufacturing activity from a variety of geographic areas. Among such surveys, the U.S. and Chicago Institute for Supply Management (ISM) Reports on Manufacturing—released at or near the beginning of each month—are viewed as leading indicators of economic activity. It’s natural for PMI reports to be considered leading economic indicators both because the data are timely and because many manufacturing indicators are generally regarded as leading economic indicators. Manufacturing activity often leads the overall economy because of the durable nature of many of the sector’s goods. Inventories can be costly to hold, so that an unexpected buildup of inventories can prompt companies to halt production activity to bring inventories back into line with sales. Consumers, too, may slow their pace of purchases of durable goods like cars and appliances in response to a dimming outlook for income or jobs; when their incomes become impaired, households do not want to be caught with such durable goods, which can be difficult to convert into cash.

PMIs are especially telling in the Seventh Federal Reserve District where manufacturing is more important to economic growth as compared with the U.S. as a whole. For example, 13% of all Midwest nonfarm payroll employment is classified as manufacturing in the year to date. Nationally, manufacturing only accounts for 8.9% of total nonfarm payroll employment. The Midwest derives 11.2% of its personal income earned from manufacturing as opposed to a 7.2% share for the U.S. Arguably, the strongest sector since the start of the U.S. economic recovery in July 2009 has been manufacturing. And because of the stronger manufacturing presence in the Seventh District, we have benefitted from the recovery more than other states and regions. The individual PMI reports throughout the Seventh District support this assertion.

Chart 1 below shows the U.S. and Seventh District PMI reports—which are compiled for Chicago, southeastern Michigan (Metro Detroit), western Michigan (Grand Rapids, Kalamazoo, Holland), Milwaukee area, and Iowa. The chart constructs a 12-month moving average for each PMI report to resolve seasonal adjustment issues. The data go back to 1990, with the earliest PMI data found for Iowa as of 1994[1]. As indicated, the PMI readings generally peaked at the end of 2004 or the start of 2005. From 2005 until the start of the recession in December 2007, manufacturing continued to expand throughout the Seventh District, but at a slower rate; the lone exception was southeastern Michigan, which was impacted by the early stages of auto industry restructuring. Once the recession began, the deceleration in manufacturing activity intensified and became widespread, with PMI readings within the U.S. and the Seventh District falling below 50 during the onset of the financial crisis in the second half of 2008.

According to the National Bureau of Economic Research, the Great Recession ended in June 2009. Looking at Chart 1, the 12-month moving averages of the PMIs bottomed out at or around June 2009. The Chicago economic area noticeably lagged the U.S. and the other Seventh District indexes by a couple of months. Since then, PMI readings have rebounded well above 50, indicating a strengthening manufacturing sector. This is especially so in the Seventh District where PMI readings are at least 4 points higher than the U.S. PMI number.

Chart 1: U.S. and Seventh District PMIs: Total

In isolating the “new orders” component of the PMI surveys below in Chart 2, one tends to see more accentuated swings in manufacturing business cycles. As indicated by survey responses on new orders, the most dramatic dip and ensuing rebound occurring during the most recent recession and its aftermath took place in Iowa, with readings approaching 75 during the recovery phase. All Seventh District PMI new order readings are currently above the U.S. number, indicating that the pace of manufacturing expansion is stronger here relative to the rest of the nation. Additionally, the ongoing rebound in light vehicle sales and business spending on equipment and software bode well for the Seventh District, since there’s a higher concentration of those industries present in the Midwest.

Chart 2: U.S. and Seventh District PMIs: New Orders

Movements in manufacturing activity are often accompanied by swings in the sector’s employment and income. As of October of this year, manufacturing employment is up 2.4% in the Midwest over last year—higher than national employment growth in manufacturing, which was 1.9% October-over-October. A specific employment component of the PMI is reported. PMIs indicate that the pace of employment expansion has been substantial, with PMI readings of around 60 or above. At the sub-regional level, a rapid pace of hiring has been taking place, especially in western Michigan. A striking feature of Chart 3 below is that southeastern Michigan’s manufacturing sector experienced nine years of job losses because of the protracted contraction in the domestic auto industry before beginning to add jobs in 2010.
The rebound in manufacturing employment has contributed to the Seventh District’s unemployment rate falling faster from its peak than the U.S. unemployment rate. The Seventh District unemployment rate is currently 9.3%, down from its peak of 11%, and just above the current U.S. unemployment of 9%.

Chart 3: U.S. and Seventh District PMIs: Employment

When looking at the “supplier deliveries” component of PMI surveys below in Chart 4, a reading above 50 indicates a slowing in the delivery of supplies to (other) manufacturers[2]. Delivery times have recently increased as longer lead times have developed for commodities, especially those coming from areas in Asia affected by last spring’s Japanese earthquake and tsunami, as well as the recent flooding in Thailand. Since the incidence of delays in obtaining materials from suppliers has increased, the supplier delivery number is currently higher than at the beginning of 2011. Longer lead times bring into question the supply chain’s ability to respond to a robust increase in consumer demand that would require a significant increase in capacity utilization.

Chart 4: U.S. and Seventh District PMIs: Supplier Deliveries

During the economic recovery, inventory levels rebounded strongly throughout the Seventh District, as Chart 5 displays. But the pace of adding to inventories has now slowed, along with the overall pace of economic growth. As the economy accelerated early in 2011 according to the initial gross domestic product (GDP) reports, so did inventories in order to satisfy consumer demand. But as economic growth has slowed to a modest pace at best, with early 2011 growth being revised downward, inventory levels have become leaner, reflecting some of the uncertainty and lack of confidence present among consumers as they assess their household budgetary situations and prospects. Inventories are currently lighter on the retail side this holiday season in anticipation of a modest increase in the pace of sales relative to last year.

Chart 5: U.S. and Seventh District PMIs: Inventories

In looking over the PMI reports from various Seventh District locations, one notes that the current readings indicate a manufacturing sector that continues to expand at a faster pace relative to the U.S. as a whole. As the national economy recovers from the Great Recession, the Seventh District economy is rebounding—in some respects ahead of the national economy—largely because of the region’s high concentration in manufacturing production of durable goods. If the current PMI trends hold, one could realistically expect that economic growth in the Seventh District will rival, if not exceed, the nation’s economic growth in the remainder of 2011 and into 2012.

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[1]In addition, the earliest southeastern Michigan report was found in January 1990, but there’s a break in the data during 2004 when responsibility for the report switched over from the National Association of Purchasing Management and Comerica Bank to the Institute for Supply Management. (Return to text)

[2]Prior to May 2011, a supplier deliveries index above 50 percent in the Milwaukee PMI indicated faster deliveries, and below 50 percent indicated slower deliveries. Milwaukee’s supply delivery index number in Chart 4 has been adjusted to reflect the other supplier delivery indexes by subtracting the index number from 100 prior to their change in methodology. (Return to text)

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November 21, 2011

An Uneven Recovery: The Chicago and Milwaukee Labor Markets

Max Lichtenstein and Scott Brave

The Midwest has benefitted from the recent rebound in manufacturing. Over the past year, total employment in the Seventh District states of Illinois, Indiana, Iowa, Michigan and Wisconsin has increased by just over 145,000 jobs, 40% of which has been due solely to manufacturing.[1] The heavy concentration of job gains in manufacturing and related industries has led labor markets in some areas of the Seventh District to benefit more than others.

Consider the metropolitan areas of Chicago and Milwaukee.[2] Looking at figure 1, one can see that employment levels in the two cities have tended to move in parallel over the past two decades. This is as one might expect for two cities that are so close geographically. However, this correlation has recently faltered. Although the data indicate that the two cities entered the most recent recession in a similar fashion, Milwaukee has seen a much bigger increase in employment during the recovery.

This becomes clearer if one looks at the year-over-year percent changes in payroll employment for each city shown in Figure 2.[3] Early in 2010, both Chicago and Milwaukee saw around 1% job growth. Since mid-2010, job growth in Chicago has returned to near zero on a year-over-year basis, while Milwaukee has seen gains of close to 3% percent for a while before also slipping in recent months to a rate of about 2%. In fact, the Milwaukee metropolitan area’s job growth over the past year stands out as one of the highest in the nation.[4]

What could account for this sudden departure from the historical trend? Table 1 shows the percent change in payroll employment in various industries for each city during two time periods: the most recent recession and its recovery. Looking at the first row, one can see that total employment fell by nearly the same amount in both cities in percentage terms during the recession. Furthermore, the remaining rows demonstrate that the concentrations of job losses during the recession were fairly similar across industries with a few exceptions.

Milwaukee has, however, seen a more pronounced recovery in jobs since the end of the recession. Job growth has been greater for the manufacturing (particularly in durable goods but also for nondurable goods), wholesale trade, education and healthcare, leisure and hospitality, and government sectors in Milwaukee than in Chicago; and only in the professional and business services and transportation sectors does Chicago have the advantage in job growth. Furthermore, decreases in employment in percentage terms in the retail trade and information sectors have been smaller in Milwaukee than in Chicago. Such decreases in the financial sector have been of a similar size in both cities.

To gain more context, one should take note of the relative magnitude of each of these sectors in both cities. Figure 3, which complements table 1, shows the sectoral composition for each city in 2010.[5] Overall, the two labor markets were quite similar in industry concentrations heading into 2011. The biggest differences were in durable goods manufacturing and education and healthcare, where Milwaukee had a higher concentration, and professional and business services and government, where Chicago had a higher concentration.

The industries where Milwaukee has seen greater job growth over the past 12 months relative to Chicago account for nearly 76% of total 2010 employment in Milwaukee. These same industries account for roughly 70% of total 2010 employment in Chicago. In this sense, the sectoral composition of the demand for labor has slightly favored Milwaukee’s core industries over the past year. However, this comparison can be a little misleading as it doesn’t take into account the linkages between sectors. For instance, transportation and wholesale trade in Chicago are likely to be influenced by durable goods manufacturing in Milwaukee.

By looking across a large number of metropolitan areas, we can draw finer distinctions that can help us put the year-over-year job growth of Chicago and Milwaukee into perspective. Figure 4 shows a scatter plot and regression line of year-over-year growth in payroll employment[6] through September of this year versus each sector’s share of total 2010 employment in 37 different MSAs in the Seventh Federal Reserve District.[7]

The first thing we notice is that Milwaukee, represented by the green dot, consistently appears above the regression line, meaning that it performs better than the statistical average MSA in the Seventh District in nearly all the sectors we have data on. In contrast, Chicago, represented by the red dot, is essentially on the line in all cases. This result is broadly in line with our direct comparisons discussed before. In most industries, Milwaukee’s employment gains have exceeded the average gains based solely on industry concentration.

A second thing to take notice of is those industries with positive sloping trends, or those in which a higher concentration is correlated with a higher rate of overall job growth in the past 12 months. These industries are durable goods manufacturing and education and healthcare—two sectors in which Milwaukee has both a large concentration and large increases in employment over the past year. In this sense, our statement about the core industries for Milwaukee providing an advantage in labor demand over the past 12 months is more accurate.

Given the two cities’ past history, Milwaukee is not likely to maintain its advantage over Chicago unless the strength in manufacturing continues to outpace that of the service sector. Indeed, in the past three months, the rate of employment growth in the largest employment sector in Chicago, professional and business services, has picked up, while manufacturing’s rate of employment growth has edged lower in Milwaukee. Regardless, the lessons we can learn from this comparison will make it an interesting one to keep track of in the coming months.


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[1]These figures reflect State employment data through September 2011.(Return to text)
[2]By metropolitan area, we are referring to the U.S. Census Bureau definitions of metropolitan statistical area (MSA) and primary metropolitan statistical area (PMSA), respectively, for Chicago-Naperville-Joliet and Milwaukee-Waukesha-West Allis.(Return to text)
[3]Constructing this figure using the broader household survey measure of employment produces a similar result.(Return to text)
[4]Joe Taschler, 2011, “Milwaukee area’s job growth leads U.S.,” Milwaukee Journal-Sentinel, October 1, available here; U.S. Bureau of Labor Statistics, 2011, Metropolitan Area Employment and Unemployment Summary, release, November 2, available here.(Return to text)
[5]The industry compositions for both Chicago and Milwaukee have changed very little in recent years. The numbers displayed in Figure 3 look essentially identical to the analogous numbers for 2007.(Return to text)
[6]A similar exercise was performed with household employment data and achieved nearly identical results across the 37 MSAs and for Chicago and Milwaukee.(Return to text)
[7]Because of gaps in reporting, the analysis for durable manufacturing contains only 25 MSAs.(Return to text)


Posted by Testa at 8:26 AM | Comments (0)

September 27, 2011

Beige Book and District Indicators

by Norman Wang and Scott Brave

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A summary of economic conditions in the Seventh District from the latest release of the Beige Book:

Overall conditions: Economic activity in the Seventh District expanded more slowly in July and August. Seventh District business contacts expressed concern about the economic outlook, noting lower business and consumer confidence.
Consumer spending: Retailers reported the back-to-school shopping season got off to a strong start with consumers responding more than expected to the increase in early back-to-school promotions. Vehicle sales edged up in July before leveling off in August.
Business Spending: Business spending continued at a slow, but steady, pace in July and August. Several contacts noted closely watching inventory and staffing levels due to the uncertain economic climate. Labor market conditions weakened, with hiring still slow and unemployment edging up in the District.
Construction and Real Estate: Construction activity decreased. Residential real estate conditions remained weak, and commercial real estate conditions were little changed, with vacancy rates steady and some remaining downward pressure on rents.
Manufacturing: Demand for heavy equipment moderated from its robust pace during the first half of the year and auto production increased in July before leveling off in August. Capacity utilization in the steel industry remained at a record high level.
Banking and finance: Business loan demand fell while credit supply continued to improve both for large and small borrowers. Volatility in financial markets also increased dramatically in early August, leading to moderately higher funding costs.
Prices and Costs: Elevated commodity prices continued to put pressure on costs in July and August, and several manufacturers reported extended material lead times, particularly for specialty metals. Wage pressures remained moderate.
Agriculture: Prices for corn, wheat, cattle, soybeans, milk, and hogs all moved higher. Due to hot temperatures and a lack of precipitation, corn and soybean crop conditions declined markedly in the District.

The Midwest Economy Index (MEI) decreased to +0.03 in July from +0.36 in June, and approached its historical trend for the first time in 17 months. However, Midwest growth continued to outperform its historical deviation with respect to national growth, even as the relative MEI decreased to +0.85 in July from +1.05 in the previous month.

The Chicago Fed Midwest Manufacturing Index (CFMMI) increased 0.5% in July, to a seasonally adjusted level of 84.8 (2007 = 100). Revised data show the index increased 0.3% in June. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) increased 0.6% in July. Regional output in July rose 6.2% from a year earlier, and national output increased 4.2%.

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August 23, 2011

Digging Out of a Hole – A View from Detroit

Paul Traub

Digging out of a hole sounds like an oxymoron, but that seems to be what is happening with this particular economic recovery compared with recoveries from past recessions. Rather than the more rapid growth we would expect from the type of recession the U.S. just experienced, the economy is experiencing very tepid growth. The latest gross state product (GSP) data show just how slowly the recovery is proceeding for the Seventh District. [1]

Even though the District is leading the nation during the recovery in its manufacturing and agricultural sectors, as of the end of 2010 its total output is still lower than it was in 2005. The District is making some progress, but the direction of the recovery does look more like tunneling out of a hole than a vertical assent.

To get a sense of how different this recovery is, we can look at past rebounds from recession. For example, on average, three years after the start of the previous two recessions, the region had already experienced expansion of over 10.0%. By 2010, three years after the start of the 2007 recession, total GSP for the District is still 2.6% below its 2007 level. This hole is pretty deep.

It is important to note that the recession was not evenly distributed across all District states. The following chart shows the GSP for each state in the District indexed to calendar year 2000. It can be seen here that Michigan never really recovered from the 2001 recession. In fact, Michigan’s previous GSP peak was eight years earlier back in 2003.

While Wisconsin, Indiana, and Illinois seem to have tracked each other very closely over the past decade, Iowa has shown the strongest growth of all the states in the District. In fact, Iowa has experienced 21.3% growth since 2000. Its growth has been supported by a rise in agricultural commodity prices and the fact that it didn’t experience a housing price bubble, which has allowed the real estate sector to continue to show growth over the last decade. On the other hand, Michigan’s economy, which has been hurt significantly by declines in auto sales, has shown the weakest growth, its 2010 total GSP is still below where it was in 2000.

The next chart compares real state product growth in the District states from 2009 to 2010 with the nation as a whole.

The District grew at 2.8% in 2010, compared with 3.0% for the nation. Two of the five states grew at rates greater than the nation and four out of five states grew faster than more than half the states in the country. Michigan, which has been struggling for the past decade, actually did quite well growing at 2.9% and coming in at 16th place among all the states. Indiana, Iowa, Wisconsin and Illinois placed 3rd, 13th, 23rd, and 32nd, respectively.

In terms of job growth, the region’s economy may be performing slightly better than the nation overall in 2011. Through June 2011, the District had created jobs at a faster pace (0.9%) than the nation as a whole (0.7%), albeit from a much lower trough.

Michigan, which lost population in the last census, actually led the District in the first half of this year with job growth of 1.9%, it ranked 4th in the nation in growth of nonfarm payroll jobs. On the other hand, Indiana ranked last with employment down 0.4% in July 2011 on a year-to-date basis.[2] Even though Indiana has seen a decline in total nonfarm July 2011 year-to-date, the state has experienced job gains in two sectors, mining and logging (1.5%) and manufacturing (1.2%).

Still, total nonfarm payroll employment in the District remains well below its previous peak. In fact, as can be seen in the following chart, nonfarm payroll employment for the District is still below where it was in 1996. In addition, the nation as a whole has also seen a sharp decline in nonfarm payroll jobs since the start of the latest recession -- nonfarm payroll employment for the country is currently about where it was in 2004.

If we take a closer look at manufacturing employment data for the nation and the District, we see an even more distressing picture. Since 1990, the nation and the District have lost about 35% of their manufacturing jobs. This is equivalent to over 6.0 million jobs nationally, of which the District accounts for about 1.1 million. At its peak in 2000, the District accounted for 19.1% of the nation’s manufacturing employment. By July 2011 its share had fallen to about 18.6%. Also at the peak in 2000, the region had 474,000 auto related jobs, which accounted for about 14.4% of the region’s manufacturing employment. As of July 2011, manufacturing employment in the region was 2.2 million jobs, of which 203,600 or 9.3% were in the auto industry.

Some of the employment declines have come about from labor-saving productivity improvements, but many are the result of declining U.S. auto sales together with declining market shares of the Michigan-based Detroit 3 auto makers and their suppliers.

In the past couple of months total light vehicle sales have been disappointing but, on the bright side, the traditional domestic manufacturers have been doing relatively well. In fact, on a year-over-year basis through June of this year, the Detroit 3 collectively saw sales increase by 15.5% versus an increase of just 7.6% for the industry as a whole. The Japanese manufacturers experienced a decline in sales on a year-over-year basis of 11.6%, largely due to supply disruptions as a result of devastating earthquake in Japan. In addition, some customers may be postponing purchases until the Japanese manufacturers can get their inventories replenished. Thus, absent the impact of the earthquake and related supply disruptions, auto sales overall would have been stronger in recent months.

It remains to be seen when auto sales will regain the positive momentum they had shown earlier in the year but despite recent setbacks, the August 2011 Blue Chip consensus for light vehicle sales for 2012 is 13.6 million units. This is a 30.1% increase from the 10.6 million units sold in 2009 and an increase of 1.4 million units from the July SAAR of 12.2 million units. In addition, Ward’s Automotive is projecting that by 2012, vehicle production in the District will be up by 2.3 million units from its low point in 2009. If these projections are correct we would expect to see some more positive gains in manufacturing employment for our region -- especially Michigan. Meanwhile, we just have to keep digging.
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[1]GSP is the equivalent of GDP at the national level – the sum total value of all goods and services.(Return to text)
[2]State rankings include the District of Columbia. (Return to text)

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August 1, 2011

Midwest Economy Update

By Norman Wang and Scott Brave

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A summary of economic conditions in the Seventh District from the latest release of the Beige Book:

“Economic activity in the Seventh District continued to expand slowly in June and early July. Contacts expressed heightened uncertainty about the economic outlook given recent weaker-than-expected demand as well as the ongoing fiscal issues in the U.S. and Europe.”

Consumer spending: Consumer spending picked up some in June and early July. Consumers took advantage of early summer promotions for apparel and accessories. Auto sales edged lower in June, but then improved moderately in early July as incentives increased.
Business Spending: Inventory investment decreased, but expenditures on equipment and structures increased. Labor market conditions weakened. Hiring continued at a slow pace, layoffs picked up, and unemployment in the District increased.
Construction and Real Estate: Construction activity was again subdued, apart from an increase in construction of apartments and manufacturing facilities. Residential real estate conditions remained weak, while commercial real estate conditions improved, albeit moderately.
Manufacturing: Manufacturing production continued to expand at a steady pace. Automakers indicated that production was recovering from the Japanese supply chain disruptions, and capacity utilization in the steel industry reached its highest point since 2008.
Banking and finance: On balance, credit conditions improved modestly in June and early July. Volatility increased, but funding costs and liquidity tightened only marginally. Credit terms and availability continued to improve, though standards remained tight for many borrowers.
Prices and Costs: Despite recent price declines, prices for many commodities remained elevated. Fuel surcharges and shipping costs also have yet to come down, and pass-through of higher wholesale costs to the retail sector picked up. Wage pressures remained moderate.
Agriculture: Despite recent above-average temperatures, contacts remained optimistic for corn and soybean yields this fall. On balance over the reporting period, cash prices for corn, wheat, and cattle were down while prices for soybeans, milk and hogs prices moved higher.

The Midwest Economy Index (MEI) declined to +0.37 in June from +0.85 in May, but remained above its historical trend for the sixteenth consecutive month. In addition, Midwest growth continued to outperform its historical deviation with respect to national growth, although the relative MEI decreased to +1.01 in June from +1.48 in the previous month.

The Chicago Fed Midwest Manufacturing Index (CFMMI) was essentially unchanged in June, at a seasonally adjusted level of 84.0 (2007 = 100). Revised data show the index increased 0.4% in May. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) was also essentially unchanged in June. Regional output in June rose 7.1% from a year earlier, and national output increased 4.1%.

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July 25, 2011

The Labor Market into the Third Quarter

By Bill Testa and Norman Wang

The Seventh District states (Illinois, Indiana, Iowa, Michigan and Wisconsin) experienced a faltering labor market in the second quarter of 2011, with little or no positive momentum going into the third quarter. According to estimates of the Bureau of Labor Statistics, monthly average employment growth slowed to 7,000 per month during the second quarter, from 53,000 per month during the first quarter. In addition, potential job seekers tended to see little improvement in job opportunities; the labor force size (which includes both those who are employed and those who are actively looking for work) continued to decline in the second quarter and into June. And as evidenced by rising initial claims for unemployment insurance, layoffs and job elimination accelerated modestly.

In contrast, the Monster Employment Index, which is a survey of employer job postings online, continued to report improved labor demand from the first quarter and into June.

The “hiring” component of the ISM (Institute of Supply Managers) Index, reflecting the manufacturing sector, continued to show strength with an index reading above 50. However, the index number softened throughout the second quarter. While manufacturing continues to grow, interruptions related to the Japanese earthquake and tsunami continued to restrain production activity in the second quarter. However, according to the latest reporting of the District Summary of Economic Conditions, “contacts expected the recent slowdown would be temporary with conditions expected to rebound in the coming months.”


*Click to enlarge

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May 19, 2011

What's Behind the Seventh District Resurgence?

Fame and fortune can be fleeting, but over the past year the Seventh District has been leading other U.S. regions in the pace of economic recovery. It is not so much that economic conditions are better here. Rather, it is that the pace of improvement has been quicker. As the map below illustrates, unemployment rates have fallen most rapidly in Michigan, followed by Illinois, and in quick succession by Indiana and Wisconsin.


[click to enlarge]

The rebounding District economy is being pulled along by its two hallmark goods industries—agriculture and, especially, manufacturing. The manufacturing output recovery has far exceeded overall output growth in both the nation and the District. Since the District’s manufacturing concentration exceeds that of the nation, this unbalanced recovery has exerted an outsized effect on the District economy. Moreover, output gains in the Seventh District have outpaced those in the U.S. manufacturing sector overall. The chart below compares U.S. industrial production to its regional counterpart, the Chicago Fed Midwest Manufacturing Index. From their respective troughs in mid 2009, the IPMFG has gained 14.2 percent and the CFMMI has gained 24.2 percent. Jobs in the manufacturing sector have also been rebounding from deep lows. From the first quarter of 2010 to the first quarter of 2011, the District states of Michigan, Wisconsin, and Indiana, in that order, have led all other states in net job growth in the sector.

The fact that the District’s manufacturing has outpaced that of the nation during the expansionary period is not surprising, since the District’s industry composition is highly concentrated in the most cyclically sensitive sectors, such as automotive, primary metals, and basic machinery. Prominent automotive companies GM and Chrysler underwent bankruptcy-like events during the recent recession, in which their production activity dropped severely. Afterward, during their rebirth, these companies have ramped up rapidly to rebuild depleted inventories.

More generally, the process of rebuilding inventories has spurred manufacturing production activity. Inventory-rebuilding is somewhat typical during economic recoveries. At the low point of this past recession, as businesses began to raise their forecasts of national economic growth, they began to rebuild their inventories in earnest in order to meet anticipated product demand for both consumer products and business equipment. Since the trough of the recession in mid 2009, inventory rebuilding has contributed an average .93 percentage points to the growth rate of U.S. GDP. This contribution from inventory rebuilding amounts to one-third of total realized GDP growth from mid 2009 through the first quarter of 2011.

Realized sales of manufactured goods have also benefited District manufacturers of both business equipment and consumer durable goods. The annual pace of U.S. sales of business fixed investment in “equipment and software” have averaged over 14.1 percent so far during the economic recovery. Prominent District producers in this category include makers of farm, mining, and construction machinery, medical equipment, and electrical machinery such as engines and turbines.

Among consumer goods manufacturers that are highly concentrated in the District, the automotive assembly and parts makers are experiencing rapid growth in sales. From annual sales of 10.4 million light vehicles in 2009, the annualized pace of vehicle sales have averaged over 13 million over the first four months of this year. In response, light vehicle production in the U.S. climbed almost 73 percent from the first quarter of 2009 to the first quarter of 2011.

Analysts see more room for growth in domestic light vehicle production and sales. The scrappage rate of the “automotive fleet”-- vehicles now on the road-- has been running very low so that, according to Detroit Branch Business Economist Paul Traub, the average age of the automotive fleet has been rising since 2000. As the existing fleet wears out, demand for new vehicles will grow. In addition, the age and quality-adjusted price of used cars is running high in comparison to prices of new vehicles due to both the slow pace of new vehicle sales since 2008 and the 2009 “Cash for Clunkers” program, which took used cars off the road.

A revival in U.S. exports abroad is a third leg that underpins the manufacturing resurgence in the District. U.S. exports abroad grew strongly from 2004 to 2007 as world GDP growth averaged 5.0 percent per year. [1] However, during 2008 and 2009, world trade fell dramatically due to the global financial crisis and evaporating availability of credit to finance imports and exports. According to a recent article by Senior Economist Meredith Crowley, “ ….in April 2009, the world economy appeared to be in a free fall. Global trade in goods and services had fallen 15.8 percent over the final two quarters of 2008 and first quarter of 2009. This world trade collapse had been the largest three-quarter decline of the past 40 years.”

Led by economic recovery—principally in Asia and Latin America—world growth and trade recovered sharply in 2010 and into this year, supporting a recovery in U.S. exports. Over the seven quarters of the U.S. economic recovery since mid 2009, export growth has contributed an average 1.25 percentage points to annual output growth. .

Exports of manufactured goods have also rebounded in the District. The District exports capital goods, heavy machinery, and medical and transportation equipment needed by developing countries as they build their own economies. The District’s overall export orientation in manufacturing is very similar to the nation’s, and it has recovered similarly as well. The five District states experienced 48 percent growth in manufactured exports from the first quarter of 2009 through the first quarter of 2011 versus 38 percent for the U.S. Barring any unforeseen stumbles to the expected and continued pace of world economic growth, exports should continue to support economic expansion in both the District and the nation.

The District’s primary agricultural sectors have also contributed mightily to economic recovery. So far in 2011, both corn and soybean prices are trading well above 2010 and well above their previous 5-year ranges. Milk and hog prices are also trading at prices above their previous averages (below).

Production of both corn and soybeans has climbed over the decade, especially corn. Corn usage in meeting production mandates of ethanol fuels has especially spurred both the volume of corn planting and its price. Exports of soybeans and related products have responded to rising global demand, especially in Asia. These developments have acted to lift farm-related incomes and jobs, as well as purchases of farm equipment and traded prices of farmland. As reported by Dave Oppedahl in the AgLetter "At 16 percent, the year-over-year increase in farmland values in the first quarter of 2011 for the Seventh Federal Reserve District was the largest since 2007 and was last surpsassed in 1979.” As also reported, domestic sales of harvesting equipment and large tractors have shown strong gains over the past two years.

One dark cloud has been the cold and wet spring of 2011, which has delayed planting, thereby threatening this year’s crop yields and production.

While it is clear that goods-producing sectors are driving the District’s economic gains, it is also significant that labor market improvement are concurrently taking place in service-oriented metropolitan areas. Much like other large MSAs, Chicago’s employment composition is not highly concentrated in goods-producing sectors—at least not directly. However, among the 20 most populous MSAs, Chicago’s unemployment rate declines have been among the most precipitous, declining 2.2 percentage points year over year versus .9 percent for the nation (below). Here, the surrounding region’s goods-producing activity has apparently lifted Chicago area business and professional services employment, as well as its leisure and hospitality sectors. Similarly, service-oriented Indianapolis experienced declining unemployment rates of 1.6 percentage points. Meanwhile, those Seventh District metropolitan areas that serve as both financial-service hubs for their surrounding regions and as manufacturing centers in their own right also saw significant unemployment rate declines. The Detroit MSA recorded a 3.5 percentage point decline; Indianapolis MSA a 1.6 percent decline, and the Milwaukee MSA, a 1.9 percentage point decline.

What’s ahead for the Seventh District economy? Much, but not all, of the recent resurgence derives from transitory causes. In particular, the marked U.S. growth rebound from the deep recession to a modest expansion has lifted inventory building of durable goods. But as inventory accumulation returns to normal, this element of growth in demand will ease off. In a similar vein, the return to robust world economic growth is expected to continue, but not accelerate. Accordingly, manufacturing exports will continue to grow, though perhaps at a more subdued pace. Similarly, domestic U.S. demand for manufactured goods and capital equipment is expected to continue but not to greatly accelerate. However, domestic demand for light vehicles to replace the aging U.S. fleet is thought to hold promise for expansion.

The current period of strong prices for farm commodities is being watched with caution by market participants. As developing countries supplement their diets with U.S. farm products, export demand will continue to support farm prices. However, farm commodity prices are also notoriously volatile as they are buffeted by climate events related to surprise crop failures or successes round the world.
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[1] IMF, April 2011. (Return to text)

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April 26, 2011

Job Recovery in the Seventh District

by Bill Testa and Max Lichtenstein

The resumption of growth in the U.S. economy, beginning in mid-2009, has been welcome news. However, the pace of recovery has been disappointing, relative to the severity of the recession. Following a period in which U.S. output shrank 4.1 percent from the fourth quarter of 2007 to the second quarter of 2009, the economy did not regain its former size until the fourth quarter of 2010. The deep recession and relatively slow recovery have left behind startling numbers of unemployed working age adults. According to the Household Survey of employed and unemployed, 13.7 million people reported they were unemployed during the first quarter of 2011, double the number reported during the fourth quarter of 2006.

Growth in employment has resumed, especially in recent months. Outside of the government sector, payroll jobs have grown an average of 138,000 per month over the past year, and 188,000 per month over January, February, and March of this year. We can characterize this performance as a mildly encouraging start toward repairing a very large deficit in employment.

To see the extent of recovery so far, the chart below indexes payroll employment back to the first quarter of 2007, near the peak of employment in the Seventh District states. From that time, payroll jobs declined 7.2 percent in the Seventh District and 6.2 percent in the U.S. From its low point, the U.S. has regained 0.9 percent in payroll employment. The Seventh District states have recovered more strongly, regaining 1.4 percent from the trough.

As of the first quarter of this year, Michigan, which had the largest decline in employment in the District since the start of the recession, now ranks first in the District and fifth in the nation in household employment growth on a year-over-year basis. Illinois, Wisconsin, Indiana, and Iowa rank 15th, 28th, 31st, and 33rd, in the nation, respectively.

The District’s relatively strong recovery is partly explained by its relatively steep descent. Our region’s economy is tilted toward durable goods manufacturing— including autos and machinery, which fall precipitously during U.S. economic downturns. However, on the upside, manufacturing tends to bounce back more rapidly. It has done so again over the recent recovery as retailers and wholesale establishments began rebuilding their inventories in response to revived expectations of sales. Exports of manufactured goods abroad also contributed, as the world economy pulled out ahead of the U.S. recovery. This influence of durable goods can be seen in the chart below; U.S. manufacturing payroll jobs declined steeply during the recession, but have been rising at a healthy clip during the recovery.

Job growth has made a down payment toward lowering unemployment in the Seventh District. Per the chart below, both U.S. and Seventh District unemployment rates have been falling throughout 2010 and into the early part of 2011. Seventh District unemployment has fallen more steeply; it has now converged on the U.S. level, following several years of above-average rates.

Unemployment rates have fallen in all five District states (below), with broad variation among them. Although the automotive sector’s recovery has exerted significant downward pressure on Michigan’s unemployment rate, it remains the highest in the District (10.3 percent). With 6.1 percent unemployment, Iowa’s rate is the lowest in the District, owing to its concentrations in production agriculture, food processing, and export-oriented agricultural machinery.

As a group, the District states of Wisconsin, Illinois, Michigan, and Indiana have experienced steeply declining unemployment rates over the past year (map below). Gains in manufacturing activity, along with related services and transportation, have led employment gains here and eastward throughout the Midwest industrial belt.

Declining unemployment rates are a positive development. However, while “job destruction” levels appear to have abated, “job creation” levels have yet to rebound significantly. Chicago Fed Economist Lisa Barrow finds that the largest factor in recent national unemployment rate declines has been a reduction in the number of workers transitioning from employment to unemployment, rather than job growth. The Chicago Fed Letter reports that, from November 2010 to March 2011, the pace at which employed workers became unemployed slowed markedly. In the Seventh District, this trend is similarly evident from data reporting workers who file initial claims for unemployment insurance—another measure of “job destruction.” As illustrated below, in recent months initial claims for unemployment insurance have been running below year-ago levels and far below the worst months of the recession in 2009.

Despite the labor market progress to date, there is ample room for growth in employment among persons of working age. We can see this if we compare the proportion of the working age population (16 years of age and older) who are currently employed with the 2000 level (see the table below). The employed status of the population lies well below normal. In the first quarter of 2011, fewer than 6 in 10 of those of working age counted themselves as employed.

Labor market indicators suggest that, as economic recovery continues to unfold, employers will increasingly shift toward net hiring. Many employers are reaching the limit of the sales and production gains they can achieve using their existing work forces. In particular, measures of the average hourly workweek continue to tighten in both the District and in the nation so that, barring rapid growth in productivity, employers will need to hire in order to meet heightened demand for goods and services.[1] Data that more closely reflect actual hiring decisions also portend a potential hiring upswing. The national survey of job openings and labor market turnover (JOLTS) reports a strong growth in job openings—nearly 3 million since the trough of the recession.[2]

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[1] These data are reported by the Bureau of Labor Statistics (BLS) covering nonproduction nonsupervisory workers in the private nonfarm sector. See http://www.bls.gov/news.release/empsit.nr0.htm. (Return to text)
[2] See BLS, www.bls.gov/web/jolts/jlt_labstatgraphs.pdf. (Return to text)


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March 14, 2011

Manufacturing in the Seventh District: Agriculture, Construction, and Mining Machinery

by Thomas Walstrum and Bill Testa

As discussed regularly in this blog, manufacturing has long played an important role in the Midwest economy. One of our most prominent manufacturing sectors is agriculture, construction, and mining machinery. This industry’s products are the large machines that plow fields and harvest crops, tear up and repave roads, dig mines and rescue miners. To define the sector specifically, we use the Census Bureau NAICS code 3331.

Two companies headquartered in the Midwest are such household names that you may have played with toy replicas of their products as a child--earth moving equipment maker Caterpillar and farm tractor and harvester maker John Deere. These two companies are the Midwest’s largest in the sector by market capitalization and revenue. As measured by company value, the agriculture, construction, and farm machinery industry has experienced a significant recovery since the financial crisis in 2008. Stock prices for all the sector’s companies based in the Midwest are near their 52-week highs and above their 2008 peak. From a low at the beginning of 2009, the S&P agriculture, construction and machinery index has dramatically outpaced the growth of the overall economy. In addition to the two heavy hitters mentioned earlier, the Midwest is home to a number of other companies, both public and privately owned, with a significant presence in this sector.

A couple of the publicly traded companies overlap with other sectors: Oshkosh also manufactures defense and fire & emergency equipment; Manitowoc also manufactures food service equipment.[1]

Like company stock prices, industry employment grew steadily until the financial crisis in 2008 and fell significantly in the aftermath. Employment began recovering in 2010, but is still 32,000 below the 2008 peak. Jobs are spread relatively evenly among the three subsectors. In December 2010, mining accounted for 35% of the sector’s total employment, construction 29%, and agriculture 36%.

According to the U.S. Department of Commerce, there are over 500 manufacturing establishments for the sector in the Illinois, Indiana, Iowa, Michigan and Indiana. The counties that are part of major metropolitan statistical areas or MSAs have notable concentrations of establishments, but the map below shows that manufacturing establishments are well distributed throughout the region. Some rural counties have a relatively large number of establishments, such as Sioux County in northwest Iowa and Houghton County in Michigan’s western Upper Peninsula.

The construction, mining, and agricultural machinery sector is an important part of all manufacturing in the Midwest. In terms of value-added by this sector to total manufacturing activity, in 2009 the sector contributed 1.6% to total U.S. manufacturing and 3.8% to Midwest manufacturing.

Within the sector, a significant proportion of manufacturing takes place in the Midwest. In 2009, almost one-third of all employees in the sector worked in the Midwest and just over 40% of the value added by the sector came from the Midwest. The sector’s footprint is largest in Illinois and Iowa, but Wisconsin makes a significant contribution as well.

In spite of its relatively small population, Iowa is the second largest producer of construction, mining, and agriculture machinery in the Midwest. For this reason, the industry is particularly important to Iowa in per capita terms. In 2009, more than 6 in 1,000 Iowans were employed by the sector--more than four times the regional average of 1.5 and ten times the national average of 0.6.

As reflected in recent trends, future prospects are bright for growth in the agriculture, construction, and mining machinery industry. Emerging economies such as China and India are continuing to experience significant economic growth, thereby lifting demand for machinery. With the growth of emerging economies, exports from the U.S. are becoming increasingly important. Beginning in 2004, exports for the U.S. industry increased by about 20% annually until the financial crisis of 2008. The parallel increase in the balance of trade provides further evidence that exports became an increasingly important part of industry growth between 2004 and 2008. While exports took a significant hit in 2009, they have recovered somewhat in 2010, and the trade balance is still well above levels in the early 2000s.

Producers of agriculture, construction, and mining machinery also serve a large U.S. market. Domestic sales in 2009 totaled nearly $60 billion; and domestic manufacturers hold a significant proportion of that market—73.6% in 2009.

Companies based in the Midwest have a presence outside North America to varying degrees. For companies that reported such figures in their annual reports, an average of 45% of revenue came from outside North America in 2010. Not all of that foreign revenue is from exports because production often takes place outside the US. For example, using data from Caterpillar's 2010 midyear report and fourth quarter 2010 earnings release, 45 % of their employment is U.S. based.

Among Midwest states, industry exports are most important to Illinois, representing 42.4% of sales, just below the U.S. average of 43.3%. For the Seventh District states, exports make up 31.0% of sales.
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[1] Aside from company financial data, the descriptive data to follow covers only the particular establishment sites that are primarily engaged in manufacturing products in the sector, whether the establishments are owned by public or private companies. (Return to text)

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December 21, 2010

District Population in 2010

With much fanfare, the Census Bureau released its first population estimates from the 2010 census for the nation and the states. Per the table below, population in the five states of the Seventh District grew by 3.3 percent, or 1.2 million people, since the last national census was conducted in the year 2000. The average masks sharp differences among the states of the Seventh District. Michigan was the only state in the nation to experience an overall decline in population this past decade—its population shrank by more than one-half percent. The other District states experienced population gains ranging from 3.3 percent in Illinois to 6.6 percent in Indiana. In comparison, total U.S. population grew by 9.7 percent.


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A comparison of District population growth over the past decade with the decade of the 1990s reflects hard times in Michigan and, to a lesser extent, in Illinois. During the 1990s, Michigan population grew at about one-half the pace of the nation. At that time, a resurgent automotive sector produced SUVs, small trucks, and mini-vans during a decade of low gasoline prices and buoyant overall U.S. automotive sales.

Illinois’s economy and population also grew rapidly during the 1990s, with population growth exceeding 8 percent. In contrast, population growth reached only 3.3 percent during the recent decade. The Chicago area economy was hit hard by the large downdraft in telecommunications production early in the decade, as well as the sharp decline in travel that was precipitated by the terrorist attacks of September 11, 2001. In this climate, Chicago’s producer and business services recovered very slowly following the 2001 recession.

Iowa’s population grew by only 4.1 percent since 2000. However, this pace represents only a modest slowdown from the state’s 5.4 growth during the 1990s. Slow population growth in Iowa reflects the state’s high concentration in production agriculture and its less urbanized population. The state has enjoyed an unemployment rate below the national average since the mid-1980s.

Due their subpar population growth, Iowa, Michigan and Illinois will each lose one Congressional representative following the 2012 national elections. Following the year 2000 census, each state of the District lost one representative with the exception of Iowa, which remained the same.

Note: Thanks to Britton Lombardi for assistance.



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July 13, 2010

Comparing Jobless Recoveries

The term “jobless recovery” was coined in the aftermath of the 1990–91 recession because job growth following the end of that recession was quite slow. Job growth was also slow after the 2001 recession. A similar pattern in job growth has emerged for the most recent recession: At midyear in 2010, the economic recovery is under way, although again job growth is not nearly as robust as desired.

The arbiters who date the beginnings and ends of recessionary periods—i.e., members of the National Bureau of Economic Research’s (NBER) Business Cycle Dating Committee—have not yet formally decided on the end date of the most recent recession. However, the latest recession is widely thought to have ended in May or June of 2009. At that time, U.S. nonfarm payroll employment had declined by approximately 7 million from its previous peak. Yet, as measured on a month-to-month basis, employment continued to decline through December 2009, albeit at a slower pace. The chart below indexes total employment from the U.S. employment peak in 2001 for the nation, as well as for the Seventh District states of Illinois, Indiana, Iowa, Michigan, and Wisconsin.


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As the figure above suggests, payroll employment began to turn upward in January of 2010 for the U.S. But to date, job gains in the nation and in the District have been tepid when compared against the peak-to-trough job declines. Accordingly, public opinions on the overall economic recovery have been somewhat negative. Consumer sentiment readings, for example, have largely remained flat since their partial recovery during 2009, when financial market conditions had improved.

In my analysis, I assume that the most recent recession concluded in May 2009, which may not turn out to be the case according to the NBER. Over the period June 2009 through May 2010 (the first 12 months of the recovery overall job growth closely resembled that of the first 12 months following the end of the 2001 recession (December 2001 through November 2002). For the nation, the U.S. lost a net 560,000 jobs from June 2009 through May 2010, versus 562,000 during the first twelve months following the 2001 recession. Similarly, the Seventh District states lost 74,000 jobs over this recent 12-month span, versus 67,000 during the first twelve months after the 2001 recession .

Although the current labor market rebound is proceeding at about the same pace as the 2001–02 experience, it falls well short of expectations. That is because, this time around, the amount of jobs lost that need to be regained through job growth is much larger. As the chart above again illustrates, the recent recession was much greater in both depth and duration. Nationally, from the most recent peak in employment to its trough, over 8 million jobs were lost. Over the course of 2010, the economic recovery has resulted in new jobs totaling a little over 10 percent of that loss. For this reason, indicators of labor market stress—such as the average duration of those who are unemployed and the unemployment rate—remain at elevated levels that have been scarcely seen in many decades.

By comparing individual industry sectors’ job growth over the period June 2009 through May 2010, we can see that the character of this recession’s recovery is quite different from that of the 2001 recession’s recovery. The tables below show industry-specific payroll job gains or losses in the 12 months following the 2001 recession; and for the sake of comparison, they also show these gains and losses in the 12 months following the 2008–09 recession (again, I assume that the most recession concluded in May 2009).

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Notably, recent job losses in construction evidence the continued weakness in both residential and commercial construction in both the Seventh District and the U.S. As compared with the 12 months following the 2001 recession, the recent construction job losses in the nation continue to unfold at a pace seven times as great (versus three to four times as great in the District). In the U.S. as a whole, 516, 000 construction jobs have been lost from June 2009 through May 2010.

In contrast, the manufacturing sector is faring relatively better, experiencing a net job loss one-fourth as large as the job loss during the aftermath of the 2001 recession. During the current recovery, manufacturers have been furiously rebuilding their inventories after a long period of depletion. As expectations of economic growth were revised upward during 2009, producers realized the need to rebuild inventories in anticipation of sales. In turn, hours worked in manufacturing plants were raised, and net hiring took place, especially as the recovery unfolded.

During the six months ending in May, 2010, net jobs in manufacturing grew (rather than declined) by 109,000 nationally; and they grew by 34,000 across the Seventh District states. In the District, hikes in manufacturing production took place broadly across the regions industries—especially in durable goods -- especially in automotive, steel and machinery industries. Growth in exports to other recovering regions of the world, especially countries in Asia and South America, have helped sustain this sector’s hiring.


Unfortunately, job growth in the financial activities sector has thus far not mirrored what has happened in manufacturing. The financial activities sector contributed to net job loss during the first twelve months following the recession in both the nation and in the District, as real estate activity and related lending activities continued to falter. In the post-2001 recovery, employment in this sector grew in both the nation and the District.

The ongoing recovery in professional and business services employment seemingly outperforms what happened following the 2001 recession. However, massive hiring taking place in a single sub-category of professional services, namely, the temporary help category, throws this resurgence into question. Most of the gains taking place represent temporary help that is being taken on by firms who are reluctant to (yet) commit to permanent hires. [1]

Job gains in both education and health care services are contributing to net job growth during the recent recovery. However, the pace of job growth in both remains slower than in the post-2001 recovery period.

The leisure and hospitality industries continued to add employment during the post-2001 economic recovery, but these sectors are shedding jobs this time around. The depleted wealth of households following the declines in the financial markets and residential real estate markets has raised saving rates, and dampened enthusiasm for leisure and entertainment services.


Finally, state and local government hiring provided a bulwark to the post-2001 recovery period. However, financial stresses in these sectors today are resulting in real budget cuts—including cuts in employment. In the Seventh District, the state-local government sector added 29,000 net jobs in the post-2001 recovery period, but they have already cut 27,000 jobs over the period June 2009 through May 2010. Such cuts are expected to continue as federal recovery assistance funds are depleted—and as states face up to budget realities created by shortfalls in state and local tax revenue.

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[1] Contract and temporary workers are classified within the business and professional businesses sector, though such workers may be performing work in any sector. (Return to text)

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March 22, 2010

Job Revisions Downward

Over the past few years, the drop in employment has been steep and painful. A recent reassessment of the job count shows that even steeper declines have taken place than initially thought—both across the U.S. as a whole and in the Seventh Federal Reserve District, which covers all of Iowa and most of Illinois, Indiana, Michigan, and Wisconsin.

The U.S. Bureau of Labor Statistics (BLS) releases much awaited monthly estimates of payroll jobs for the nation. These estimates, which exclude self-employed individuals, are derived from a sample of reporting firms. Once each year, these monthly estimates of payroll employment levels are revised in a major way by the BLS. The BLS revisions are reported during the first quarter of each year to reflect an almost complete count of nonfarm payroll jobs that becomes available for the month of March of the previous year[1]. In a separate release , state payroll job estimates are similarly revised.

This year’s BLS revisions were unfavorable to both the U.S and to Seventh District states. On an average monthly basis for the year 2009 in its entirety, the revisions indicated further job decline in the U.S., by more than 1 million payroll jobs, or approximately 0.8 percent (table below). All five Seventh District states also reported downward revisions. Only Indiana’s downward revision of 1.2 percent exceeded the nation’s. Revisions for the states of Wisconsin and Michigan were relatively minor.


These downward revisions constitute more bad news because the original estimates already indicated rather sharp job declines (chart below). In the chart below, yearly decline is measured by the 12-month percent change from December 2008 to December 2009 (red bars)[2]. In examining the annual rates of decline before the revisions, payroll job counts for the Seventh District region were off 4.1 percent. Prior to the revisions, the U.S. as a whole showed a net decline of 3.1 percent of total payroll employment over the same period. The revisions to these data widen the U.S.–Seventh District gap, from 1 percentage point to 1.3 percentage points.

Among individual states, Illinois and Indiana have the sharpest revisions—both at 0.9 percentage points. And the revisions for Wisconsin and Iowa are just behind, at 0.8 percentage points and 0.7 percentage points, respectively. After the revisions, Michigan was actually 0.1 percentage point higher than before—a small bit of good news for a state that lost 840,000 nonfarm payroll jobs since mid-year 2000, an 18 percent decline; by comparison, the U.S. experienced a 1.7 percent decline since that time.

Note: Chenfei Lu and Christian Delgado de Jesús assisted with this essay.
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[1]These BLS counts are not of workers but of jobs. A worker may hold one or more jobs. Data in the chart are seasonally adjusted. (Return to text)

[2]The region reported covers the full state boundaries of those states. As mentioned before, the Seventh Federal Reserve District covers only the parts of Illinois, Indiana, Michigan, and Winsconsin. (Return to text)

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January 11, 2010

State population growth: What does it tell us about the states in the Seventh Federal Reserve District?

The degree to which a state’s population has grown can tell us a lot about that state’s economic conditions and prospects. Many U.S. households move very far to find a better quality of life. They seek not only more sunshine and recreational amenities, but also higher income and wages, more employment opportunities, and better housing affordability. Local public leaders and businesses care deeply about population growth. Lately, such concerns focus on possible loss of highly educated “knowledge workers,” who help drive local economic growth. More generally, a decline in population in a local area can create difficult problems in public infrastructure. If a state’s population shrinks unexpectedly, many public services and facilities, such as roadways and water and electricity infrastructure, are not easily reduced in scope or size. And if current population estimates hold up through the end of 2010, national political representation is likely to shift. In particular, the Seventh Federal Reserve District states of Michigan, Illinois, and Iowa could each lose one seat in the House of Representatives.

The U.S. Census Bureau recently released its state population estimates through mid-2009, with a breakdown of population change. The Seventh District comprises all of Iowa and most of Illinois, Indiana, Michigan, and Wisconsin; of these five states, Michigan alone is estimated to have experienced a decline in population between July 1, 2008, and July 1, 2009[1]. This marks the fourth year in a row, beginning with 2006, that Michigan has had that distinction. Michigan also lags every state in the nation in cumulative growth since 2005. Michigan has cumulatively lost 121,000 people over the period 2005–09.




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The “natural increase” in population, namely, births minus deaths, is typically the largest component of year-to-year population change. But the states’ different migration trends can tell us the most about their relative attractiveness. A state’s “net domestic migration” measures how many people come in from other states to live there versus how many residents leave for other states. In the table below, it’s clear that all five Seventh District states experienced domestic out-migration in 2009. This has been their typical experience over the past decade. Only Indiana experienced any years of positive domestic net migration during the decade (over the period 2006–08).



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Converting net domestic migration to a rate of migration (per 1,000 residents) helps us to scale these figures relative to the size of each state. Here, Michigan’s rate of domestic out-migration easily outweighs the other states’, though Illinois’s is also quite high. For 2009, Illinois’s rate of domestic net-migration, at -3.8 residents per thousand ranked 46th in the nation; Michigan ranked 50th.

Illinois and Michigan differ greatly in the degree to which net foreign in-migration offsets domestic out-migration. Illinois’s net gain of 36,000 individuals through foreign in-migration in 2008–09 offset virtually three-fourths of the state’s domestic out-migration. In contrast, for example, Michigan’s net foreign in-migration offset only 15 percent of the state’s domestic out-migration. According to demographer William Frey, states having important “gateway” cities for immigrants, such as Chicago, are especially advantaged in this regard.

Surprisingly, even though Michigan’s economy has foundered over the past decade, the state’s pace of domestic out-migration held steady rather than climbed in 2009. Michigan’s state demographer, Kenneth Darga, has carefully documented the state’s demographic trends over many years, including net migration back to 1961. As seen below, net out-migration during the early years of the 1980s easily outpaced those of recent years. By way of possible explanation, in comparison to today, there were more states back then having labor market opportunities that unemployed Michiganders found attractive, compelling them to move away. Recall that some energy-producing states, such as Texas and Louisiana, were then faring well; and other states were benefiting from surging national defense expenditures and a technology boom in personal computers and related equipment and software.



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Other explanations have been offered. Demographer Frey and others note that the overall U.S. domestic migration rate has been declining; it is currently at its lowest point since such statistics have been reported, back in the late 1940s. Americans are less likely to move far away from their current homes for economic opportunities out of state, as both average age and homeownership rates have climbed. Michigan—with 76 percent of its households being homeowners—does have among the nation’s highest rates of homeownership. At the same time, because of its flagging economy, the share of Michigan homes whose current market value exceeds the size of the mortgage debt on the property is also among the highest. In contemplating a move to another state in search of employment, some of these Michigan households may find themselves too cash-constrained to finance job searches outside the state. That is, even if they managed to sell their homes and move away, they would likely need to pay off the remaining balances to their homes’ existing mortgages.

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[1]Among all 50 states, only Michigan, Maine, and Rhode Island lost population year over year over this time period. (Return to text)

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March 12, 2009

Midwest in Recession: Then and Now

By Bill Testa and Vanessa Haleco-Meyer

Longtime Midwest residents may be befuddled by ongoing comparisons of the current national recession with those of 1974-75 and 1981-82. While the headlines suggest this recession compares, so far, with the deepest recessions of the past 50 years[1], we in the Midwest have a somewhat different perspective. For us, the recessions of 1974-75 and 1981-82 were far worse, at least so far. An exception may be made here for Michigan, which has been experiencing a recession of sorts all decade long.

Statistical comparisons of regional recessions with the nation are difficult for a number of reasons. Arguably, the best basis of comparison can be made using payroll employment data which are available monthly from the Bureau of Labor Statistics.[2] In the charts that follow, we index job levels in states, the Seventh District (Illinois, Iowa, Indiana, Michigan, and Wisconsin), and the U.S. to a beginning value of 1.0. We begin the time series at the quarter in which employment levels peaked in the state, region, or nation. Since employment peaks may differ between a state or region and the U.S., we sometimes begin comparative series at slightly different dates. For example, employment in the Seventh District last peaked in the second quarter of 2007, but the U.S. peaked in the fourth quarter of 2007. (On the charts, the indexed lines will appear to begin in the same quarter). We use seasonal adjustment to iron out variations in employment that typically occur every year.

The chart below compares payroll job growth for the Seventh District versus the U.S. during the 1974-75 downturn, the 1980s downturn(s), and the 2008 downturn. The U.S. economy officially recorded two back-to-back recessionary periods in the early 1980s. Since the episodes took place so close together, and since the Midwest experienced virtually no pause between downturns, we index jobs beginning from the previous peak (1980-Q1 for the U.S. and 1979-Q2 for the Seventh District) through to the final trough.

In examining payroll job performance during these recessionary periods, the first thing to note is that payroll employment dropped more rapidly in the 1974-75 recession (blue lines) than in subsequent recessions. Seventh District payroll job levels fell by 4% in the four quarters following their peak in the third quarter of 1974 (before turning upwards). In comparison, and despite the dramatic declines over the past few months, the current recession has experienced a shallower and slower decline from the previous employment peak (green lines).


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Recent job declines have also been shallower so far than the fairly dramatic declines the Midwest experienced in the 1980s (red lines). After reaching a peak in 1979, payroll jobs in the District fell for four years, reaching bottom in the first quarter of 1983 at 10% below the peak. The U.S. experience of that time was quite different. Following a slight decline in 1980, national employment growth resumed briefly before falling 3% during the 1981-82 recession. Over the entire length of both recessions, the pace of job decline in the Seventh District was more than five times that of the nation.

The dismal experience of having no post-recession recovery is one that the state of Michigan is now experiencing. The chart below indexes payroll job decline and growth circa the 2001 recessionary period. From its second quarter peak in year 2000, Michigan’s employment has fallen by over 10% (green line). The remaining states of the Seventh District—Indiana, Illinois, Wisconsin, and Iowa—have fared somewhat better, but in the aggregate the four-state region only recently regained its previous peak. In contrast, national employment had regained its previous peak by the end of 2004.


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The final charts (below) display the employment experiences of each Seventh District state for the three aforementioned periods. In each state, the 1980s look worse than the current recession. This is even true for Michigan, which underwent a 15% job decline from its peak in the second quarter of 1979 to the fourth quarter of 1982. However, Michigan and its troubled automotive industry enjoyed a big bounce in 1982 when U.S. consumers returned to auto showrooms and began to buy cars at a rapid pace as gasoline prices eased. This time around, Michigan and much of the surrounding Midwest automotive belt hope for a repeat performance. However, Michigan’s current automotive challenges are surely more structural and deeply rooted. It will take more than an upturn in national automotive sales to pull along the state’s employment and income.


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[1]The nation also experienced less serious downturns, during 1969-70, 1990-91, and 2001. See http://www.nber.org/cycles.html. (Return to text)

[2]Payroll employment numbers are subject to revision in March of every year. See http://www.bls.gov/sae/790over.htm#employ. (Return to text)

Posted by Testa at 10:14 AM | Comments (0)

February 3, 2009

Seventh District Labor Markets at Year-end

by Bill Testa and Vanessa Haleco-Meyer

Government agencies regularly report statistics that reflect state and local labor market conditions. These measures are far from perfect in their accuracy, and they often seem to conflict. Yet, these measures currently agree to a negative view of the labor markets in the Seventh Federal Reserve District.

State unemployment rates, using a household sample survey, measure those people of working age who are actively looking for work as a fraction of the work force (both employed and unemployed). Since it is sample based, the measure is imprecise, especially readings for a single given month. The chart below shows that the unemployment rates for the nation and the Seventh District began to move up moderately off of their cyclical lows throughout 2007. During 2008, the unemployment rates accelerated primarily because of net job destruction. The gap between the Seventh District’s higher unemployment rate and that of the nation remained fairly steady in recent years, even as unemployment rates were climbing in each of the District’s states and in the nation as a whole.


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Not all states of the District maintained a higher-than-average unemployment rate over the past few years. As measured in the fourth quarter of 2006 (chart below), Michigan’s high unemployment rate accounted for the bulk of the gap between the District’s rate and the nation’s. By the fourth quarter of 2008, Illinois’ unemployment rate had climbed above that of the nation, and Indiana’s unemployment rate also topped the national average. In contrast, Iowa’s and Wisconsin’s rates of unemployment in 2008 were seemingly lower than those of the overall District and the nation.


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Federal and state government agencies also track and report payroll employment. These data, released on a monthly basis, are drawn from a sample survey of firms that provide information on their employees; and so, unlike the unemployment figures, the data are not counting those in the work force who are self-employed. Since it is only sample-based, the payroll survey, too, contains measurement error. These errors tend to be more pronounced during times of sharp turns in economic direction (such as the present). During economic downturns, some firms may drop out of the sample as they cease operations. This has tended to understate net job declines, since the sampling methods cannot distinguish between a failed firm and one that is simply late or negligent in reporting. State payroll figures are adjusted for such biases during the first quarter, but even with such adjustments, revised figures do not cover the recent months, but are rather “re-benchmarked” up to a point early in the previous year.

The chart below displays the change in total payroll jobs in the fourth quarter of 2008 relative to fourth quarter in 2006. All states except Iowa lost jobs on net. Over much of this two-year period, Iowa continued to enjoy a boom in farm commodity prices and strong production and sales of related equipment. In the chart, job losses in Michigan and Indiana are especially prominent, reflecting their troubles with their automotive sectors. Using this measure, Wisconsin’s job losses seem to be more severe than what its unemployment rate may have suggested.


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Labor market indicators often conflict both because of inherent measurement error and because they measure different features of the labor market.[1] Accordingly, it is often best to gather an array of indicators in assessing labor market conditions. Reported figures from each state’s unemployment insurance (UI) system are also followed. Each state’s UI system records weekly data on new applications or claims for insurance by those who have recently lost their jobs. (Data also report the number of people who have lost jobs and continue to receive unemployment benefits.) These data do not comprehensively reflect labor market conditions. That is because layoffs or other job separation events are only part of the process of net job gain or loss. In particular, job hires or emerging self-employment may be taking place in a state at the same time that job separations are on the rise. The chart below displays changes in initial claims for UI in the fourth quarter of 2008 relative to the fourth quarter of 2006. As compared with the final quarter of 2006, layoffs and other involuntary unemployment events were emerging much more rapidly in late 2008. This is so in the nation and in each of the District’s states. Indiana’s job separations were running especially high late in 2008 as compared with the fourth quarter of 2006—well in excess of the increase experienced nationally. And separations in Iowa have also begun to rise sharply in the fourth quarter.


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The severity and speed with which labor markets deteriorated during the final three months of 2008 has been especially disconcerting. In the District, jobs declined at a 5.1% pace. Nationally, payroll jobs declined at a 3.7% annualized rate during the fourth quarter of 2008 (1.3 million). Since 1960, payroll job decline in the nation has exceeded this pace in only one quarter, that being the first quarter of 1975 (-6.1%). And currently, most forecasts predict economic output to bottom out no sooner than the second half of this year.

Such concerns are especially acute because job markets recovered slowly in the aftermath of the past two national recessions. Slowly recovering job markets often reflect structural imbalances that have preceded and accompanied recessionary periods. The 2001 recession partly reflected the fallout from overspending on technology-oriented enterprises, such as telecommunications, and other capital equipment. Workers displaced from these sectors might have found it difficult to find jobs in new industries, or the impacted sectors themselves were slow to recover and begin hiring anew. This time around, sharp structural imbalances in housing construction and financial services are underway.

Imbalances that can emerge among different multistate regions in the U.S. can also play a role in achieving “full employment.”[2] An industry shock to a particular sector that is highly concentrated in one region may displace workers whose job opportunities may be emerging in another region. Past Midwest experiences are a case in point. The region suffered inordinately through the double-dip national recessions of 1980 and 1981–82. The chart below compares the District’s unemployment rates with those of the nation from two periods: the 1980s and the current decade. By the end of 1982, the nation’s unemployment rate approached 11%, while the District’s unemployment exceeded 13%.

This wide gap of the early 1980s came about from underlying currents having distinct geographical accents. In particular, high oil and natural gas prices were buoying energy exploration activities in many parts of the West and Southwest; rapidly expanding federal spending to rebuild national defense stocks were lifting many regions of the South and West; and the rapidly rising value of the U.S. dollar contributed to moribund exports of farm products and manufactured goods from the Midwest (as well as to stiff import competition).


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In contrast, the recession of 2001 and its immediate economic aftermath had fewer inter-regional differences. As seen above, unemployment rates between the District and the nation were very similar. As the remainder of the decade unfolded, however, the profound structural changes going on in the automotive industry did begin to negatively affect District labor markets; the District’s unemployment rate began to rise higher relative to the national average. The Detroit Three automakers (Chrysler LLC, Ford Motor Co., and General Motors Corp.) and their suppliers experienced significant losses to foreign-domiciled auto plants located in other regions and to imported automotive products as well. While (post-2001) job levels largely recovered in the District, Michigan experienced continuous year-over-year job losses.

Now, amid a sharp regional downturn, employment statistics will be keenly watched to help guide our decisions regarding job search, education and training, local investment, home sales, and migration.
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[1]Note: Unemployment rates do not necessarily reflect job trends because working age people can drop out of the work force in response to a lack of job opportunities, thereby lowering the unemployment rate, even though payroll jobs and job vacancies are falling. A worker who drops out of the labor force no longer reports as being “unemployed” in the survey. The reverse can also take place by the same reasoning: Even with a rising number of jobs and employed persons, there can be rising unemployment. (Return to text)

[2]Note: Comparing levels of unemployment between periods can be somewhat difficult. The “natural rate of unemployment,” or normal benchmark for a “full employment economy,” is thought to have been higher in the 1980s than today—by about 1 to 1.5 percentage points. The natural rate depends on demographics of the population, such as age and education (affecting labor force participation rates by age). For a discussion, see study by David Brauer, among others. (Return to text)

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

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.


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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.

Posted by Testa at 1:32 PM | Comments (0)

July 2, 2008

Michigan—Brakes and Shocks

Few outside the state of Michigan are fully aware of its economic woes. Nationally, the U.S. economic slowdown, housing market decline, and rising gasoline prices have captured the headlines. Even within the Midwest, spring and early summer flooding have dominated our news. Somewhat lost in the shuffle, Michigan payroll jobs are down more than 10% from their peak in June, 2000, representing over 486,000 jobs. Recent developments are no more encouraging. The state's (preliminary) unemployment rate rose by 1.6 percentage points in May, to a seasonally adjusted 8.5% percent—topping the U.S. rate of 5.5% by 3 full percentage points. Preliminary statistics estimate that payroll jobs in Michigan fell by 68,000 over the month (seasonally adjusted). Minus Michigan, reported U.S. employment would have grown by 19,000.


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Michigan’s economy currently suffers from unfortunate industry composition, with an added dose of structural shocks to several of its prominent lines of business. In particular, the automotive, tourism, and office furniture sectors are highly sensitive to national swings in economic activity. As the U.S. economy slows, such industries tend to decline even more. Moreover, in the case of automotive and tourism, structural changes are tending to further dampen economic production and hiring in Michigan.

Michigan’s economy remains far and away the nation’s most concentrated in motor vehicle manufacturing. Its overall employment concentration lies 8.5 times the national average in combined automotive parts and assembly, with many attendant jobs in manufacturing, distribution, and professional service companies that are customers or vendors to automotive producers.

While U.S. automotive sales remained robust until recently, the former Big Three automakers (now more appropriately called the Detroit Three) and their suppliers have been steadily losing market share to imports and to foreign nameplate producers located elsewhere in the U.S. As of May 2008, market share of the Detroit Three automakers had fallen from 67.8% in 2000 to 47.2%. Prominent parts supply companies, including Delphi, Dana, Tower, and Collins & Aikman, have folded, merged, or are currently trying to emerge from bankruptcy.


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With the recent economic slowdown, automotive sales are resuming their cyclical pattern of retrenchment. To some degree, the historical behavior of sales declines was allayed in the aftermath of September 11, 2001, when automakers offered generous sales and financing incentives to prospective buyers. However, today’s slowing economy appears to be leading consumers to avoid the purchase of new autos. As discussed recently at our annual Automotive Outlook Symposium, rising gasoline prices are curbing driving behavior while draining household income.


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The recent run-up in gasoline prices has magnified loss of market share and erosion of profitability of the Detroit Three automakers and their suppliers. Over the past year, the Detroit 3 share of domestic sales has fallen by 7.1 percentage points. To some degree, this repeats the pattern of the 1970s when U.S. consumers turned to (imported) foreign-domiciled automakers who offered vehicles with greater fuel efficiency. Domestic automakers are more reliant on trucks than on cars, and they tend to lag foreign manufacturers on fuel efficiency.

Not only the automotive sector has been impacted by rising energy prices. Michigan’s tourism, recreation, and hospitality industry has taken on added importance in the wake of the state’s waning automotive industry presence. Many parts of western and northern Michigan feature attractive scenic and semi-rural locales for retirement, recreational living, and seasonal tourism. In addition to its many inland lakes, the state is endowed with 3,126 miles of Great Lakes shoreline, which is attractive for boating, fishing, and other recreational activities like hiking, cycling, and golf. In particular, the state registers nearly as many boats as Florida or California. Such activities in Michigan are especially related to vacation and seasonal homes. As of the last Census, 5.6 percent of homes in Michigan were of this variety versus a national average of 3.1 percent.

The map below shows recreational counties as designated by demographers Calvin Beale and Kenneth Johnson. The northern tier counties of Michigan and Wisconsin have long been recreational destinations, especially for Michiganders and residents of the greater Midwest region.



Recreational spending is highly discretionary on the part of consumers. As household income falls, recreational spending can be easily curtailed by households in an effort to maintain spending on necessities.

Recent declines in Michigan recreational spending are reflected in data collected by the State of Michigan on sales tax collections imposed on overnight lodging. These accord with declining lodging occupancy rates collected by the industry. Both are down so far in 2008 on a year over year basis. A broader index of Michigan’s tourism activity is displaying a modest uptick for the first quarter of 2008 versus one year ago. However, with rising gasoline prices, the index (and activity) is expected to trend lower in coming months.

Two additional factors may be restraining recreation sector growth in Michigan. Michigan’s recreational counties are characterized by ownership of second homes. The run-up in housing prices and the subsequent rash of foreclosures and price declines have been especially severe in recreational/seasonal home locales. Seasonal home residents who have experienced asset price losses on their second homes may be especially aggressive in re-building their household balance sheets by restraining current spending in the second-home locales.

The second, more obvious, factor affecting recreation this year is rising gasoline prices which raise both travel costs to vacation locales and, in Michigan's case, the cost of boating. However, some domestic vacation locales may benefit from a backwash effect as households choose nearby attractions rather than long distance adventures. Nonetheless, in most instances, the overall effect tends to be a dampening. For these reasons, tourism industry analysts in Michigan are forecasting declines in tourism activity for 2008.

In addition to automotive and recreation sectors, Michigan has a strong presence in the furniture sector. Indeed, Western Michigan hosts the nation’s largest concentration of makers of office furniture. This industry took shape in the late nineteenth century during rapid industrial growth, which was accompanied by rapid growth in office employment. Taking advantage of the region’s abundant hardwoods and skilled immigrant craftsmen, most furniture companies in the area had developed as manufacturers of high-end traditional style home furnishings. However, the labor-intensive wood furniture industry declined in Grand Rapids and other northern centers by the mid-1900s due to competition from Southern producers. In response, the Grand Rapids industry shifted its focus from household to office furniture, led by companies that would become industry giants: Steelcase, Haworth, and Herman Miller.

The U.S. Census reports that the state is the nation’s leading producer of office furniture and fixtures, with 17,000 direct employees in 2005. Broadly defined, the state’s industry share accounts for 24% of the nation’s shipments. (Michigan’s share is larger according to the way that the industry trade association defines the industry).

Michigan’s office furniture companies have been affected by competition from China and other low-cost locales. Despite competitive pressures, the companies have successfully responded in two ways. To some extent, producers have moved or offshored production of select product lines to low-cost locales while maintaining high value added and custom design services domestically. More importantly, these companies are characterized by great innovation in product and processes. They have succeeded and grown by offering custom and advanced products and services.

However, office furniture sales and production have been highly cyclical. The industry experienced sagging sales in the late 1980s and early 1990s when U.S. businesses downsized middle management positions and as the U.S. economy sagged. So too, the “technology bust” years that began the current decade saw a falloff in demand for office systems and furniture, especially in the IT sector.


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So far in the current environment, industry production has been holding up well. However, if industry observers are correct, office furniture may be “one more shoe about to drop” in Michigan. An opinion poll of office furniture executives has been flashing negative for the near term outlook, and the industry association has recently lowered its forecast of 2008 production.

If such expectations develop, this would further dampen economic activity and the labor market in Michigan. Cyclicality of certain businesses can be planned for and absorbed by states such as Michigan and its neighbors. However, cyclical episodes in the economy can be exceptionally severe when shocks such as rising energy prices are in play and when longer term structural changes are taking place, as they are in Michigan’s automotive sector.


Thanks to Graham McKee and Vanessa Haleco-Meyer for assistance.

Posted by Testa at 11:57 AM | Comments (0)

June 5, 2008

2007 Economic Growth in the Seventh District

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

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

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

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

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

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


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

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

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

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

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

Posted by Testa at 2:06 PM | Comments (0)

May 22, 2008

Tracking Seventh District Manufacturing

By Emily Engel, Associate Economist

There is a greater concentration in manufacturing among the five states of the Seventh Federal Reserve District than in the nation. For example, as measured by the share of payroll jobs in manufacturing, Indiana ranked first among the 50 states in 2007; Wisconsin, second; Iowa, fourth; Michigan, seventh; and Illinois, 19th. For this reason, we at the Federal Reserve Bank of Chicago tend to closely watch the manufacturing sector. In fact, our watchfulness often becomes close scrutiny during times like the present when the U.S. economy shows signs of slowing. (Manufacturing activity has tended to be highly sensitive to general business downturns.)

The Chicago Fed Midwest Manufacturing Index (CFMMI) is a public statistical release that the Federal Reserve Bank of Chicago has been producing since 1987. This monthly release tracks manufacturing output for the Seventh District states (Illinois, Indiana, Michigan, Iowa, and Wisconsin) and compares it to the manufacturing component of the Industrial Production Index (IPMFG) produced by the Federal Reserve Board of Governors. The chart below, taken directly from the March release of the CFMMI, shows historical data comparing the CFMMI to the IPMFG. Over the decade, Midwest output growth has lagged the nation. During the current slowdown in national economic activity, both the IPMFG and the CFMMI have slowed and declined at a very mild rate in comparison with past episodes.


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Industry concentration in specific industrial sectors influences economic performance among District states. In particular, transportation equipment and machinery are bellwethers of state economic performance in the District.

Since the beginning of this decade, the automotive-intensive states of Indiana and especially Michigan have experienced a softening of their labor markets relative to the national average.

Meanwhile, by the same measure, the machinery-intensive states of Illinois and Iowa have outperformed the nation. The remaining state, Wisconsin, deviates from this pattern, being a machinery-intensive state with an unemployment rate that has deteriorated relative to the national average.


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The charts below compare these states’ concentration in both machinery and transportation equipment, respectively. Manufacturing activity in these industries is compiled by the U.S. Census Bureau’s Annual Survey of Manufactures (ASM). Specifically, the Census data measure “value added” by manufacturing establishments within each state. Value added roughly corresponds to the value of shipments of manufactured establishments, net of intermediate inputs to production, such as fuel, materials, parts, and components that are purchased from other establishments. In this sense, value added is manufacturing output.


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It takes much time and effort for the U.S. Census Bureau to compile these data, so that detailed information on output by specific industry sector and location are issued with a one or two year lag. The data above, for example, refer to 2005 and 2006.

To keep more current than the Census statistics allow, our CFMMI constructs sector-specific estimates of manufacturing output for the overall Seventh District. These estimates are primarily based on data reported on payroll hours worked in manufacturing establishments across the District, and these data are usually available with only one month’s lag. When complete data on value added are issued by the U.S. Census Bureau, we adjust or benchmark our CFMMI data series to correspond to that data.

There are four major sectors of the CFMMI: auto, steel, machinery, and resource. The CFMMI is made up of 15 North American Industry Classification System (NAICS) codes of hours worked data. The breakdown of the NAICS codes is given under each graph (such as the one below) on the press release every month. The auto sector components are plastics & rubber products (326) and transportation equipment (336). Primary metal (331) and fabricated metal products (332) compose the steel sector. The machinery sector is made up of machinery (333), computer & electronic product (334), and electrical equipment, appliance, & components (335). There are five categories for the resource sector: food manufacturing (311), wood product (321), paper (322), chemical (325), and nonmetallic mineral product (327). The overall CFMMI is composed of the four sector components as well as these industries: printing & related support activities (323), furniture & related product (337), and miscellaneous manufacturing (339).

As seen by the two sector charts below, taken directly from the March CFMMI release, the District’s output growth paths in the machinery and auto sectors have diverged. While the machinery sector of the CFMMI is slowly outpacing the overall CFMMI, the auto sector of the CFMMI continues to fall below the overall CFMMI. Such developments can help us understand differences in economic performance around the Seventh District.


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To see more information about the CFMMI, please check the Federal Reserve Bank of Chicago’s website. Additionally, some of the other Federal Reserve Banks also have manufacturing indexes/surveys. Please see below for some of those links:

Federal Reserve Bank of Philadelphia Business Outlook Survey

Federal Reserve Bank of New York Empire State Manufacturing Survey

Federal Reserve Bank of Richmond Manufacturing Conditions Survey

Federal Reserve Bank of Kansas City Survey of Tenth District Manufactures

Federal Reserve Bank of Dallas Texas Manufacturing Outlook Survey

Posted by Testa at 6:12 AM | Comments (3)

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.


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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.

Posted by Testa at 2:15 PM | Comments (0)

June 15, 2007

The Stability of State Economies

By Guest Blogger Michael Munley

In recent years, Fed Chairman Bernanke and other economists have been analyzing the causes of the increased stability in the U.S. economy, a phenomenon known as "The Great Moderation." Most of their analyses have focused on the national economy, noting that the fluctuations, or volatility, in GDP growth, employment growth and inflation have declined noticeably over the past 25 years or so. But a Philadelphia Fed economist, Jerry Carlino, recently wrote a paper that looks at the issue at the state level and finds that every state has shared in the decline in employment volatility.

Increased stability has numerous benefits for both households and businesses. When employment is growing at more stable rates, people can be more certain of their job prospects, which makes it easier to decide whether to buy a new car, for example. Similarly, businesses have an easier time deciding whether to invest in new machinery when they can be more certain about the state of the economy. In turn, better decision-making by people and businesses can minimize the potential waste in the economy created by bankruptcies and other problems that can arise when people make decisions that turn out poorly.

Comparing the average volatility (measured in Carlino’s paper as the standard deviation of quarterly changes in employment) before and after 1984, Carlino’s results show that the states of the Seventh District all had declines that ranked in the top half of all U.S. states. Michigan ranked 2nd with a 63.6% drop in volatility, Indiana 4th with 57.1%, Wisconsin 8th with 52.5%, Iowa 16th with 45.3%, and Illinois 20th with 42.7%.

The following graph illustrates how the volatility in total employment has changed over time in each of the District states, converging toward the national average.



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One reason for the relatively bigger declines in employment volatility in the Midwest is our concentration in manufacturing and, specifically, our concentration in durable goods manufacturing. Carlino reports that volatility in U.S. factory employment was cut in half after 1984, whereas the declines in employment volatility in services were much smaller. And by my estimates, the volatility reduction in durable goods manufacturing employment was much sharper than that in nondurable goods.

As a result, Seventh District states ranked in the top half of all states in terms of the magnitude of the decline in manufacturing employment volatility. Michigan ranked 1st with a 66.3% drop, Indiana 3rd with 63.1%, Wisconsin 7th with 56.9%, Illinois 12th with 55.7%, and Iowa 22nd with 48.8%.

I’ve also looked at other state-level data series to see if they too reveal evidence of the Great Moderation. The quarterly changes in unemployment rates show similar reductions in volatility to those seen in employment (though the state-level unemployment data only go back to 1976). Real per capita income also shows a reduction in volatility, but the relative reductions are smaller.



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Interestingly, whereas the District’s concentration in durable goods manufacturing seemed to lead to larger reductions in volatility compared with other states, that is not the case with changes in unemployment rates and personal income. As shown in the following table, the Midwest states’ reductions in unemployment and income volatility were rather middling.


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Carlino notes that the economists who have been tracking the Great Moderation have proposed numerous reasons for the decline in volatility nationwide. Explanations include better monetary policy, structural changes (such as improved inventory management, the decline of unionization, the redistribution of jobs from manufacturing to services, banking deregulation), and plain good luck, in that the economy has not faced any significant crises like the oil embargo of the 1970s.

Regardless of the causes, it is clear that changes in employment and other variables are much more stable here in the Midwest than they were 25 years or so ago. Yet while lower volatility has its benefits, it does not uniformly deliver positive outcomes. Typically, volatility rises during a recession (as shown in the graphs above) then settles back down when the economy recovers and employment expands again.

However, that has not been the case in Michigan. Its volatility in all three variables increased during the 2001 recession and retreated since then, but the state economy has not recovered. Michigan's employment has been stabilizing around an average decline in jobs (-0.2 percent per quarter over the past five years). Its unemployment is high; in April the unemployment rate in Michigan was 7.1%, the highest in the nation. And per capita incomes in Michigan are stabilizing around slow growth of 0.1% per quarter, which is below the national average and among the slowest in the nation.

If you buy the assumption that the observed volatility affects the confidence of business and household decision-making, this means that Michiganders could be getting more certain that the local economy is heading in the wrong direction.

Posted by Testa at 6:34 AM | Comments (0)

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.


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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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Click to enlarge.

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.

Posted by Testa at 1:13 PM | Comments (0)

February 5, 2007

Michigan Labor Market--Still Awaiting Recovery

Following the 2001 national recession, the labor market remained somewhat slack and slow-growing until mid-2003. Subsequently, the national economy accelerated, pulling along labor demand and employment growth. The year 2006 marks the third consecutive year of strong year-over-year employment growth (and falling unemployment) nationally.

Meanwhile, the Seventh District, which includes the state of Iowa and most of Michigan, Indiana, Illinois, and Wisconsin, also experienced an employment recovery. However, the pace of job growth in the Seventh District has fallen somewhat short of the nation over most of the post-recession period. From the fourth quarter of 2001 until the fourth quarter of 2006, payroll job growth is currently reported to have risen by 3.9 percent in the nation, versus 0.7 in the Seventh District states overall.

Much of the Seventh District weakness is confined to Michigan, and recent indications show little sign that the Michigan labor market performance is turning around. As illustrated below by a 3-month moving average of monthly unemployment rates, the U.S. and the rest of the Seventh District states (excluding Michigan) have reported a falling rate of unemployment over much of the past 3 years. Currently, the region’s unemployment rate lies very close to the nation at around 4.5 percent. In contrast, Michigan’s current unemployment rate, after improving in 2005, is now back where it was in 2004.


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Unemployment rates are not fool-proof indicators of labor market performance because they are conducted by household surveys which are subject to sampling bias. However, other independent indicators tend to corroborate these survey indicators. Among the other indicators, the survey of payroll employment at business establishments is reported for states by the Bureau of Labor Statistics. It too is based on a survey, and it is revised later as more information becomes available.

Below, year-over-year growth in payroll employment is shown for Michigan versus the District and the U.S. The payroll survey suggests that Seventh District job growth, though slower than the U.S., has shown steady growth over the past three years. Michigan’s year-over-year job growth has continued to decline—at an accelerating pace.


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So too, reported information on initial claims for unemployment insurance by laid off (or otherwise severed) workers exhibits the same pattern: deterioration at an accelerated pace over the past three years in Michigan, and improvement outside the state.


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In past decades, weak automotive-related performance in Michigan has sometimes been appraised as temporary or cyclical. However, this time around, as indicated by labor market performance in surrounding states, weak economic performance in Michigan appears to reflect structural problems for auto makers and automotive supply companies. Since early 2004, Michigan has lost 17.6 thousand net jobs at auto assembly establishments (a 24 percent decline) and 27.5 thousand jobs in motor vehicle parts production (a 15.8 percent decline).

Overall domestic automotive production is being eroded by imports and by enhanced production and sales of transplant automotive companies who largely produce outside the state of Michigan. Recent employee buyout programs at Ford, General Motors, and Delphi will result in a head count reduction of nearly 100,000 across the U.S. Approximately one-third of those jobs are situated in Michigan.

At least for the near future, the Michigan labor market situations does not yet look to be improving. The Michigan-domiciled auto assembly companies foresee or have announced continued employment reductions and facilities closings in both production and in administrative/R&D employees. Longer term, the Michigan economy's sharp automotive concentration means that the labor market will continued to be driven by developments in the industry.


Posted by Testa at 9:14 AM | Comments (2)

October 11, 2006

Global Agriculture Conference

On average, rural America has not been faring as well as metropolitan America in terms of population and income growth. Is this trend yet another painful adjustment that can be attributed to globalization?

Globalization policies continue to be closely intertwined with agricultural markets, which have been the historic lifeblood of rural communities in the Midwest. Last month, the Chicago Fed held a conference on “Globally Competitive Agriculture in the Midwest.” The event included the Midwest release of a task force report by the Chicago Council on Global Affairs, Modernizing America’s Food and Farm Policy. Conference discussion concerned how current global trends and policy debates are affecting agriculture and rural communities, and how prospective policies such as the next Federal farm bill and the Doha round of the world trade talks might play out.

During the conference discussion, several presenters expressed the opinion, without challenges from the audience, that globalization was in some way responsible for the lagging economic performance and stark challenges facing the rural Midwest. However, I think that it is somewhat mistaken to confuse globalization with technological advances and associated structural changes now taking place in the production of agriculture.

First, to concede some ground to the opposition, several forces of globalization have hastened structural adjustments taking place in smaller towns and rural communities. In particular, an expansion of the world market for goods and services has sharpened the economic specializations of many countries and their subnational regions. For the U.S., as global markets in goods, services, and capital have been opened up, the domestic economy has shifted away from manufacturing production and less-skilled services such as back office processing, some software production, and call center activity in favor of advanced services such as finance, investment, and management. For such advanced services, the large urban form, rather than the smaller city or rural town, is the more productive and favorable locale. This preference of industries performing such advanced services has contributed to the growth of large metropolitan areas, such as New York, Chicago, Washington, D.C., Atlanta, and San Francisco.

Aside from that, there is little to argue about globalization as a detriment to rural economic growth. And even at that, I would argue that technological advancements, rather than globalization, account for most of the structural changes that are moving us toward an advanced services economy in the U.S. New technologies, particularly their adaptation in wireless communication and in advanced computing, are highly complementary to such service production, with or without globalization. This is evident the world over as wages, salaries, and employment opportunities have risen sharply for those workers who have the education and technical skills to work with advanced communication and technical tools.

While rural areas have not fared as well in advanced services, the net effects of globalization on commodity production and income in rural areas are mixed rather than one-sided. In much of rural America, the local economy is highly dependent on commodity agriculture or on commodity materials such as energy products, minerals, and timber. Here, relentless productivity advances, especially in agriculture, have obviated the need for as much labor as in the past. In turn, lessened labor demand has put pressure on rural growth.

Yet, such labor substitution is hardly related to globalization. It is true that global markets can introduce competition into commodity markets. Yet, on the flip side, falling transport costs and more open markets also increase possibilities for heightened exports and firmer prices for the commodities produced in rural areas. In the Midwest, for example, global exports in soybean and corn have helped to sustain jobs and income. More recently, as developing countries have improved their diets, U.S. exports of beef, pork, chicken, and poultry have grown. Here, the competitive advantage in grain production translates into local livestock production. The processing of grains and livestock (in order to shed weight and volume before exports) is kept close to the location of grain and livestock production, that is, rural communities.

Growing global growth has also boosted prices of carbon-based fuels. As a result, exploration, mining, and production of fuel sources are providing more jobs and lifting income in many rural communities. In corn-producing states, federal subsidies have combined with rising prices of fossil fuels to spur rapid expansion of corn-based ethanol capacity as a viable energy source. As a result, prices for corn have been raised and are expected to remain so. Moreover, ethanol plants are being built near corn production in rural communities, thereby boosting associated manufacturing jobs.

But ethanol production has not been the only source of manufacturing jobs in rural communities. In the Midwest, as shown below, rural and nonmetropolitan counties have been gaining share of manufacturing jobs at the expense of metropolitan counties for several decades. There are several reasons for this shift, but the dominant factor points to technological changes in production. In particular, areas with lower population density are favored for many types of production due to easier transportation access and lower land costs. And if these forces have been accelerated by global competition, rural areas are the beneficiaries. Income from manufacturing is replacing income earned on farms as the dominant economic base across the Midwest.



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Of course, rural communities in the Midwest face many challenges in the years ahead. For one, manufacturing production centers sited in rural communities are highly vulnerable to global competition. So, too, commodity prices have historically been volatile such that commodity-based economies have often been whipsawed by downward price swings. Global markets show no promise of easing the variability of commodity price swings.

For these reasons, rural communities are striving to avail themselves of development opportunities as they present themselves. On October 24–25, 2006, the Chicago Fed will be partnering with Iowa groups on an informational conference in Ames, Iowa, called “Expanding the Rural Economy through Alternative Energy, Sustainable Agriculture, and Entrepreneurship.”

The question of whether globalization has been a net plus or a net negative for rural areas is not an easy one. Yet, more than ever, rural communities will want to stay closely attuned to trends and policies related to global affairs.

Posted by Testa at 2:01 PM | Comments (0)

September 20, 2006

Midwest housing market update

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

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

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

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

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


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

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

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

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

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

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


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

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


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

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

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

Posted by Testa at 10:24 AM | Comments (0)

September 13, 2006

Where is automotive employment in the Seventh District?

Perhaps the most notable economic development taking place in the Seventh District is the market shift away from the traditional "Big 3" domestic auto makers--General Motors, Ford, and (Daimler)-Chrysler--and their parts suppliers. Lost sales are shifting toward the "new domestics" such as Toyota and Nissan and their parts suppliers. The sales gainers tend to be located outside of the Midwest to a greater degree than the Big 3. This shift is documented and analyzed in a recent Economic Perspectives article by Thomas Klier and Dan McMillen. This market upheaval is tending to idle and displace workers in many Midwest communities. Per Klier and McMillen, Michigan automotive employment is down almost one-third since 1979 while southern states such as Kentucky, Tennessee, Alabama, and the Carolinas have experienced a tripling of jobs.

But despite these shifts, Detroit and much of the Midwest continues to be the center of the production. Which particular communities remain most sensitive to future swings in automotive fortunes? The data below attribute automotive employment to particular metropolitan areas in the Seventh District. Those metropolitan areas with green shading had an employment concentration in automotive that exceeded the nation; those shaded in red had a lesser concentration. Looking across metropolitan areas in the entire Seventh District region, an east-west split in auto employment concentration becomes very apparent. The Michigan-Indiana corridor contains most of the metropolitan areas having an above-average concentration. Darkly-shaded metropolitan areas in southeast Michigan are exceptionally concentrated in automotive. So too, an east-west band of metropolitan areas across north central Indiana is steeped in automotive employment.


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A numerical listing of automotive employment below shows just how concentrated some communities can be. Metropolitan areas including Detroit/Livonia/Deaborn, Flint, Holland, Saginaw, Battle Creek, and Lansing/East Lansing in Michigan all reported concentrations over 5 times the national average, as did the Kokomo and Lafayette metro areas in Indiana.



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The final table below further illustrates the sharp geographic rift in employment fortunes over the 1990-2005 period. As a whole, the state of Michigan lost over 64,000 jobs in automotive, on net accounting for all job losses nationally. Largely due to the Michigan experience, the Seventh District states experienced an 18 percent decline in automotive jobs since 1990 while the remainder of the U.S. experienced a 3 percent gain in similar employment.


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Posted by Testa at 10:05 AM | Comments (0)

September 6, 2006

What industries are key to Midwest economic performance?

Urban economist Wilbur Thompson once said, “Tell me your industries, and I’ll tell you your future.” A region’s industries do tell us a lot about its economy. In the Midwest, manufacturing industries often drive fluctuations and trends in the region’s overall economic growth because manufacturing is a much larger part of its economy, on average, than the rest of the nation’s. So, too, manufactured goods are traded far and wide—that is, they are exported and imported across national boundaries as well as across regions that make up the U.S. economy. Accordingly, shifts in demand for manufactured goods can have an outsized impact on states and communities in the Midwest. For example, a national shift in buying behavior toward foreign nameplate autos, or toward smaller and more energy efficient autos, may well impact automotive production, investment, and employment in some parts of the Midwest region.

On a short-term basis, fluctuations in aggregate economic activity, such as recessions, diminish demands for durable goods such as capital equipment, thereby making the Midwest economy more sensitive to national “business cycle” fluctuations.

So, too, many Midwest manufacturing industries are impacted by global competitive shifts. Production operations of some home appliance manufacturers have shifted to Mexico, for instance.

But how can we identify which particular industries to observe and follow in the Seventh District? First, we must ascertain how concentrated is an industry in a local economy as compared with the national economy. Analysts often construct a “location quotient” to do so. In one such application, each industry’s employment share of total employment in the region is compared with its national counterpart. The comparison is constructed as a ratio with the local share on top. For example, if a locality’s labor force had 20 percent of its workers in manufacturing as compared with 10 percent nationally, the index (ratio) takes on a value of 2.0, i.e., 20/10. Parity with the nation would take on a value of 1.0.

While such an index is useful by way of comparison, it says little about the actual size of a particular industry in a state or region. For this reason, the chart below identifies manufacturing industries in the Seventh District states by relative concentration and by employment size. The horizontal scale depicts the concentration, and it is centered at the index value of one, or parity with the nation. The vertical scale is centered at the value of the median-sized manufacturing industry in the District (as measured by payroll employment).

By construction then, we may quickly characterize the most prominent industries in the District as they are located in the upper right hand quadrant of the graph. For the District, it is clear that transportation, food processing, and machinery are the most prominent industries, with transportation (representing automotive) winning hands down. The fabricated metal products sector also looms large; however, these industries represent many diverse intermediate products that are eventually used to produce more final goods such as autos or machinery. Primary metals, principally steel foundries as designated by the industry code 331 on the chart, is the most concentrated industry (as measured by employment) in the District. Yet, its employment is relatively small in comparison.


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Charts for each individual state will soon be available on our Midwest Regional Website. Iowa is reproduced below. As the chart suggests, employment in food processing stands out as the largest and the most concentrated in the state. In large part, this activity represents Iowa’s further processing of corn and soybeans into meals and oils, as well as its meat packing industry, chiefly pork. Iowa’s large and highly concentrated machinery industry reflects its focus on its manufacturing of farm machinery and equipment.


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Analysis of the District’s lesser industries can also be informative. In the overall U.S., the computing and electronic products industries have grown rapidly into a large component of overall U.S. manufacturing. In virtually every Seventh District state, for example, employment in this sector exceeds the median manufacturing sector. But at the same time, the states’ concentration of this sector is universally below the national average. In this instance, the sector’s lower concentration and lesser expansion here have contributed to a slower pace of overall economic growth.

Of course, these glimpses are only a superficial beginning to understanding the structure and behavior the region’s economy. For one, individually identified sectors often have important linkages to others that merit further consideration. Such industries as machinery and autos, for example, purchase great volumes of intermediate materials and parts locally, including those found in rubber and plastics, fabricated metals, and machinery (e.g., tool and die and metal cutting machinery). Also, in varying degrees, sectors may purchase local services as diverse as management consulting and transportation. Specific industry linkages can be found in the input–output tables of the U.S., which are produced by the U.S. Bureau of Economic Analysis (BEA).

However, the U.S. input–output tables may often be misleading for regional analysis. That is because specific inter-sector buying and selling relationships will differ greatly and vary widely from region to region. For one, local firms will purchase intermediate goods and services from many possible places. For the most part, we know little about the varying geography of such relationships. In response, the BEA has adapted and estimated the national relationships for individual regions of the U.S. in its RIMS II modeling system. This system and others like it, which are available commercially, are often used to estimate the broader economic impacts of small changes to a community or local industry.

Posted by Testa at 8:42 AM | Comments (0)

August 30, 2006

Are U.S. and Seventh District business cycles alike?

This question is posed by Michael Kouparitsas and Daisuke Nakajima (K-N) in a current Economic Perspectives article. The answer, in general, is “yes,” and, in their analysis, many additional insights are gained about the structure and behavior of the Seventh District regional economy and its five component states of Illinois, Indiana, Michigan, Iowa and Wisconsin.

The so-called business cycle refers to the way that cyclical fluctuations of aggregate income relate to cyclical fluctuations of individual economic components, such as consumer spending, business investment, and job creation, and the ways that these components relate to each other. In this regard, academic economists have found that national economies around the world behave similarly, and a lesser body of evidence now suggests that sub-national or regional economies do, too.

The K-N article gathers some long time series of data on the overall Seventh District economy along with component parts that are analogs to U.S. economic series. The figure below from K-N juxtaposes the aggregate business cycle of the Seventh District and each state with the overall U.S. economic cycle.


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In their analyses, K-N show that the timing of swings in Seventh District state economies is very similar to the nation. Most likely, this is explained by the fact that the economies of the U.S. and the District are affected by common “shocks” such as energy price surges. One exception is a weak tendency for Michigan and Indiana economies to lead the direction of the overall Seventh District by one quarter of a year, perhaps because of those states’ sharp concentrations in durable goods production.

Behaviors of various components of the District economy also mimic their counterparts in the U.S. and world economies. Residential investment and consumption in general tend to lead business cycles. As a leading indicator, average weekly hours of workers in the manufacturing sector also tend to precede swings in aggregate income, as does initial claims for unemployment insurance. Total employment often is a coincident or lagging indicator.

Such information can be further used to construct economic indexes that lead, lag or are coincident with a region’s business cycle. These indexes can be useful for short-term planning and forecasting, especially because there is no timely measure of aggregate economic activity for states and regions that is akin to GDP for the nation.

While the timing of the swings in District state economies are similar to those of the nation’s, there are some differences in the behavior of the states. Iowa’s overall economy is less synchronous with the nation than other District states. Presumably, Iowa’s much larger economic concentration in agriculture means that its economy fluctuates with commodity prices to a greater extent. For Indiana and Michigan, the amplitude of their economic swings are more profound—something that Michiganders, for example, have long tried to consider in their mechanisms to fund state government.

Michael Kouparitsas has previously researched the relative coincidence of business cycles among regions of the U.S (EP article). From a policy perspective, such studies reveal those instances, such as in the U.S., where adjacent regional economies are closely aligned. This alignment indicates that there are gains to having a common currency for our national economy (which we do, the U.S. dollar) as well as gains to conducting a common monetary policy for the overall economy (which we do through the Federal Reserve System). In addition to these policy implications, such research is helpful in understanding particular regional economies such as the Seventh District.

Posted by Testa at 10:00 AM | Comments (0)


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