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Midwest Economy





Modified: 2014-09-24T15:21:03Z

Copyright: Copyright (c) 2014, Testa
 



Mid-year Export Trends

2014-09-24T15:21:03Z

By Bill Testa Recently released data on U.S. foreign trade for July from the U.S. Census Bureau and U.S. Bureau of Economic Analysis (BEA) show an improvement in exports of U.S. goods. On a month-over-month basis, exports increased $1.8 billion,... By Bill Testa Recently released data on U.S. foreign trade for July from the U.S. Census Bureau and U.S. Bureau of Economic Analysis (BEA) show an improvement in exports of U.S. goods. On a month-over-month basis, exports increased $1.8 billion, to $138.6 billion. This rise in exports—which helps to narrow the trade deficit—points to a stronger pace of U.S. gross domestic product (GDP) growth for the third quarter of 2014 relative to earlier this year. July’s improvement in trade performance also bodes well for the economy of the Seventh Federal Reserve District. As seen below, exported manufactured goods make up a greater percentage of District production than of national production. Moreover, each District state’s ratio of manufactured export value to annual state output meets or surpasses the nation’s ratio of manufactured export value to GDP (7.1%). Notably, by this measure, Indiana and Michigan significantly exceed the nation as a whole, owing to their strong industry concentrations in transportation equipment (cars and trucks). Looking more closely at July’s performance, one can see that the composition of July’s U.S. export growth favored District industries. As the Census/BEA trade report states: “The June to July increase in exports of goods reflected increases in automotive vehicles, parts, and engines ($1.7 billion); industrial supplies and materials ($1.3 billion); and capital goods ($0.4 billion).” In addition to the District economy’s high concentration in the export of transportation equipment, several District states also export significant amounts of capital goods: machinery and equipment such as agriculture, construction, and mining equipment, as well as computers and electronic equipment (see below). Moreover, several District states export chemicals, including both industrial chemicals and pharmaceuticals. According to measures of export growth in first half of the year as compared to a year ago, not all industry categories have been holding up in 2014 (see below). Of particular note, machinery exports from Illinois, Michigan, and Wisconsin have been lagging compared to last year’s first half. And while automotive sales and production have been generally growing, transportation equipment exports from Michigan, Wisconsin, and Illinois recorded declines in first six months of 2014 over last year. And so, if continued export growth can be sustained for the rest of this year and beyond, it will be welcome news for the District economy. Following a surge in growth during 2010–11 (see below), District (and U.S.) manufactured exports slumped in tandem with slowing growth in eurozone countries, which are important buyers of District manufactured goods. District manufactured export growth has also faltered on account of slower economic growth in China and in other lesser developed countries. Since global economic growth slowed down, global demands for commodities such as minerals and energy have eased, depressing Midwest exports of mining and construction equipment. Rising District manufactured exports in 2014 would be consistent with modestly stronger global economic growth as compared with 2013.[1] As of its July forecast, the International Monetary Fund (IMF) expects global growth to be 3.4% this year, up from 3.2% in 2013 (see below). World economic growth is expected to further accelerate to 4.0% in 2015, according to the IMF. As our trading partners continue to experience faster economic growth, we can expect that their purchases of the District’s manufactured goods, such as machinery, transportation equipment, and industrial supplies, will begin to bolster the region’s manufacturing production. Note: Thanks to Rebecca Friedman and Paul Traub for assistance. _____________________________________ [1] Year to date th[...]



New Survey-Based Activity Indexes

2014-09-15T19:52:46Z

By Rebecca Friedman In a recent Chicago Fed Letter, Scott Brave and Thomas Walstrum discuss a business conditions survey that the Chicago Fed has been conducting in conjunction with the Beige Book since March 2013. To measure economic activity in... By Rebecca Friedman In a recent Chicago Fed Letter, Scott Brave and Thomas Walstrum discuss a business conditions survey that the Chicago Fed has been conducting in conjunction with the Beige Book since March 2013. To measure economic activity in the Seventh District, they construct a set of diffusion indexes based on survey responses (which are explained in greater detail in the article itself). Brave and Walstrum then compare their diffusion indexes with the Institute for Supply Management’s (ISM) purchasing managers’ indexes (PMIs) and the Chicago Fed’s Midwest Economy Index (MEI), and demonstrate how the anecdotal evidence collected for the Beige Book can often be helpful in understanding pivotal or special economic events. Survey respondents come from all of the major industries in the Seventh Federal Reserve District, with manufacturing contacts composing the largest subset. Respondents are asked to rate the performance of their respective businesses on a seven-point scale in a series of questions covering the demand for their products or services over the past four to six weeks relative to the previous four to six weeks. A series of diffusion indexes are then calculated from the survey responses that are intended to capture changes in the prevailing direction of regional business conditions. The figure below compares Brave and Walstrum’s Beige Book indexes against similar measures produced by the ISM. The ISM’s indexes are also calculated using a survey-based methodology allowing the authors to compare their survey responses for manufacturers and nonmanufacturers with the ISM’s national manufacturing and nonmanufacturing PMIs, as well as with a Midwest PMI (taken by averaging the ISM’s PMIs for Chicago, Detroit, and Milwaukee). Brave and Walstrum cite the strong correlation observed between their Beige Book diffusion indexes and the ISM’s national PMIs in the figure, suggesting that their indexes are capturing very similar business conditions. They also note that there may be some evidence that their Beige Book index leads the Midwest PMI. The authors next examine the ability of their main Beige Book index (covering both manufacturers and nonmanufacturers) to predict non-survey-based measures of economic activity by comparing them with with the MEI—a monthly weighted average of Midwest economic indicators measured relative to a trend rate of Midwest economic growth. To compare the Beige Book index with the MEI, the authors adjust their Beige Book index to be relative to survey respondents’ trend (or average) responses. Their analysis comparing the two indexes suggests that their Beige Book index may slightly lead the MEI in capturing changes in the direction of regional economic activity. Brave and Walstrum also describe two recent instances where anecdotal information collected for the Beige Book was useful in this regard: 1) discerning whether the slowdown in economic growth in the first quarter of 2014 was likely to be a temporary setback and 2) capturing the recent pickup in activity in regional labor markets. A more detailed description of the survey and index methodologies can be found here. The authors note that they continue to study the potential applications of their survey and diffusion indexes, with the intention to make their results publicly available in the future. [...]



Seventh District Update, September 2014

2014-09-03T20:54:29Z

By Thom Walstrum and Scott Brave 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 remained moderate...

By Thom Walstrum and Scott Brave

(image)

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 remained moderate in July and August, and contacts maintained their optimistic outlook for the rest of the year.

• Consumer spending: Growth in consumer spending picked up to a moderate pace in July and August. Retailers reported noteworthy sales increases for apparel and lawn and garden items, but cited weaker growth at grocery stores. Promotional activity scaled back some, but remained high, as clearance sales have been effective at eliminating excess inventories. Light vehicle sales increased, particularly for mid-size sedans and crossover vehicles.

• Business Spending: Business spending continued to grow at a moderate pace in July and August. Capital expenditures and spending plans both increased, as more contacts reported capital expenditures to support capacity expansion, particularly in the auto and construction industries. The pace of hiring slowed slightly, though hiring plans ticked up.

• Construction and Real Estate: Construction and real estate activity increased over the reporting period. Residential construction, home sales, nonresidential construction, and commercial real estate activity all increased moderately.

• Manufacturing: Manufacturing continued to grow at a moderate pace in July and August. The auto industry remained a source of strength for the District and demand for steel increased further. Demand for heavy machinery picked up some on net, as higher demand for construction machinery overshadowed weakness for agricultural and mining machinery.

• Banking and finance: Credit conditions improved modestly in July and August. Business lending increased, with contacts noting continued growth in demand for the financing of equipment and commercial real estate from small and middle-market businesses. Consumer loan demand grew moderately, with an increase in credit card lending, continued growth in auto lending, and a slight uptick in new mortgage originations.

• Prices and Costs: Cost pressures increased, but remained modest. Energy prices remained elevated and steel prices were higher in spite of increased imports, as a large share of these imports remains at the docks due to customers’ unwillingness to pay elevated shipping surcharges. Retail prices were up slightly as contacts reported decreasing the generosity of sales promotions. Overall, wage pressures were modest, but a number of contacts again reported wage pressures for skilled workers.

• Agriculture: Corn and soybean production in the District should exceed last year’s levels. Corn, soybean, hog, and cattle prices were lower, while milk prices were higher.

Led by continued strength in the manufacturing sector, the Midwest Economy Index (MEI) increased to +0.62 in July from +0.56 in June. The relative MEI increased to +0.29 in July from –0.01 in the previous month, marking its first positive reading since February 2014. July’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.




Are Seventh District Labor Markets Still Slack?

2014-08-25T13:56:36Z

By Bill Testa and Jacob Berman There is no question that the U.S. labor market has been gradually but steadily healing after the Great Recession. The national unemployment rate peaked at 10% in October 2009, but it has since fallen... By Bill Testa and Jacob Berman There is no question that the U.S. labor market has been gradually but steadily healing after the Great Recession. The national unemployment rate peaked at 10% in October 2009, but it has since fallen to 6.2% (as of July 2014). The nation experienced a net loss of 8.7 million jobs during the downturn, and finally finished making up for those job losses just this past May. So, undeniably, progress has been made in the labor market, but now the questions facing policymakers and other government officials are how much slack capacity in the employable population remains and whether further tightening of labor market conditions will push up wages and prices. Recently, short-term unemployment—defined as the share of the labor force that has been unemployed for 26 weeks or less (see below)—has fallen to levels that have been historically associated with robust economic conditions. In contrast, despite post-recessionary declines in long-term unemployment (i.e., the share of the labor force that has been unemployed for greater than 26 weeks), its recent levels remain well above the historical norm. Though high long-term unemployment may be a sign of considerable labor market slack, some argue that the vast majority of the long-term unemployed lack the specific skills and other characteristics to be hired or trained. If this proves to be correct, it would imply that the U.S. labor market is nearing its full capacity. Source: U.S. Bureau of Labor Statistics, Current Population Survey, from Haver Analytics In order to provide more useful guideposts for macroeconomic policymaking, economists Dan Aaronson and Andrew Jordan recently investigated the relationships between rising wages and indicators of labor market tightness. In their recent Chicago Fed Letter, the authors find a strong correlation between real wage growth and two prominent measures of labor market slack—medium-term unemployment (i.e., the share of labor force unemployed for five to 26 weeks) and the percentage of the labor force reporting they are working part-time involuntarily for economic reasons (such as unfavorable business conditions or seasonal decreases in demand). Partly because both of these measures of labor slack remain elevated today, the authors conclude that real wage growth in June 2014 would have been one-half of a percentage point to one full percentage point higher under the labor market conditions of the 2005-07 U.S. economy. While we often speak of the labor market as one monolithic term, labor market conditions vary widely by occupation, industry, and location. In their analyses, Aaronson and Jordan identify statistical relationships between real wage growth and labor market conditions by observing individual states. In the chart below, we see the general pace of employee compensation for both the United States and for the East North Central Region, which includes four of the five states of the Seventh Federal Reserve District.[1] In both the nation and the region, recent growth in labor compensation continues to fall short of that in the pre-recessionary period.[2] Source: U.S. Bureau of Labor Statistics, Current Population Survey, from Haver Analytics Also, as seen in the next three charts, Seventh District states generally exhibited signs of greater labor market slack in 2013 relative to the pre-recession year of 2007.[3] Long-term unemployment—both in the Seventh District states and in the nation—has stayed high during the economic recovery. In 2013, the long-term unemployment rate in Illinois was the highest among the District states (followed by Michigan). Notably, Michigan’s long-term unemployment rate had been at a high rate already in 2007 as a result of the severe restructur[...]



Economic Development in Chicago

2014-08-18T20:20:15Z

By Rick Mattoon This last blog in our series on the largest cities in the Chicago Fed’s District focuses on Chicago. (For a complete profile of all five cities, see Industrial clusters and economic development in the Seventh District’s largest... By Rick Mattoon This last blog in our series on the largest cities in the Chicago Fed’s District focuses on Chicago. (For a complete profile of all five cities, see Industrial clusters and economic development in the Seventh District’s largest cities.) Chicago holds a different place in the urban hierarchy than the other large cities in the District. More than just a large midwestern city, Chicago has obtained global city status and competes with other global cities in the U.S. (New York, Los Angeles, Washington and San Francisco) and abroad (London, Paris, Tokyo, and Hong Kong to name a few) for investment and reputation. Chicago is the home to world-class museums, cultural institutions and universities, as well as corporate headquarters and one of the busiest airports in the world. Importantly, one of Chicago’s primary advantages is its ability to attract human capital. Recent work by Bill Testa and Bill Sander highlighted the ability of Chicago’s downtown core to attract educated young adults.[1] As this survey of city economic strategies has shown, human capital accumulation is a primary strategy for growth, and Chicago appears to have advantages in attracting and retaining skilled workers. Chicago’s economy underwent a profound shift in the 1990s. As manufacturing jobs began to decline, the Chicago-area economy shifted toward business and professional services. These sectors provided the city with high-paying jobs and helped lift its economy relative to other manufacturing-dependent Midwest cities. As we can see in the data (table 1), Chicago has a highly diversified economy, which closely mirrors the structure of the U.S. economy. Chicago does have challenges. The fiscal condition of the city (and the state) is precarious, highlighted by large underfunded public pension obligations. Also, the city has struggled to emerge from the Great Recession, as highlighted by slow job growth (figure 1). Chicago’s Industry Structure As figure 1 shows, Chicago has eight industries with higher employment and location quotients (LQs than the U.S. average.) [2] They are: manufacturing (LQ 1.04), wholesale trade (1.14), professional and technical services (1.13), management of companies (1.28), administrative and waste services (1.20), educational services (1.44), transportation and warehousing (1.24), and finance and insurance (1.16). This provides a highly diverse mix of high-end professional services (accounting, consulting, and advertising) with retained strength in manufacturing and logistics and warehousing. Economic Development Strategy in Chicago In 2012, Chicago unveiled a new economic development strategy that was based on a study conducted by World Business Chicago (WBC), which is the city’s public–private economic development agency. The study was based on a series of reports by subcommittees that focused on the recent strengths and weaknesses of Chicago’s economy. In the end, the report identified ten strategies, which included a focus on specific industry clusters—advanced manufacturing, professional services, and headquarters operations—as well as infrastructure improvements. The strategies are as follows: • Support advanced manufacturing—high-value-added manufacturing. • Increase the region’s attractiveness for business services and headquarters. • Enhance the city’s competitive position as a transportation and logistics hub. • Make Chicago a premier destination for tourism and entertainment. • Make the city a leading exporter—support export activities, particularly for small and mid-sized businesses. • Develop a work force in a demand-driven and targeted manner. • Support entrepreneurship and innovation[...]



Economic Development in Detroit

2014-08-11T14:29:25Z

By Rick Mattoon Detroit is the focus of this blog examining economic development issues in the five largest cities in the Chicago Fed’s District. (For a complete profile of all five cities. see “Industrial clusters and economic development in the... By Rick Mattoon Detroit is the focus of this blog examining economic development issues in the five largest cities in the Chicago Fed’s District. (For a complete profile of all five cities. see “Industrial clusters and economic development in the Seventh District’s largest cities”). Relative to the other large cities, Detroit faces some special challenges. Home to the domestic auto industry, Detroit grew and flourished until increased foreign auto competition began to erode the dominant position of Detroit-based auto producers. With a challenged industrial base and increasing racial strife culminating in the 1967 riots, Detroit began a long process of population out-migration. The city’s population fell from a high of 1.8 million in 1950[1] to the most recent estimate of just under 700,000.[2] This combination of industrial and population decline severely challenged the fiscal condition of the city. The city’s large geographic footprint (140 square miles) and declining tax base made it increasingly difficult to provide city services, culminating in a 2013 Chapter 9 bankruptcy filing, which is still being resolved. Not surprisingly, the city’s immediate economic development plans aim to stabilize its population, restore government services, and attract new businesses that should find its relatively low property prices attractive. Detroit’s Industry Structure Figure 1 shows Detroit’s employment structure and industry concentrations (location quotients or LQs) relative to the U.S. Detroit has five industries with above U.S. average employment shares and location quotients above 1. These industries are manufacturing (LQ of 1.29 or 29% above the U.S. average), professional and technical services (LQ 1.45), management of companies (LQ of 1.34), administrative and waste services (1.15), and health care and social assistance (1.09). This reflects recent efforts by the city to develop business and professional services in the downtown business district, which has led to investments by Quicken Loans and Compuware. Economic Development Strategy in Detroit In December 2012, the Detroit Strategic Framework Plan was released.[3] The long-term planning aspect of the report was produced by a mayor-appointed, 12-member steering committee drawn from the business, community, faith-based, government, and philanthropic communities. The Detroit Economic Growth Corporation managed the project. The plan is designed to recognize core assets that the city has and to examine ways to leverage those assets to restore and stabilize the Detroit economy. The plan creates four benchmark goals for the city to achieve by 2030. • Stabilize the residential population at between 600,000 and 800,000. • Increase the number of jobs available per city resident from the current level of 27 per 100 people to 50 per 100 people. • Enhance the regional transportation network to better integrate Detroit and the rest of the MSA and develop land-reuse plans that will repurpose existing vacant tracks for new types of development. • Establish an ongoing framework for civic involvement. The plan also has specific economic development elements that are captured by five implementation strategies. • Emphasize support for four key sectors with highest potential growth—education and medical, industrial, digital/creative, and local entrepreneurship. To support growth in these sectors, the plan calls for aligning private and civic investments. This includes having work force development strategies specific to these four industry clusters. • Use a place-based strategy for growth. In practice, this would target “employment districts” where resource[...]



Economic Development in Milwaukee, WI

2014-08-04T15:09:44Z

By Rick Mattoon Milwaukee is the focus of this third blog examining the economic structure and development plans of the five largest cities in the Seventh Federal Reserve District. (For a complete profile of all five cities see, Industrial clusters... By Rick Mattoon Milwaukee is the focus of this third blog examining the economic structure and development plans of the five largest cities in the Seventh Federal Reserve District. (For a complete profile of all five cities see, Industrial clusters and economic development in the Seventh District’s largest cities.) Milwaukee grew up as a manufacturing city and was famed for its beer industry. Today manufacturing still plays an important role, but the city has added an array of financial and professional services firms and is targeting niche industries, such as freshwater management and industrial controls, to help drive future growth. Milwaukee also has an important difference from other large cities in the District in the sense that it is geographically close to Chicago. Chicago’s considerable economic shadow presents both advantages and disadvantages for Milwaukee. On the one hand, Chicago provides a huge market for Milwaukee’s products. On the other hand, Chicago’s size and influence pulls regional assets, including skilled workers, away from Milwaukee. However, as we will see from the economic development plan, Milwaukee is focused on industries that are either absent in Chicago or might compliment the greater bi-state regional economy. Milwaukee's Industry Structure Table 1 shows the Milwaukee MSA’s employment and industry concentration levels (also known as location quotients or LQs) relative to the US. Milwaukee has a diverse economic base, with above-average shares of employment and industry concentrations across an array of industries. Economic Development Strategy in Milwaukee The Milwaukee 7 Regional Economic Development Partnership released a strategy plan in November 2013.[1] The plan was developed over 18 months and was based on the work of five cross-sector working groups. The plan recognizes that Milwaukee’s economy has been lagging that of the nation for the past decade and is in a state of transition, with growth favoring knowledge-intensive products, services, and processes over traditional manufacturing. The plan identifies nine specific strategies aimed at improving regional productivity. These strategies are: • become a leading innovator, producer, and exporter of products and services related to energy, power, and controls • become a global hub for activity in water technology • grow the food cluster by leveraging geographic, supply chain, and human capital advantages • increase export capacity, particularly for small- and medium-sized firms • align work force development with growth in high-potential clusters • foster an innovation and entrepreneurship ecosystem • catalyze economic place-making (e.g., recast the economy from an image of traditional manufacturing to more technology-oriented manufacturing and services) • modernize regional infrastructure • enhance inter-jurisdictional cooperation and collaboration Milwaukee’s strategy appears to be more targeted than most other cities’. The Milwaukee MSA has a diverse economic base, with LQs above 1.05 in five industries. Rather than focusing on broader categories, the plan looks at subsectors within large groups, such as energy and energy controls, water science and management, and food production. The other elements of the policy are designed to create economic conditions (through productivity policies) that would benefit almost any industry. These infrastructure and workforce policies seem designed to create a platform for growth for many types of firms. Finally, as Figure 1 illustrates, Milwaukee’s job growth generally exceeded the region’s average heading into the Great Recession but underp[...]



Economic Development in Indianapolis, Indiana

2014-07-28T18:17:15Z

By Rick Mattoon This is a second in a series of blogs that highlights findings from an upcoming Economic Perspectives article on economic development efforts and industry trends in the largest metropolitan areas in the Seventh District. (For a complete... By Rick Mattoon This is a second in a series of blogs that highlights findings from an upcoming Economic Perspectives article on economic development efforts and industry trends in the largest metropolitan areas in the Seventh District. (For a complete profile of all five cities see, Industrial clusters and economic development in the Seventh District’s largest cities.) This blog focuses on Indianapolis. Like Des Moines, Indianapolis has the advantage of being the state capitol. This helps stabilize its performance in economic downturns. In addition, Indianapolis has a fairly unique regional governance structure called Uni-gov, which it adopted in 1970. This structure supports more unified economic planning across the metropolitan area. When it comes to industry structure, there is a diverse mix of industries in the area, along with some specialized niche industries, such as amateur athletics and auto racing. Indianapolis MSA Industry Structure Table 1 displays the industry structure of Indianapolis (based on employment relative to the U.S. as a whole). In addition, the table provides location quotients (LQs)[1] that demonstrate the relative concentration of that industry in the Indianapolis MSA versus the U.S. as a whole. Any score above 1 indicates that the MSA has a concentration above the U.S. average. For example, construction employment in Indianapolis has an LQ of 1.06, which means that its employment share is 6 percent above the U.S. average. The BLS figures for 2012 have nondisclosure issues for some large sectors, such as manufacturing and accommodations and food service, which likely make significant contributions to the metropolitan economy. Based on the available sectors, Indianapolis’s metropolitan employment shows above national average concentrations in real estate (LQ = 1.1), finance and insurance (1.07), transportation and warehousing (1.66), administrative and waste services (1.29), and construction (1.06). Indianapolis MSA Economic Development Strategy Develop Indy is a business unit of the Indianapolis Chamber of Commerce that partners with a wide array of local agencies to identify the region’s competitive advantages and target industries for growth.[2] The initiative has identified six factors that provide a competitive edge to the region: 1) low cost of doing business, including favorable taxation rates (lowest sales tax rate in the Midwest), real estate prices, and utility rates; 2) superior transportation infrastructure, including five major interstate connections, new airport terminal with significant cargo operations, the second largest Fed Ex hub in the nation, more than 100 trucking companies, five major rail lines, and three maritime ports; 3) available and well-trained work force with skills focused in life sciences, digital technology, advanced manufacturing, logistics, motor sports, and clean technology; 4) global appeal, with large foreign direct investment as evidenced by more than 500 foreign companies in the state; and 5) excellent higher education and cultural institutions, including Indiana University-Purdue University Indianapolis, Butler University, University of Indianapolis, and Ivy Tech Community College, amateur and professional sports teams, museums, zoo, and many public parks. Finally, as the figure below illustrates, employment growth for Indianapolis has done well relative to the Seventh District as a whole. Both before and after the Great Recession, Indianapolis has shown more robust employment gains than has been the case for the District. ________________________________________ [1]The U.S. Bureau of Labor Stati[...]



Economic Development in Des Moines, Iowa

2014-07-21T13:52:39Z

By Rick Mattoon In a forthcoming article in the bank’s Economic Perspectives, I profile the economic development efforts underway in the five largest cities in the Seventh District—Des Moines, Indianapolis, Milwaukee, Detroit, and Chicago. (For a complete profile of all... By Rick Mattoon In a forthcoming article in the bank’s Economic Perspectives, I profile the economic development efforts underway in the five largest cities in the Seventh District—Des Moines, Indianapolis, Milwaukee, Detroit, and Chicago. (For a complete profile of all five cities see, Industrial clusters and economic development in the Seventh District’s largest cities.) Each city faces its own unique set of challenges and has a distinctive economic base that has influenced its growth path. In a series of blogs, I would like to summarize some of the major trends in each metropolitan economy, starting with Iowa’s capital city—Des Moines. The Des Moines MSA (metropolitan statistical area) economy has developed a strong mix between financial and professional service firms and manufacturing. In addition, the city benefits from being the capitol of the state, leading to a high concentration in state government employment. Large employers in the area include Wells Fargo (banking), Principal Financial (financial services), Mercy Medical and United Point Health (both health care), DuPont Pioneer (agribusiness), John Deere (agricultural machinery), Marsh (insurance), and UPS (shipment and logistics). Des Moines MSA Industry Structure To get a sense of which industries are most important to the metropolitan area’s economy, we can look at its employment concentration in industries relative to the U.S. Table 1 shows the employment percentage for each industry for both the U.S. and the Des Moines MSA. For example, Des Moines has only two industries where the share of local employment is above the national share of employment—wholesale trade and management of companies. In addition, the table provides location quotients (LQs)[1] that demonstrate the relative concentration of each industry in the Des Moines MSA compared with the U.S. A reading of 1 indicates that Des Moines has the same industry employment concentration as the U.S. As the table shows, Des Moines has significantly above average employment concentrations in two industries—wholesale trade at 1.27 ( or 27% above the U.S. average) and management of companies at 1.17. Additionally, Des Moines’s industry concentrations are roughly in line with the U.S. averages for such important industries as construction, retail trade, administrative and waste services, and arts and entertainment. The industries that are much less represented in Des Moines are agriculture, mining, and utilities (although clearly agriculture is of key importance to Iowa as a whole). Interestingly, two sectors that the city targets for growth, professional and business services and manufacturing, have relatively low concentrations (0.74 and 0.64, respectively). In the case of professional and business services, an issue with the data is that nondisclosure rules do not permit an LQ to be calculated for the important finance and insurance sector, which is likely to have high levels of professional employment. Des Moines MSA Economic Development Strategy The Greater Des Moines Partnership led an effort to develop a five-year plan for Des Moines and the capital region. The plan aims to position Des Moines as a midsized city with a specialized industry base. It focuses on an industry and demographic comparison with other similar regions, including Omaha, Nebraska, Madison, Wisconsin, and Denver, Colorado. The plan identifies key clusters in which the region is most competitive and recommends that the region market itself specifically to these sectors: finance and insurance; information solutions; hea[...]



Seventh District Update, July 2014

2014-07-16T20:02:34Z

By Thom Walstrum and Scott Brave 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 remained moderate...

By Thom Walstrum and Scott Brave

(image)

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 remained moderate in June and contacts maintained their optimistic outlook for the rest of the year.
Consumer spending: Consumer spending increased in June, but the overall pace of growth remained modest. In most cases, retail sales met or fell slightly below expectations. Light vehicle sales rose as consumers continued to enjoy favorable incentives and credit conditions.
Business spending: Business spending continued to grow at a moderate pace in June. Capital expenditures and spending plans continued to increase, with expenditures still concentrated on industrial and IT equipment. Hiring picked up and hiring expectations continued to increase, with the gains more pronounced in the service sector than in manufacturing.
Construction and real estate: Construction and real estate activity increased at a moderate pace in June. Residential construction increased, but home sales declined modestly. Nonresidential construction strengthened considerably and commercial real estate activity continued to expand.
Manufacturing: Manufacturing production continued to grow at a moderate pace in June. The auto, aerospace, and energy industries remained a source of strength for the District. Steel service centers reported improving order books, as did many specialty metal manufacturers. Demand for heavy machinery grew at a slow but steady pace, weighed down by the weakness in mining.
Banking and finance: Credit conditions improved moderately. Corporate financing costs decreased further. Business lending increased, with contacts noting a pickup in demand for financing of equipment and commercial real estate. Growth in consumer loan demand was steady.
Prices and costs: Cost pressures increased, but remained modest. Energy costs remained elevated. Competition put downward pressure on retail prices, but wholesale prices changed little, compressing margins. Wage pressures increased, primarily for skilled workers. Non-wage labor costs were little changed.
Agriculture: The District’s corn and soybean crops made up ground as favorable weather helped plants emerge more quickly than the five-year average. Corn, soybean, wheat, milk and cattle prices moved down, while hog prices moved higher as disease affected supplies.

Led by improvements in the manufacturing sector, the Midwest Economy Index (MEI) increased to +0.41 in May from +0.11 in April, reaching its highest level since December 2013. However, the relative MEI remained negative for the third straight month, after edging down to –0.38 in May from –0.36 in the previous month. 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.




District Housing Update

2014-07-10T16:30:33Z

By Bill Testa The housing sector has made halting progress throughout the five-year recovery from the Great Recession. Beginning in June 2013, progress began to slow as mortgage rates jumped, thereby hampering affordability and lending viability. Even as home mortgage... By Bill Testa The housing sector has made halting progress throughout the five-year recovery from the Great Recession. Beginning in June 2013, progress began to slow as mortgage rates jumped, thereby hampering affordability and lending viability. Even as home mortgage rates and lending standards were beginning to ease, this past winter’s unusually cold and stormy weather dealt another setback to sales and construction activity in several regions, including the Midwest, Northeast, and parts of the South. In an effort to analyze residential real estate market developments in the Seventh District, I have developed an index that monitors its metropolitan statistical areas (MSAs).[1] The index combines observations of each District MSA’s housing market on a year-over-year basis. Any index value greater than 50 (indicating that more MSA observations are positive than negative) signals expansion for the Seventh District’s residential real estate sector; index values less than 50 indicate contraction. As of the first quarter of 2013, the Index entered positive (expansionary) territory for the first time since 2005, where it remained throughout 2013, although the pace of expansion eased during the second half of the year. However, the most recent reading for Q1:2014 shows that downward momentum from 2013 coupled with the depressing effect of a harsh winter pushed the index into contractionary mode once again. In observing individual MSAs (below), scattered contractionary trends are evident in each District state, but especially in smaller MSAs. In contrast, large MSAs continued to expand (e.g., Chicago and Des Moines) or at least showed neutral growth trends (e.g., Detroit, Indianapolis, and Milwaukee). A look back to the fourth quarter of 2013 (above) shows that, to a greater extent, local housing markets continued to display improvement before the onset of winter, which raises the question of whether forward momentum will soon be reestablished. During the past couple of months, housing indicators suggest that activity has bounced back to some extent. Nationally, three major housing activity indicators—new housing sales, existing home sales, and pending home sales—have all flashed positive in May.[2] Though these measures are not recorded for the particular geography of the Seventh District, all four major U.S. regions expanded by these measures in May—including the Midwest.[3] Seemingly, Midwest housing is back on the road to recovery. Still, strong activity in the second quarter of 2014 may partly reflect pent-up demand from last winter’s stall. Note: thanks to Thom Walstrum for assistance. ________________________________________ [1]The number of MSA observations varies slightly as MSA boundaries change and some observations must be temporarily dropped from the sample. This index is built from two distinct data measures of housing market activity in each metropolitan area. The first measure is residential building permits. Permits are obtained prior to the construction of both single-family homes and multi-family buildings, such as apartments and condos; and data on the issuance of these permits are collected on a monthly basis. The second measure is the Federal Housing Finance Agency’s House Price Index (HPI), which is a quarterly measure that tracks the movement of single-family house prices. For a discussion of methodology see this earlier blog post. (Return to text) [2]See http://www.census.gov/construction/nrs/; http://www.realtor.org/research-and-st[...]



Seventh District R&D: Manufacturing the Leader

2014-06-23T21:24:29Z

By Bill Testa Few would take issue that the U.S. economy is propelled by innovation. To stay ahead of their competitors, virtually all enterprises engage in innovation of one form or another. Such innovations take the form of improvements to... By Bill Testa Few would take issue that the U.S. economy is propelled by innovation. To stay ahead of their competitors, virtually all enterprises engage in innovation of one form or another. Such innovations take the form of improvements to products, services, and internal processes of production and delivery. In the case of start-ups or new enterprises, the proportion of activity devoted to innovation can be the dominant activity for years prior to its actual operation and revenue generation. Start-up firms have captured the imagination of cities that are encouraging entrepreneurs in their pursuits.[1] Recently, the State of Illinois has offered funds to expand Chicago’s prominent new business incubator, which is named “1871” in reference to re-building from the great fire of that year. Similarly, the City of Detroit will seek to designate and boost its “TechTown” as a major part of its economic redevelopment. Many established businesses also engage in innovation, but they do so in a more formal way, that is by budgeting for and performing research and development (R&D). The National Science Foundation tracks R&D funds across all sectors, including the U.S. business sector. Their preliminary estimates for 2012 report that the business sector overall performed 70 percent of the nation’s R&D, amounting to $316.7 billion, followed by federal government (12.2 percent), and universities and colleges (13.9 percent).[2] In tracking R&D performance as measured in dollars that can be allocated across states, the table below ranks Seventh District states by the dollar amount of R&D for each of four major categories for the latest year available, 2011.[3] The business sector dwarfs others in 2011, accounting for almost 70 percent of R&D performed. By this measure, each District state is ranked above the national average, with Michigan’s sixth place and Illinois’ eighth place figuring very prominently. Based largely on the strength of their performance in the business sector, these states also rank highly in overall R&D performed, at seventh for Michigan and eighth for Illinois. Significant contributions to their rankings are also evident from universities and colleges and federally funded R&D Centers (Illinois), and in the case of Michigan, universities and federal government operations. Within the business sector, manufacturing companies continue to conduct the lion’s share of R&D. As shown below, manufacturing performed 68.5 percent of private sector R&D in 2011. This is down from previous decades, as several service sectors have grown rapidly. In particular, the software publication, computer systems design, and scientific services sectors now comprise, in aggregate, 19.2 percent of R&D performed. But rather than these service sectors, manufacturing remains the primary contributor to the Seventh District’s R&D prominence. The far right columns in the table below display the District’s relative employment concentration in leading R&D sectors by individual industry.[4] The first three rows present the employment concentration of leading service industries in R&D performance. With a few exceptions, such as Wisconsin’s high concentration in software publishing at 39 percent above the national average, District state concentrations tend to fall below national levels. In contrast, the manufacturing leaders in R&D activity are much more concentrated in District states. For example, concentrations in non-medicinal chemicals such as industrial chemicals exceed na[...]



Industrial Cities Initiative Profiled in New Report

2014-06-13T19:50:51Z

By Emily Engel and Jere Boyle (via) Community Development and Policy Studies at the Chicago Fed recently published profiles of a group of 10 cities that experienced significant manufacturing job loss in recent decades. The Industrial Cities Initiative (ICI) includes,... By Emily Engel and Jere Boyle (via) Community Development and Policy Studies at the Chicago Fed recently published profiles of a group of 10 cities that experienced significant manufacturing job loss in recent decades. The Industrial Cities Initiative (ICI) includes, Aurora and Joliet in Illinois; Fort Wayne and Gary in Indiana; Cedar Rapids and Waterloo in Iowa; Grand Rapids and Pontiac in Michigan; and, Green Bay and Racine in Wisconsin. While each city has been blogged about before (see the “BLOG” tab), a complete set of more detailed profiles are now compiled into one report. Collectively, the profiles provide insights from local economic development leaders on the cities’ actions in the wake of the job loss that have either helped or hindered redevelopment efforts. The authors and contributors to the ICI do not pass judgment on individual cities. So, while we understand the temptation to simply link directly to just one city’s profile, we encourage readers to start their exploration of the ICI with the Summary. The ICI looked at cities’ conditions, trends and experiences and concluded that efforts to improve their economic and social well-being are shaped by: Macroeconomic forces: Regardless of their size or location, these cities are impacted by globalization, immigration, education, job training needs, demographic trends including an aging population, and the benefits and burdens of wealth, wages, and poverty; State and national policies: State and national policies pit one city against another in a zero-sum competition for job- and wealth-generating firms; and The dynamic relationship between the city and the region in which it is located: Regional strengths and weaknesses to a large extent determine the fate of the respective cities. The ICI homepage provides access to the full ICI report, individual ICI city profiles and related research, and blogs from around the country about cities that share a manufacturing legacy. [...]



Seventh District Update

2014-06-04T19:50:18Z

by Thom Walstrum and Scott Brave 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...

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 was moderate in April and May. Although contacts were expecting a stronger pick-up in growth, they maintained their optimistic outlooks for the remainder of the year.
Consumer spending: Growth in consumer spending increased slightly, but overall remained modest. Several retail contacts reported higher than normal inventories in anticipation of stronger summer sales. Light vehicle sales decreased slightly.
Business Spending: Business spending grew at a moderate pace, led by higher capital expenditures on equipment and software. Hiring plans changed little from the previous period.
Construction and Real Estate: Growth in construction and real estate activity picked up. Residential construction increased, while nonresidential construction continued to expand at a slow pace. Contacts also noted improvement in residential and commercial real estate markets.
Manufacturing: Manufacturing production continued to grow at a moderate pace. Capacity utilization in the auto and steel industries increased as production levels rose. Demand for heavy machinery grew at a slow but steady pace, weighed down by the weakness in mining.
Banking and finance: Credit conditions improved slightly. Corporate financing costs decreased. Business lending increased, driven by commercial and industrial loan demand from small businesses. Growth in consumer loan demand remained modest.
Prices and Costs: Cost pressures increased, but overall were modest. Energy and transportation costs remained elevated. Contacts reported lingering shipment delays of goods and raw materials from the harsh winter weather earlier in the year. Wage pressures rose slightly and non-wage pressures rose moderately.
Agriculture: Corn and soybean planting progressed quickly after precipitation and cool temperatures slowed fieldwork earlier in the spring. Corn and wheat prices were lower, while soybean prices drifted higher. Livestock prices remained well above the levels of a year ago, although hog prices moved lower.

The Midwest Economy Index (MEI) increased to +0.12 in April from –0.04 in March. However, the relative MEI decreased to –0.23 in April from –0.13 in the previous month, remaining negative for the second consecutive month. 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.




Is Something Ailing the Illinois Economy?

2014-05-08T20:28:43Z

By Bill Testa As the US economic recovery approaches the five-year mark, a look back shows that it has been far from a smooth and upward ride. Since the end of the Great Recession, the economy has grown at a... By Bill Testa As the US economic recovery approaches the five-year mark, a look back shows that it has been far from a smooth and upward ride. Since the end of the Great Recession, the economy has grown at a generally disappointing pace with fits and starts due to repeated setbacks. Many parts of the U.S. economy are still working their way through the effects of the financial crisis that accompanied the recession. For instance, the labor market has been healing quite slowly. And many households and businesses are still repairing their balance sheets after having suffered steep losses in asset values. Also, the overhang in housing inventory has been slow to clear. Meanwhile, global economic recovery has faltered several times—first, in Europe and, most recently, in East Asia. As the U.S. economy began to recover in mid-2009, Illinois and other states in the Great Lakes region bounced back at a quick pace, albeit from a very low point. The Great Lakes region’s strong industrial orientation—that is, its heavy involvement in durable goods production—translated into a steep economic recovery as the nation’s businesses sought to rebuild their depleted inventories of capital goods and equipment while households similarly began to replace automobiles and other consumer durable goods. Moreover, since the global recovery was quite strong back then, exports of machinery and foodstuffs from the Great Lakes region also contributed to the economic climb. However, the Great Lakes region’s pace of growth began to decelerate two years into the recovery. The aforementioned growth impetus of inventory rebuilding and exports abroad eased. Among the major sectors, only the automotive industry continued to grow quickly. Following the Great Recession, Illinois began to recover and even gain ground on the nation, but its economic performance began to alarm many observers in 2011. As seen below, Illinois’s unemployment rate fell quickly in 2010 and into early 2011. However, the state’s unemployment rate then failed to show much improvement, even as the nation’s unemployment rate continued to fall more. It could be that Illinois’s deviation from the national trend in unemployment is related to the economic performance of the broader Great Lakes region. The Illinois economy is highly integrated with the other industrial states of the Great Lakes region—Wisconsin, Indiana, Michigan, and Ohio. Accordingly, the Illinois economy regularly rises and falls along with the economies of these states. If Illinois’s performance differs from its neighbors, it would be a cause for concern—and the degree of concern would be higher as Illinois fell further behind its neighbors. As the chart below suggests, the aggregate unemployment rate of the Great Lakes states (less Illinois), has continued to decline since 2011; Illinois progress has been much less. In what follows, I discuss possible sources of the deviation, including Illinois tax structure and Illinois industrial structure. In addition, I examine an alternative measure of labor market performance, namely the growth in payroll jobs. Illinois’s seemingly poor economic performance compared with that of its neighboring states has sparked a policy debate as to whether the state’s recent hikes in statewide income taxes may be deterring investment and hiring in the state. Beginning in January 2011, the state’s personal income tax rates were hiked from 3.0 percent to 5.0 percent for t[...]