Impact of Lower Natural Gas Prices on the Freight Transportation Sector

Posted on April 24, 2013 by Paul Traub

Enhanced exploration and recovery of natural gas and other fuels from shale rock have significantly boosted expected availability of energy in the United States. Projections of natural gas supply in this country have gone up so quickly in the past decade that it is hard to get a good handle on where energy markets are going to settle in the decade ahead—that is, at what price and in what industries it will be used as the fuel of choice. One thing is clear—natural gas is now readily available. Nothing shows this better than the falling price of natural gas relative to oil. While the price of oil is up 64.5 percent from 2005, the price of natural gas has actual fallen by 56.7 percent.

Falling prices of natural gas will surely result in increased investment in the many industries and activities that can use natural gas. Natural gas can be used not only as a less expensive alternative for energy and electric power generation, but also as a material input for such products as petro chemicals, plastics and fertilizers. To consider the implications of this new energy revolution, the Federal Reserve Bank of Chicago recently held an event entitled, New Access to Energy: Midwest and Global Industry Impacts. The conference featured panels on diverse topics, including the availability of supply, regional and global market impacts, re-shoring of manufacturing, and developments in the freight transportation sector.

The transportation industry has quickly adapted to falling natural gas prices, especially freight transportation by truck. The trucking sector has had to overcome some significant challenges over the past couple of decades, including rising diesel prices, added emissions standards, and enhanced driver safety regulations, just to name a few.

In an effort to understand more about how falling natural gas prices might impact the trucking industry, the conference’s transportation session covered four specific areas:
1. Overview of the medium and heavy truck market.
2. Implementation of natural gas vehicles into a delivery fleet.
3. The development of natural gas heavy duty trucks.
4. The availability of natural gas and associated infrastructure development.

The U.S. class 8 trucks industry outlook was presented by Ken Vieth, senior partner and general manager for Americas Commercial Transportation (ACT) Research Company, LLC. Vieth’s presentation overviewed the heavy duty truck market and its potential for conversion to natural gas. In the U.S., trucks are classified by size or gross vehicle weight rating (GVWR). Most commercial trucks are rated from GVWR 3 (10,001–14,000 pounds) to GVWR 8. Heavy duty or class 8 trucks are trucks with a GVWR above 33,000 pounds. These are the vehicles most often used for carrying freight over long distances. The mix of trucks by GVWR has changed significantly over the last 65 years, with class 8 truck share growing from virtually zero in 1946 to over 30 percent in 2012. According to data from Ward’s Automotive, in calendar year 2012 class 8 trucks accounted for 34.2 percent of all class 3 through class 8 trucks sold in the United States.

In 2012, there were 201,300 class 8 trucks produced in the United States. Of those, only about 3.0 percent were designed to use natural gas. However, ACT Research expects the share of natural gas powered class 8 trucks to grow to 50 percent in the next 10 to 20 years. Two of the main reasons cited for this dramatic change in demand for natural gas driven trucks (NG trucks) are regulatory considerations related to more stringent emissions standards and the competitive cost advantage natural gas provides compared with gasoline or diesel fuel. Vieth pointed out that, at today’s prices, on a cost per gallon equivalency basis, natural gas is 33 percent less expensive than gasoline and 39 percent cheaper than diesel. A natural gas truck is more expensive to buy than a comparable gasoline or diesel vehicle but, over a five-year period, the cost savings with an NG truck could be as high as $100,000, more than offsetting the higher initial investment. As for emissions and other regulatory issues, natural gas burns cleaner, resulting in far less greenhouse gas and particulate matter being released into the atmosphere.

To gain a better understanding of how NG trucks are currently being used, a case study of the implementation of natural gas vehicles into a delivery fleet was provided by Jeff Shefchik, president of Paper Transport, Inc. in Green Bay, Wisconsin. Paper Transport is one of the early adopters of natural gas powered trucks for the freight industry. In February 2010, Paper Transport purchased two Freightliner M-2 tractors powered by the Cummins ISL-G natural gas engine. Today they have 35 such vehicles in operation out of a fleet of 390 tractors, and their fleet has logged over 3.5 million miles. Shefchik pointed out that Paper Transport began converting to natural gas for the environmental benefits, as well as the economics of natural gas versus diesel. The decision to convert so many of their trucks wasn’t without some concerns—specifically, finding the right applications, convincing the drivers, maintaining the engines, and the fuel delivery infrastructure. But, according to Shefchik, these issues were easily overcome. He said that the return on investment and payback are application dependent, but for a regional over-the-road model, the payback was just four years for a truck that would most likely stay in service for ten years or more. Shefchik’s payback model was consistent with that presented by Vieth. Shefchik also mentioned that natural gas prices tended to be a lot more stable over time than gasoline and diesel fuel prices, which is helpful for business planning purposes.

We heard about the development of natural gas trucks and what lies ahead from Robert Carrick, sales manager for natural gas vehicles at Daimler Trucks N.A. LLC. Carrick has worked in the trucking industry for 28 years and has held a number of management positions. While working for Freightliner Trucks, which is the largest division of Daimler Trucks N.A., he initiated the first natural gas project for the ports of Los Angeles and Long Beach and delivered over 500 natural gas trucks all across North America. Since that time, Freightliner has delivered an additional 1,500 natural gas trucks. Daimler has developed NG trucks for a variety of applications, including port tractors, food delivery, regional haul tractors, refuse trucks, sewer trucks, utility trucks, and municipal vehicles. Carrick pointed out that natural gas engines produce less pollution and are significantly quieter than comparable diesel engines, making them preferable for many applications in cities or confined areas. Also, municipal and utility fleets that return to the same location every evening are good applications for natural gas because vehicles can be refueled onsite overnight. Another good application for natural gas is long-haul freight distribution, because NG trucks can be equipped with fuel tanks that allow them to go up 600 miles between fill-ups. To prove this point, Freightliner completed a cross country tour from Los Angeles to Washington D.C. in seven days. During the trip, the vehicle refueled just four times, stopping in Phoenix, Oklahoma City, Little Rock, and Nashville. Carrick said Daimler recognizes that natural gas prices could increase again and infrastructure improvements need to continue, but he predicted that by 2020, NG trucks could equal 10 percent of Daimler Truck N.A.’s total production.

The final presentation addressed the availability of natural gas and the development of the fuel distribution infrastructure for the trucking industry and was given by David Jaskolski, a senior account manager for Pivotal LNG, a wholly owned subsidiary of AGL Resources. Jaskolski has over 30 years of experience in developing and implementing strategic plans for key accounts in commercial on-highway, construction, marine, petroleum, and rail markets, and is recognized as an expert in the use of natural gas as an alternative fuel for heavy duty trucks.

Jaskolski pointed out that the U.S. already has an extensive natural gas pipeline network that runs throughout the country. Using a plumbing analogy, he said the pipes are already in the house—we just need to decide what types of faucets we need and where we want to put them. There are two options for using natural gas, each requiring a different faucet—compressed natural gas (CNG) and liquid natural gas (LNG). CNG is a better option for buses, refuse trucks, and utility or municipal fleets, for which fuel consumption is low (less than 65 gallons a day), space for numerous tanks is available on the vehicle, vehicle weight is not important, wheelbase is not an issue, time to fuel is not an issue (can fuel overnight), and vehicles may sit idle for long periods. The exact opposite of this holds true for long-haul vehicles. Because of this, they are better suited to using LNG. LNG is the same natural gas that is used in homes across America and, thus, it is readily available. The major difference is that the gas is cooled in an industrial process to –260 degrees, at which point it turns into a liquid. Once cooled to a liquid, 1 cubic foot of LNG is equal to 600 cubic feet of natural gas. Care must be taken when fueling, because the fuel will turn back to a gaseous state if it is not kept cold. This is why LNG is not good for applications in which vehicles are allowed to sit idle for extended periods as the gas will just dissipate. However, the quick dissipation of liquid natural gas is a plus in terms of safety and the environment. In the event of a spill, unlike diesel fuel and gasoline that can pool on the ground or flow into lakes and streams, LNG will just evaporate into atmosphere. In addition, LNG is not explosive or flammable like gasoline or diesel fuel. For LNG to be flammable, it must return to vapor first, and natural gas vapor will only ignite in a ratio of 5 percent to 15 percent natural gas to air and only if there is an ignition source present. For natural gas vapor to get to the level of concentration needed to ignite, it must be in a confined area. Unlike gasoline, natural gas vapor is not explosive in the open air.

In summary, there appear to be many applications in the trucking industry for which natural gas makes good economic sense. Early adopters have had good success in incorporating natural gas vehicles profitably into their fleets. Truck developers are working on creating more options for the future. And for CNG and LNG, most of the distribution network is already in place.

For more on the conference and to access copies of the presentations cited here and others from the conference, please visit the New Access to Energy: Midwest and Global Industry Impacts page on the Federal Reserve Bank of Chicago’s website.

2012 Michigan Employment Summary

Posted on April 11, 2013 by Paul Traub

By Martin Lavelle

The Bureau of Labor Statistics’ annual benchmark revisions indicate that Michigan’s labor market decelerated in 2012, adding 37,400 to total nonfarm payrolls while seeing its unemployment rate fall to 9.0% in March and rise to 9.3% during the summer, before falling again and settling at its current rate of 8.9%. As seen in chart 1, Michigan’s unemployment rate tracked somewhat the behavior of the national and Seventh District unemployment rates, though Michigan’s unemployment rate uptick was sharper. Despite the drop in the unemployment rate, Michigan’s labor force shrank for the sixth straight year. Over the past six years, Michigan’s labor force participation rate has fallen from 64% to 59% as population out-migration accelerated.

Chart 1: U.S., Seventh District, and Michigan Unemployment Rates

As shown in chart 2, the state’s labor market expanded at a stronger and more consistent pace last year, adding 97,000 workers to nonfarm payrolls as the unemployment rate fell throughout the year. After revisions, Michigan nonfarm payroll employment over the past two years was revised upward by 51,500. In 2012, the largest job gains were recorded in manufacturing (+20,700) and professional & business services (+9,900). Construction and government were the two largest drags on employment growth, though construction employment picked up slightly toward the end of 2012.

Chart 2: Changes in Michigan Total Nonfarm Payroll Employment, Level vs. 3 Month Moving Average

In 2012, Michigan’s nonfarm payroll employment increased 1.9%, slightly faster than the nation’s, which grew 1.7%. Michigan’s nonfarm payroll employment growth slightly decelerated from 2011 when growth was 2.3%. The state placed fourteenth in employment growth among all states in 2012 after placing second the previous year. During the second half of 2012, Michigan’s employment growth slowed to a rate slower than the nation’s.

Chart 3 compares employment levels in the fourth quarter of 2012 and the fourth quarter of 2011. Michigan’s employment grew at a slower rate than both the nation’s and the District’s. The only job category that expanded at a faster rate in Michigan was manufacturing. When comparing fourth quarter year-over-year employment levels, Michigan’s total nonfarm payroll employment expanded 1.1%, ranking 36th among the states. However, for the first quarter, year over year, Michigan’s total nonfarm payroll employment increased 2.6%, ranking fourth among the states.

Chart 3: Employment Growth by Sector, 4th quarter 2012 vs. 4th quarter 2011, U.S., Midwest, Michigan

Where has the slowdown in Michigan employment growth taken place? Sector-wise, while still registering strong annual increases, growth in manufacturing employment has slowed considerably, especially in metals, plastics & rubber, and machinery-related occupations. Chemical manufacturing and transportation equipment growth rates flattened out, while declines took place in computers and electronic equipment.

Relative sector weaknesses emerged in retail trade and leisure & hospitality during the fourth quarter of 2012. Nationally, retail trade employment grew at a 1.5–2.0% annual rate during the holiday season. However, Michigan’s retail trade employment decreased at a –0.2–0.5% rate, with the most significant declines occurring at gas stations, grocery stores, and general merchandise stores. Leisure & hospitality employment in Michigan only grew at a 1.2% rate versus 2.7% growth nationally. A large divergence took place in the subsector of arts, entertainment & recreation, where nationally, employment grew at around a 2.5% annual pace while statewide employment fell at an annualized pace of –9.5%.

The rate of decline in metro area unemployment rates slowed from its 2011 pace. Western Michigan’s metros (Grand Rapids, Kalamazoo, and Holland) are seeing their unemployment rates fall faster than other parts of the state. Lansing and Detroit have seen slight increases in their respective unemployment rates. Payroll employment growth has also slowed, with decreases in Saginaw and continued stagnation in Lansing. Growth continues to be strongest in Grand Rapids and Holland, although the only major Michigan metro area that is seeing a significant acceleration in employment growth is Ann Arbor.

Employment growth continues slowly

Posted on February 26, 2013 by Paul Traub

Each year at the end of January, the U.S. Bureau of Labor Statistics updates its monthly seasonal factors and revises its nonfarm payroll employment numbers. This year, the revised employment numbers indicate that job growth in the United States may have been stronger than previously estimated. Chart 1 below shows monthly nonfarm employment from January 2010 through December 2012 before and after the latest revisions.

According to the latest revision, there were some 647,000 more nonfarm payroll jobs created since January 2010 than originally estimated, with more than half of them created during calendar year 2012.

While this is good news, the unemployment rate in the United States in January 2013 remained at 7.9 percent; and the fact remains that there are fewer people working today than at the start of the recession. In fact, since the start of the recession in December 2007, we have lost over 9.0 million jobs. Through January 2013, only 5.8 million new jobs have been created. This means that nonfarm payroll employment levels are still running 3.2 million behind where they were when the recession began. Chart 2 shows U.S. nonfarm payroll jobs gained and lost by sector since January 2008, when U.S. nonfarm payroll employment peaked.

In the private sector, the industries that have been the slowest to recover include manufacturing, construction, trade and transportation, information technology, and financial activities. In total, these sectors are still down a total of 5.2 million employees. The public sector is still down by 512,000 employees, with local governments accounting for 89% of those job losses. It is no surprise that local governments have been the hardest hit, given the impact falling real estate price have had on revenue generation in many local communities and school districts throughout the country.

On the plus side, the biggest employment gains can be seen in the education and health services, leisure and hospitality, and mining and logging sectors. Health services alone has added 1.6 million jobs, accounting for half of all jobs created since the start of the 2008 recession. In fact, that sector has added jobs in every month since December 2007. This is a pretty remarkable feat, given the severity of the recession.

How has Michigan fared? Unlike the U.S., in Michigan nonfarm payroll employment actually peaked in April 2000 at 4,691,100 jobs. Michigan continued to lose jobs from then through the start of the 2008 recession. By January 2008, Michigan’s total nonfarm payroll employment had fallen by 450,000 jobs. After the 2008 recession started, Michigan lost an additional 413,300 jobs before bottoming out in July 2009 at 3,827,800 jobs. This is a total job decline from peak to trough of 863,300 jobs or 18.4% of all nonfarm payroll employment in the state. In December 2012, Michigan’s nonfarm payroll employment was reported to be 3,973,300, which is an increase of 145,500 jobs since July 2009. However, from peak to trough, Michigan is still down 717,800 nonfarm payroll jobs.

Chart 3 shows Michigan’s nonfarm payroll jobs gained and lost by sector since the start of the 2008 recession. Since the recession began, Michigan is still down 267,800 payroll jobs.

Even with the recent job gains in the auto industry, Michigan’s manufacturing employment is still down 76,900 jobs from the start of the recession. However like the nation as a whole, Michigan has seen fairly steady job growth in the education and health services sectors. The good news is that, relative to the nation’s, Michigan’s job recovery has been somewhat stronger, albeit from a much lower base. Charts 4 and 5 show the percentage change in nonfarm payroll employment for the United States and Michigan by major category and by sector from the start of the recovery through December 2012.

As these data indicate, Michigan has seen stronger total growth than the nation since the start of the recovery, with private sector job growth overshadowing losses in the public sector. The auto recovery also shows up better in these charts, as Michigan is shown posting an 18.8% increase in manufacturing jobs compared with only 2.5% for the nation. The question is whether this trend will continue. Chart 6 shows total U.S. manufacturing employment by month from January 1960 to January 2013.

Here we see that, even taking into account the cyclicality of the 1960s and 1970s, manufacturing employment remained fairly stable through the end of the 20^th century. However, since the beginning of the 21^st century, manufacturing employment has fallen by about 5.3 million jobs. More recently there has been talk about a manufacturing resurgence in the United States. This discussion started following the Japanese earthquake and tsunami when supply chains for some industries experienced major disruptions to production throughout the world. The debate centered on the need to minimize risk, even if it meant higher prices for some commodities and component parts. More recently, new technologies for extracting natural gas and petroleum products from shale rock have led some to argue that the availability of low-cost energy could make the U.S. more competitive and lead to the return of some manufacturing jobs. This debate is ongoing.

On April 8–9, 2013, the Chicago Fed’s Detroit Branch will host an event to discuss the impact of enhanced domestic recovery of natural gas and other fuels on industries and regional economies. The conference will focus on the shifting markets, development opportunities, and economic outcomes resulting from increasing shale gas and oil extraction in the United States.

For further details on the conference, including a complete agenda and information on registration, location, and accommodation, please visits our conference webpage.

http://chicagofed.org/webpages/events/2013/detroit_energy.cfm

[1] Michigan’s employment data will be revised on March 16. We do not expect significant changes, but I will provide a review of the revisions in a subsequent blog.

Price Decisions

Posted on February 13, 2013 by Paul Traub

Written by Martin Lavelle

As promised, we will tackle not only research topics in our blog, but also personal finance and economic education topics; because these are additional areas we focus on at the Detroit Branch of the Chicago Fed. This past Friday, I had the pleasure of speaking with high school students from Northwest H.S. in Jackson, MI, and one of the subjects they were interested in learning more about was the pricing of goods and services. While labor, material, and transportation costs figure prominently into constructing prices, so do the anticipated responses, or price elasticities by customers to a set price.

In the Managerial Economics class I teach at the University of Michigan-Dearborn, one of the subjects we cover near the end of the term is price discrimination. Price discrimination is the practice of charging different prices to consumers for the same good or service. In order to practice price discrimination, a firm must have some market power. Farmers are unable to practice price discrimination because they’re in a more competitive market and are forced into the position of “price-taker,” settling for the market price.

“Price-setters” can execute one of the three types of price discrimination, as explained in a video lesson by Jason Welker. Between his notes page and video lesson, Welker does a great job detailing the different degrees of price discrimination and examples of each. Third-degree price discrimination is the most common form of price discrimination practiced by firms. Every time you go to the movies, you are subjected to third-degree price discrimination. Movie theaters try to maximize their revenue by charging different prices for tickets to different groups and at different times of the day. For example, students with a student ID are charged lower prices because they are arguably more sensitive to price changes than an adult couple who are enjoying date night. Amusement parks such as Disneyland provide more examples of third-degree price discrimination. You can buy one-day or multi-day passes. You can go to Disneyland or California Adventure Park separately. Another option is for you to stay at the hotel for multiple days and visit the parks over that time. Each option comes with a different ticket price.

Second-degree price discrimination occurs when firms post a schedule of declining prices for different ranges of quantities. Consumers decide how much to purchase based on their forecasted usage. Anything you buy in bulk, in which the price per unit you pay for goods or services declines as the quantity you purchase increases, is an example of second-degree price discrimination. The various ticket plans offered by sports teams that have become increasingly popular in recent years as athletic departments and professional sports teams try to maximize their revenue could be considered as second-degree price discrimination. Historically, sports teams like the Detroit Tigers offered season ticket and group packages in addition to single-game tickets. Now, in addition to the usual 81-game season ticket package, the Tigers offer 41-game packages, weekend packages in which you can buy season tickets for weekend home games, and 15-game packages for those baseball fans that can’t make it down to the ballpark as frequently.

First-degree price discrimination is the least common form of price discrimination practiced, because it requires the firm to charge each individual consumer the respective maximum price they’re willing to pay for a good or service. This implies firms possess a lot of information about their consumers and their buying habits. Until recently, one of the best examples of first-degree price discrimination was auctions. When you buy something at an auction, you reveal how much you’re willing to pay for a particular item. However, in recent years through the use of information technology, firms have acquired consumer information that in some cases allows them to cater to individual consumers. The June 30, 2012, edition of The Economist gives examples of how firms are using information technology to develop price discrimination strategies.

Price discrimination, while it does imply that firms are exerting market power, may not necessarily be bad news for consumers. If there is competition among suppliers in a market, and few barriers to new suppliers entering a market, consumers may sometimes be well-served by more customized pricing practices. However, concerns over firms exhibiting monopolistic or oligopolistic power may arise as firms gain more market share; such practices are illegal if they result in firms violating anti-trust policies. The Supreme Court has ruled that price discrimination claims under the Robinson-Patman Act should be evaluated in a manner consistent with broader anti-trust policies. In practice, Robinson-Patman claims must meet several specific legal tests:

The act applies to commodities, but not to services, and to purchases, but not to leases.
The goods must be of “like grade and quality.”
There must be likely injury to competition (that is, a private plaintiff must also show actual harm to his or her business).
Normally, the sales must be “in” interstate commerce (that is, the sale must be across a state line).[i]

Teachers who would like someone from the Detroit Branch to visit and present at their school should contact Katherine Nelson at 313-964-6170 or Martin Lavelle at 313-964-6150. We’ll do our best to accommodate your needs.

In addition, please consider attending our next “Teacher Night at the Fed” at the Detroit Branch on March 6. More information can be found here.

[i]http://www.ftc.gov/bc/antitrust/price_discrimination.shtm, “Price Discrimination Among Buyers: Robinson-Patman Violations,” 11 Feb 2013.

The U.S. and Canadian Economies Continue to Improve Slowly

Posted on February 6, 2013 by Paul Traub

In an earlier blog entitled “What is Canada’s Role in the U.S. and Michigan Economies?,” I talked about the link between the economies of the United States and Canada and what role Canada might play in Michigan’s economic recovery. These topics were discussed in more detail at the Canada–United States Business Association’s (CUSBA) Economic Outlook for 2013. I was fortunate enough to be asked to speak at this event, along with Martin Schwerdtfeger, senior economist for Toronto-Dominion Bank. Here are some of the main points that were presented during the discussion.

I opened the discussion with a brief summary of the U.S. economy. The most recent data through December suggest that growth in U.S. economic activity has paused in recent months, in large part because of weather-related disruptions and other transitory factors. Employment has continued to expand at a moderate pace, but the unemployment rate remains elevated. On a positive note, the recently revised employment numbers indicate that total nonfarm payroll employment had increased by as much as 647,000 more than originally thought. Based on advanced estimates from the Bureau of Economic Analysis comparing the fourth quarter of 2011 with the same period in 2012, we see that total GDP grew by 2.2 percent, personal consumption expenditures increased by 1.9 percent, and gross private domestic investment advanced by 9.6 percent. Headwinds to this growth were net exports of goods and services (–0.7 percent) and government consumption expenditures and gross investment (–1.7 percent).

I then went on to discuss the U.S. consumer. When talking about the consumer, it is important to distinguish between the consumer’s ability and willingness to consume. On the ability side, the consumer has seen some recent improvements in real disposable income and an improved debt position evidenced by lower debt service ratios, low inflation rates, and low interest rates. However, on the willingness side, the consumer remains skeptical because of slow job creation, which has led to stubbornly high unemployment rates; and although the consumer’s household net worth has improved, home prices remain well below their previous peak. In addition, slower global growth expectations, higher payroll taxes, and potential fiscal spending cuts continue to add to uncertainty. Combined, these factors have kept consumer attitudes, as indicated by the University of Michigan’s Consumer Sentiment Index, at near recessionary lows since 2008.

One positive for Michigan and the Midwest economy has been the consumer’s increasing propensity to purchase automobiles. Light vehicles sales in the U.S. increased to 14.4 million units in 2012, which was an increase of 4.0 million units from the industry trough reached in 2010. According to analysts’ forecasts, auto sales are expected to continue to increase in 2013, reaching 15.0 million units, due to pent-up demand, an aging vehicle fleet, and the consumer’s desire to take advantage of the better fuel economy featured in some of the newer products on the market.
Transitioning to a discussion on the Canadian economy, Schwerdtfeger pointed out that Canada’s economy has long been closely tied to the economic health of the United States. According to Schwerdtfeger, Canada’s economy had outperformed the economies of other developed countries since 2007, led by growing consumer spending and a vibrant housing market. However, the housing markets in Canada appear to have peaked, and consumers are becoming more cautious about adding to their debt. Schwerdtfeger went on to say that, over the next few years, growing exports to the U.S. will likely help to sustain at least modest economic growth for Canada. But once the final figures are in for 2012, Canada’s almost seven-year run of outperforming the United States will likely come to an end.

On the international front, Schwerdtfeger warned that concerns over the U.S. fiscal outlook and a continued drag from the European recession will most likely negatively impact Canada’s economic performance in 2013. Fiscal consolidation in the U.S. alone could shave as much as 0.7 percentage points off Canadian economic growth through declining exports and knock-on-effects to other areas of the Canadian economy. Beyond mid-year, Schwerdtfeger suggested that U.S. economic growth could improve enough, based on stronger real estate activity, to support a modest increase in Canadian exports. Still, an overvalued Canadian dollar, elevated household debt, and government restraint will likely keep Canada’s overall pace of economic expansion in check. Schwerdtfeger saideconomic growth for Canada in 2013 and 2014 is forecasted at 1.7 percent and 2.5 percent, respectively. Faced with this continued sub-par performance of the economy in the near term, the Bank of Canada will be in no rush to raise interest rates earlier than 2014, unless growth at the end of this year exceeds current expectations.

Please use the links provided here to view Martin Schwerdtfeger’s presentation and Paul Traub’s presentation file.

What is the U.S. Auto Industry Outlook for 2013?

Posted on January 29, 2013 by Paul Traub

On Thursday, January 24, 2013, the Detroit Association for Business Economics (DABE) held its annual Bob Fish Memorial Automotive Outlook luncheon. The speakers for this event were Joseph Barker, from the Industry Analysis Group of General Motors (GM), and Mike Jackson, senior manager of North American production forecasting at IHS Automotive. Barker discussed the U.S. automotive sales outlook for 2013 and beyond, while Jackson concentrated on the North American production forecast. Both of these analysts are strong industry experts, excellent presenters, and former colleagues of Bob Fish—a former president of the DABE and one of the group’s founders.

Light vehicle sales for 2012 started better than expected because of pent-up demand for commercial fleet vehicles and the pushing of product by Japanese original equipment manufacturers (OEMs) to meet their fiscal year targets, said Barker. Vehicle sales slowed slightly in the third quarter once the pent-up demand for commercial fleet vehicles was met. Additionally, it was estimated that the effects of Hurricane Sandy lowered sales in October by as many as 300,000 units. However, seasonally adjusted annual rates of auto sales were 15.5 million and 15.3 million units for November and December, respectively; thus, the auto sales rate in the fourth quarter of 2012 reached its strongest level since 2007 and helped pushed calendar year light vehicle sales for 2012 to 14.4 million units.

Barker said that the mix of light vehicle sales in 2012 shifted more to compact and mid-size cars when compared with the mix in 2011, thanks partially to the sales of outgoing models at discounted rates and sales of replacement models that were particularly attractive to buyers. Loyalty to luxury vehicles showed signs of decreasing, with fewer luxury car owners returning to the luxury market. Also, smaller percentages of non-luxury vehicle owners are trading up to the luxury market. Toyota and Honda saw improvements in their respective market shares, which had been hurt from the disruption in parts and supplies caused by the 2011 Japanese earthquake and tsunami; however, their market shares still haven’t recovered to pre-disaster levels.

On the pricing front, the major manufacturers saw a reversal from downward price pressures caused by overcapacity in the industry, said Barker. Average transaction prices were similar or slightly higher for the largest seven OEMs (Chrysler, Ford, GM, Toyota, Honda, Nissan, and Hyundai). In addition, average incentives as a percentage of average transaction prices for the largest seven OEMs have converged since the end of the recession indicating a less discernible difference in product quality between the manufacturers. However, the incentives for the Detroit Three OEMs (Chrysler, Ford, and GM) are still slightly above the industrial average. Even with this firming of prices, falling interest rates on loans and better leasing conditions have pushed Comerica Bank’s Auto Affordability Index to one of its lowest levels on record. Comerica’s index calculates the number of weeks of median family income needed to buy a new car; the index reported this value to be just 23.1 weeks for the fourth quarter of 2012 (compared 24.2 weeks for the fourth quarter of 2011).

Improved affordability, along with the fact that the average age of the current fleet of vehicles in operation is at a record high, has helped increase the percentage of consumers intending to buy a new vehicle within the next six months, according to Barker. Although Barker said he expects there will be a deceleration of sales growth, annual sales for 2013 should rise to between 15.0 million and 15.5 million units. This outlook remains slightly bearish because of the following factors: the upcoming fiscal policy debates, the anticipated decline in the rate of real gross domestic product (GDP) growth that is slightly below the long-term historical rate, and continued slow growth in new home construction. But auto sales are expected to keep increasing until reaching 16.6 million units in 2016.

According to Jackson, the post-recession restructuring of the industry will help narrow the gap between North American sales and production going forward meaning that more of the vehicles sold North America will also be built in North America. Long-term output levels will exceed pre-restructuring levels because of increased exports, OEM expansion, and more localization of production. One of the major concerns about the growth in production plans is whether the supply chain can handle higher production levels with 20% of existing plants already running three shifts and with significant amounts of production capacity having been eliminated (by shuttering plants) over the past few years.

Going forward, “Asian Four” OEM (Toyota, Honda, Nissan, and Hyundai) production will be at least equal to GM and Ford production combined, whereas in previous years, GM production alone was double that of Asian Four OEM production, said Jackson. Jackson also noted that the Asian Four manufacturers will increase their North American production of light vehicles for sale here and abroad because North America is viewed as a safer market with lower currency risk. North America will lead in the production of high-margin crossover utility vehicles. And there will be many new products launched in the coming years. Currently, there are 45 new product launches planned for 2014 and many more in the pipeline. Jackson expressed measured optimism about the supply chain being up to the task ahead.

According to Jackson, the North American light vehicle production forecast for 2013 is 15.9 million units—which is just 3.2% higher than the level of 2012 but 84.9% higher than the recessionary low reached in 2009 of just 8.6 million units. Production of light vehicles in North America is expected to continue to rise, reaching 17.0 million units by 2015, noted Jackson.

For more detailed information and a copy of both presentations, please use the links below:
Joseph Barker’s Presentation: U.S. Light Vehicle Sales Outlook 2013
Mike Jackson’s Presentation: N.A. Light Vehicle Production Outlook 2013

What is Canada’s Role in the U.S. and Michigan Economies?

Posted on January 24, 2013 by Paul Traub

In the wake of the worst recession the world has seen in many decades, Canada continues to play an important role in the economic recoveries of both the United States and Michigan. Canada has long been one of this country’s biggest trading partners. The chart below shows how U.S. trade with Canada has grown over the years. Although Canada’s total share of U.S. goods trade has fallen slightly over the past 20 years, the dollar value of that trade has grown by more than 250%.

Even though trade between the U.S. and Canada declined sharply following the 2008 recession, Canada was able to hold on to the bulk of its share of total U.S. goods trade. The charts below display the shares of imports and exports for the United States’ top five trading partners since 2007. They show that Canada’s share of total U.S. trade of goods has remained relatively constant since 2007, accounting for approximately 14.2% of U.S. imports and 19.1% of U.S. exports in 2012. Moreover, as seen in the charts, Canada has maintained its position as our largest export partner and second largest import partner throughout the recession and through this point in the recovery.

Additionally, when it comes to Michigan’s economy, the importance of Canadian trade is just as large if not greater. According to my calculations using data from the U.S. Census Bureau, Canada ranks number one for Michigan in terms of both imports and exports. In fact, 44.7% of Michigan’s imports in 2011 came from Canada. At $46.7 billion, the value of Canadian imports to Michigan in 2011 was up 14.6% relative to 2010. As for exports from Michigan to Canada, the story is very much the same. In 2011 Michigan exported $23.6 billion in goods to Canada—up 6.7% relative to 2010. Since most of the import and export goods pertain to the auto industry, it only stands to reason that these numbers should continue to increase as light vehicle sales continue to improve.

In an effort to provide more insights into this topic, the Canada – United States Business Association (CUSBA) will be holding an event here at the Detroit Branch of the Federal Reserve Bank of Chicago. The event titled Cross-Border Economic Forecast for 2013 will be held here on Friday, February 1, 2013, from 11:30 a.m. to 1:30 p.m. I was pleased to be asked to participate in this event. Joining me on the panel to discuss the 2013 economic outlooks for the United States and Canada will be Martin Schwerdtfeger, senior economist for Toronto-Dominion Bank, and Daniel Howes, associate business editor for the Detroit News (who will serve as the moderator). To read more information about this event, visit www.cusbaonline.com or go to the “Upcoming Events” tab on the Michigan Economy blog to access and print a flyer with all the information.

Michigan Economic Update

Posted on January 10, 2013 by Paul Traub

I would like to open with a short introduction of myself and the newly created Michigan Economy blog. My name is Paul Traub and I am a Business Economist for the Federal Reserve Bank of Chicago.

In this spot, I will offer some insights into the ongoing performance of Michigan’s economy as well as some analysis of important public policy issues, manufacturing, construction, services, employment and of course the auto industry. I must be honest that I have never won a notable award in economics and I’ve yet to appear on a late night talk show. But, I have lived in Michigan my whole life and worked in the Detroit area my entire working career. My hope is to be able to use my knowledge of Michigan and my working experience together with my understanding of economics to provide an analysis of Michigan’s economy that is rooted in an understanding that only a true Michigander could possess. I hope to engage the reader in a way that we all learn more about this great state and its many opportunities.

I would not venture to engage in this endeavor without the support of a great amount of talent to back me up. The Chicago Fed has a number of very talented economists and researchers that I can and will call on for help. Some of them – such as William Testa, Thomas Klier, David Oppendahl, William Strauss and Martin Lavelle all offer a volume of expertise that would be difficult to match anywhere in the country. And of course, I would be remiss not to mention Scott Brave whose work on the Midwest Economic Index will help to make much of the analysis I will be sharing possible.

In addition, I will be posting some results from many of our local conferences, presentation materials from some of my public appearances, an occasional cross posting of articles from the Chicago Fed’s Midwest Economy blog as well as links to other data resources. As a regular feature, I will offer a monthly summary of Michigan’s economy. It will contain information about different sectors of the economy as well as data on things like employment, income, housing and the consumer. So if you are from Michigan or just interested in the economy of the Midwest, I’m confident you will find something here that will help you to understand Michigan’s complicated economy just a little better.

A summary of Michigan’s Economy

Michigan’s economic growth improved slightly in November, according to the Federal Reserve Bank of Chicago’s MEI Index for Michigan. The index remained below zero, indicating that growth is still below Michigan’s long-term average, but it increased to -0.04 in November from –0.09 in October. Manufacturing’s contribution to the index turned positive again following two months of decline. The most favorable change was the positive contribution from the construction sector, marking the first positive contribution to the index from construction since September 2005.

Michigan’s per capita income rose by 0.6% in the third quarter of 2012 on a year-over-year basis, although this increase was slightly smaller than in the second quarter. Based on data through the third quarter of 2012, Michigan’s GSP is estimated to be growing at a 0.8% pace relative to 2011. Most of this growth is due to positive contributions from manufacturing. Such positive developments should stimulate Michigan’s economic growth through the end of the year.

Other key indicators include:

•     Michigan’s unemployment rate declined to 8.9% in November from 9.1% in October;
•     Michigan’s housing market is showing some minor improvement, which may be an indication that the housing sector is on the mend; and
•    U.S. light vehicle sales remained strong in December, helping to drive Michigan’s light vehicle production for 2012 to its highest level in in five years.

For a more detailed look into the numbers behind Michigan’s current economic performance, follow the link to the Chicago Fed’s Michigan MEI – 201301.

Developing Small Businesses and Leveraging Resources in Detroit Conference Summary

Posted on December 27, 2012 by Paul Traub

Written by Emily Engel

Detroit’s economic difficulties stem in large part from wholesale relocation of auto manufacturing jobs beginning in the 1970s. The city now has a rapidly declining population, high unemployment, very low property values, high crime rates, and underperforming schools. A variety of organizations interested in the city’s economic future believe that entrepreneurship is the way forward, and are working on multiple fronts to support and promote small businesses.
The Chicago Fed, the Michigan Bankers Association, and the New Economy Initiative for Southeast Michigan co-sponsored a symposium in Detroit on October 16–17 that brought together business experts and owners, policymakers, private capital funders, and bankers to address the issues of small business credit and financing.

Conference sessions began with a presentation of research findings on the MSA’s financial infrastructure and patterns of small business lending by Maude Toussaint-Comeau. Subsequent panels explored, broadly, the “entrepreneurial ecosystem” in Detroit; methods to connect small business owners with technical and advisory resources; on-the-ground experience of banks still active in the market and related compliance issues; and opportunities for small business lending from banks and other sources.

For years, service providers have been investing substantial resources in legal, management, and marketing services to small businesses in the Detroit area. Banks and other lenders have been active in SBA lending, Low Income Housing Tax credits and other programs that mitigate credit risks to small businesses. More recently, foundations, city planners and other civic organizations have been at the forefront of building a new ‘entrepreneurial paradigm’ in Detroit that develops the infrastructure to better connect small business owners with the resources available to them and addresses some of the capital gaps that have created liquidity constraints for small businesses.

For a more detailed summary of the symposium please read the Chicago Fed Letter co-authored by Robin Newberger and Maude Toussaint-Comeau Developing Small Businesses and Leveraging Resources in Detroit.

To view materials from the conference in Detroit please view the Developing Small Businesses and Leveraging Resources in Detroit events page on the Chicago Fed website go here.

Federal Reserve Bank of Chicago’s 26th annual Economic Outlook Symposium

Posted on December 27, 2012 by Paul Traub

Written by Martin Lavelle

The Federal Reserve Bank of Chicago hosted its 26^th annual Economic Outlook Symposium on Friday, November 30, 2012. The symposium addressed the 2012 performance as well as the 2013 outlook for the U.S and Seventh District economies and their key sectors. William Strauss, Senior Economist and Economic Advisor, reported that real GDP forecasts submitted last year by attendees, economists, and other analysts were in line with actual figures. Light vehicle sales and residential investment were stronger than predicted, the unemployment rate fell more than anticipated, and consumer spending met expectations. Total inflation, business fixed investment, and industrial production was weaker than expected.

The group’s 2013 forecast calls for real GDP to grow at a faster rate than in 2012, a rate slightly above trend. Most of the major sectors are expected to see growth slightly accelerate in 2013. The pace of growth is projected to increase in consumer spending, business fixed investment, and industrial production. The housing and employment markets are expected to improve steadily, but still remain well off their respective long-run trend levels. Inflation expectations look to be consistent with the Federal Reserve’s goal of price stability.

Carl Tannenbaum, Chief Economist, Northern Trust, calls for the U.S. economy to continue growing slowly and steadily. The unemployment rate is expected to fall slowly as the labor market sorts through issues such as high levels of discouraged workers, increasing numbers of part-time workers, and workers’ increasing acceptance of lower wages. The housing market is projected to see increased activity, though headwinds remain; these include stubbornly tight lending standards, pending regulations, and high levels of student loan debt, making it harder for potential new home buyers to enter the market. Orderly resolutions of U.S. and European financial issues are expected, though both continue to represent significant downside risks to the growth forecast.

Mary D’Ascoli, Economic Analyst, Toyota, believes U.S. and global light vehicle sales levels will increase in 2013. The forecast of higher sales levels can be attributed to an ever aging fleet of vehicles and relatively high used vehicle prices. There is presently a mismatch between new and used vehicle inventory; there aren’t large numbers of slightly used vehicles, adding to the attraction of new vehicles. As a result, vehicle manufacturing capacity utilization rates are expected to remain around 80% throughout next year. Hurricane Sandy is deemed to have lowered sales levels between 300,000 and 400,000 units, which should be made up for by the first quarter of 2013.

Robert DiCianni, Marketing Manager, ArcelorMittal USA, indicated slow growth in the steel industry continued in 2012 with slower growth expected the rest of this year and in 2013. Even though residential construction’s recovery is underway, it is restricted by lingering high unemployment levels, tight credit conditions, and distressed property inventory. Nonresidential construction activity is expected to remain relatively unchanged. Overall construction activity is expected to improve enough to increase demand for construction machinery. Continued improvements in light vehicle, truck, and appliance sales will boost sales of electric motors. An expanding energy sector will require more steel; however, steel demand for rail cars, rail tank cars, and the rest of the infrastructure segment is expected to level out. Despite the presence of continued downside domestic and global risks, such as European financial stress, there is cautious optimism within the steel market for next year.

Dr. Loren Scott, President of Loren C. Scott & Associates, Inc., delivered the keynote presentation, which looked at the potential of natural gas. The supply of domestic shale natural gas could lead to great opportunities for a number of industries, including chemical production. Ethane is a major input in ammonia fertilizer used in agriculture, and ethylene is used in household goods, ranging from toys to clothing, and clean burning boiler fuel. The cost to make ethylene is in the U.S. is half that in Europe, where oil is used to produce ethylene. Another growing natural gas demand source is power producers. Natural gas is looked at as a lower-cost, lower-emission alternative to coal. With large shale deposits such as the Bakken, Eagle Ford, Marcellus, and Utica available for mining, severe downward pressures could be applied on utility bills and overall energy prices. An additional demand source could be exports of shale natural gas and shale oil. Over the past four years, the increase in shale oil exports equals 80% of Iran’s total oil exports before the imposing of sanctions on Iran. If domestic shale deposits are explored thoroughly, complementary infrastructure such as pipelines and rail cars will need to be added to accommodate increasing supply. There is great concern surrounding the hydraulic fracturing or “fracking” that allows natural gas to be extracted from shale. However, Scott noted that in 60 years of fracking, no scientific cases of drinking water contamination were reported.

Donald Johnson, Chief Economist, Caterpillar Inc., said developing countries will grow at faster rates than developed economies next year. Developed countries, including the U.S., continue to experience record low interest rates thanks mostly to central banks’ continued efforts to enhance bank liquidity. The U.S. construction sector should improve next year. Europe has fallen into recession and little improvement is expected next year. Economic growth in developing economies should improve more than half a percentage point as countries like China and Brazil adopt more accommodative monetary policies in order to further ease credit conditions. Commodity production is expected to increase, likely increasing prices slightly.

Presentations from the Economic Outlook Symposium can be found here. Next year’s Economic Outlook Symposium will take place on Friday, December 6^th.