Michigan’s Automotive R&D Part II

By Thomas Klier, Bill Testa, and Thom Walstrum

The automotive industry is synonymous with Michigan. This relationship was born of an explosion of technological innovation in Southeast Michigan, including the assembly line and key developments in the internal combustion engine and transmission system. Looking at innovative activity today, a hundred years later, it is not far-fetched to state that the geography of automotive innovation in North America resembles that of yesteryear, with Michigan retaining its dominant role. The state has been highly successful to date in sustaining its leading automotive R&D concentration. Yet, for good reason, policy initiatives in the state are aimed at retaining and building on its strength.

The research and development (R&D) activity of private industry is increasingly being recognized as an important part of the innovation that spurs economic growth and competitiveness. Companies undertake R&D both to improve their production processes for cost and quality and to create wholly new products and services.

Among mainstay U.S. industries, automotive remains one of the most innovative in this regard. R&D that was both financed and performed by U.S. domiciled automotive companies amounted to $11.7 billion in 2011, representing 5.2 percent of total R&D spending. The R&D intensity of automotive manufacturing (as a share of the industry’s value added) is 15.3 percent, compared with 9.2 for all manufacturing, and 1.7 percent for all private industry.1/

The importance of innovation to automotive companies remains paramount. A recent report by the Boston Consulting Group cited nine automotive companies among the world’s most innovative companies in 2013. The report names several factors behind the innovative burst among automotive companies, including the quickly tightening fuel-efficiency and environmental standards, which have spurred interest in electric and hybrid vehicle technologies. At the same time, auto companies continue to strive to meet ongoing demands for safety, comfort, and performance. Today’s vehicles increasingly comprise advanced electronic and IT components, which are developed both by automotive companies and purchased from technology companies in other industry sectors. By one estimate, “Electronics make up nearly 40% of the content of today’s average new automobile, and their share will continue to grow.” R&D initiatives to enhance the performance and to lower the cost of batteries that may power many of tomorrow’s autos are one example of an important and emerging R&D direction; automatic guidance systems for tomorrow’s (driver-less) cars is another.

Today, Michigan remains the epicenter of automotive R&D in the U.S. The state has maintained its leading place even while production has dispersed throughout the nation. According to data from the National Science Foundation that has been assembled for recent years only, R&D that is both funded and performed by auto companies in Michigan held fast at between 70 and 80 percent of the nation’s total from 1998 to 2011, amounting to $8.87 billion in 2011.

Automotive R&D has propelled Michigan to a leadership position among Midwest states. The table shows Michigan leading the region with $13.7 billion in total business-performed R&D by all industries in 2011, closely followed by Illinois ($12.0 billion), but far ahead of Ohio, Indiana, and Minnesota.2/
Table 1

Michigan is also a leader in employment of auto engineers to support long-term R&D and innovation. Drawing on data from the Census and the more recent American Community Survey, we can see how large Michigan’s share of the nation’s automotive engineers is relative to its share of the nation’s work force. Michigan employs over one-half of the nation’s automotive engineers, but its work force overall represents just 3 percent of the nation’s.

Granted, Michigan’s share of the nation’s automotive engineers has fallen by ten percentage points since 1980; nonetheless, the state has added 18,000 (two thirds) of its engineers since 1980.
Chart 1

The remarkable importance of automotive technology in Michigan (as represented by engineering workers) can also be understood by comparing it with Michigan’s eroding share of automotive production. By overlaying Michigan’s automotive production workers as a share of the nation on the chart above, the strong role of automotive technology becomes clearer. Since 1950, Michigan’s share of production workers has fallen from 54 to 19 percent, a loss of approximately 255,000 jobs.
Chart 2

And while there are many technologically advanced industries in Michigan—including bio-pharma, medical equipment, industrial chemicals, and office furniture—automotive engineering has come to dominate further in recent decades. As the chart shows, automotive engineers once comprised 30 percent of engineers in all industries in Michigan. By 2012, their share had risen to 51 percent.
Chart 3

What is the future of automotive R&D in Michigan; will the region’s extreme concentration in the activity continue? There are no hard and fast answers, yet there are identifiable features that will come into play. On the one hand, there are many historical instances of geographically concentrated centers being very cohesive and long-lived. Once established, such “clusters” tend to grow and feed on themselves. Technology activity is drawn to technology activity. Skilled workers are drawn to activity-rich cities, and companies are, in turn, drawn toward pools of skilled workers. For example, global financial centers such as New York and London have held their dominant positions for many decades, even centuries. The San Francisco Bay area has enjoyed a long run of dominance in the areas of IT and biotech. In a similar way, Michigan’s established leadership in automotive R&D may persist.

On the other hand, company reorganizations and the geographical shifting of activities that tend to be interdependent with technological activities represent risks to Michigan’s position. It may be beneficial for some industries to locate technology and production in close proximity to facilitate (and reduce the cost of) communication and transportation between the two activities. Thus, the fact that Michigan has lost automotive production in recent decades may have negative implications for automotive R&D in the state.

Similarly, co-dependence between R&D and company headquarters activities such as marketing and strategic planning has also been seen as important in some industry sectors. Thus, any major shift in corporate headquarters activity away from Michigan would raise the concern that it might be accompanied by a shift in R&D activity.

Finally, mature industries such as automotive are often severely disrupted by the emergence of wholly new and sometimes unexpected technologies that greatly shake up their organization and geography. For example, the development of aerospace technologies for military uses shifted the locus of related U.S. production from the Northeast to the Southwest and West during the course of the twentieth century. So far, this has not yet taken place as Michigan continues as the U.S. leader in automotive innovation and R&D activity.

End Notes:
1/ For 2011, National Sicence Foundation, National Center for Engineering and Scientific Statistics, Business R&D and Innovation Survey, and U.S. Department of Commerce, Bureau of Economic Analysis
2/ Latest Data available, National Science Foundation, www.nsf.gov/statistics/inbreid/nsf1333f/

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

By Paul Traub and William Testa

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

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

TSI

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

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

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

VIO

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

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

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

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

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

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

1/ Truck transportation makes up a significant portion of the Transportation Services Index (TSI), accounting for 40% of the data used.
2/ Newscom Business Media Inc., 2014 “Used Trucks Cost More than Ever Before”, Today’s Trucking, February 27.
3/ Just-in-time inventory is an inventory strategy employed by firms to increase their efficiency and decrease waste by receiving goods only as they are needed in the production process; this strategy reduces costs associated with carrying large inventories (of raw materials or finished goods, such as cars).
4/ Dan Gilmore, 2013 “State of the Logistics Union 2013”, Supply Chain Digest, June, 20, 2013.
5/ Jeff Berman, 2014 “Truckload capacity trends in 2014 are worth watching, say industry stakeholders”, Logistics Management, Jan. 10, 2014.

The Detroit Branch’s role in the Southeast Michigan community

By Martin Lavelle

Recently, Detroit’s newly elected mayor, Mike Duggan, visited the Detroit Branch of the Federal Reserve Bank of Chicago to discuss possible avenues of revitalization for the city with our Board of Directors. On this occasion—and as Detroit looks past its fiscal bankruptcy and toward a brighter future—we briefly took stock of the Branch’s role in serving the Southeast Michigan community. Clearly, the Branch is involved in helping the community in a variety of ways. We’re involved in programs with entities such as United Way, Junior Achievement, the Michigan JumpStart coalition, Gleaners Food Bank, Forgotten Harvest, and the Detroit Rescue Mission. Moreover, one of our Bank officers serves on the board of directors of the Plymouth Educational Center Charter School; this school, which is located on Forest Avenue (right behind the Branch), serves over 1,200 students, with the vast majority of them being residents of the city of Detroit. Relatedly, in partnership with the Michigan Council on Economic Education, we host an event called Teacher Night at the Fed, where teachers gain professional development on a subject related to financial literacy and economics while earning continuing educational credits. Many of the attendees at this event teach in the city of Detroit. These are just some of the ways in which the Branch serves Detroit and the wider Southeast Michigan community. There are several other avenues by which the Branch helps the community: Each department—and each employee—devotes a considerable amount of time and energy to serving Detroit and the surrounding areas.
Forgotten Harvest

Detroit Branch employees volunteering for the Forgotten Harvest

The Branch’s law enforcement unit is working extensively with the Detroit’s police department to keep the Branch and the neighborhood in which it’s located as safe as possible. Specifically, along with Federal Reserve Bank law enforcement staff, the Detroit Police Department and Special Response Team/Mayor’s Executive Protection Unit train on our firing range.

Our Supervision and Regulation Department provides oversight to financial institutions in a way that fosters a sound, accessible, and competitive financial system that inspires trust. This department’s staff members conduct examinations of community banks to ensure they are operating in a safe and sound manner; our staff members check that these banks are abiding by all applicable federal consumer laws and regulations while making sure the credit needs of the community are being met fairly and equally.

Our Community & Policy Studies Department, in partnership with the U.S Treasury Department, held an Investing in Detroit conference on aligning federal resources with local resources in Detroit and its community/economic development efforts. In addition, we’ve hosted video conferences with community leaders in other Rust Belt cities that discussed revitalization strategies involving “anchor institutions” (such as medical centers and universities) that draw investment in many forms and considered how arts and culture interact and intersect with anchor institutions to generate economic opportunities and jobs, especially for low- and moderate-income people and areas. Additionally, this department now runs a poll that is part of a study being conducted of small businesses in Detroit and the resources and networks they rely on in their communities. The poll is being used to identify the community resources that business owners use, the barriers to using these resources, and the primary needs of these businesses.

The Detroit Branch Cash Services area plays a major role in the payment system for the state of Michigan. Some of the functions that Cash Services performs include counting, verifying, distributing and destroying currency. The department seeks to provide high-quality, reliable cash services that contribute to the integrity of the United States financial system. On average, the Detroit Branch ships out over $75 million in new U.S. currency notes per day and receives about $66 million per day from the financial institutions within Michigan. The department also destroys about $10 million per day in worn currency notes.

Our research department holds business roundtable meetings, in which we receive regional and national economic updates that contribute to the monetary policymaking process. Every year we host multiple conferences, such as our annual automotive symposium and the multiday conferences that covered natural gas production and possible financial reforms that would restore cities’ financial sustainability. Our economists also give economic updates on our Michigan economy blog as well as in public presentations made at business association meetings and other events. Through such efforts, our economists endeavor to inform and educate the general public about the Federal Reserve’s role in the economy and, more generally, about the latest economic trends and research findings.

The Detroit Branch of the Federal Reserve Bank of Chicago will continue to support the Southeast Michigan community, including the city of Detroit, in all of the previously mentioned ways. And the Branch is committed to assisting Detroit in its turnaround.

The Importance of Manufacturing to the Seventh District and Michigan

By Paul Traub

There has been a lot written about manufacturing returning to the United States from abroad, and there are data to suggest that this is happening. Rising wages abroad, falling energy prices in the U.S., and declining willingness of domestic manufacturers to suffer the delays and poorer quality of overseas supply chains are conspiring to shift some production back to the U.S., a trend called onshoring. At a Federal Reserve Bank of Chicago conference last April, Justin Rose of the Boston Consulting Group (BCG) attested that the U.S. still makes over 70% of the manufactured goods it consumes, while its prospects remain bright as global trends are conspiring to encourage onshoring. However, while U.S. manufacturing output remains hefty and onshoring is undoubtedly taking place, there is some debate as to whether manufacturing jobs are returning to the U.S. in a meaningful way. A recent Forbes article, “Reports Of America’s Manufacturing Renaissance Are Just a Cruel Political Hoax,” makes the case that even though “some reshoring has taken place,” there hasn’t been enough to offset the continued offshoring of manufacturing jobs. This debate is of great importance to the Seventh District and Michigan.

As Chart 1 shows, the United States lost about 33.2% of its manufacturing jobs between 2000 and 2010 compared with a 1.5% decline in total nonfarm payroll jobs. Given the extent of manufacturing job decline during the recession, it wasn’t surprising to see growth in manufacturing jobs exceed total nonfarm payroll growth through 2012 even though that pace of growth slowed somewhat in 2013. In addition, while nonfarm employment is now close to its prerecession peak, manufacturing employment is still down by more than 30% from its 2000 level and 11.0% below its 2007 level.

Chart1

Comparing U.S. employment with that of the Seventh District and Michigan (Chart 2), we see a slightly different picture. While total nonfarm employment for the District has improved, it is still 4.9% below its 2000 level and Michigan is still down 12.8%. Manufacturing employment is well below 2000 levels in both the District and Michigan, –28.9% and –38.2%, respectively. However, there has been some progress in the District since the recession, especially in manufacturing jobs. While the District has seen total nonfarm jobs grow by 4.2% since 2010, manufacturing jobs have improved by more than twice that rate, increasing by 8.7%. Michigan has seen total nonfarm employment grow by 5.5% for the same period, with manufacturing jobs increasing an astonishing 17.0%.

Chart2

Obviously, this is important to the Seventh District and Michigan economies, given the relative heft of the manufacturing sector in the region. Charts 3 and 4 use nominal data to create manufacturing’s share of total output for the United States, the Seventh District, and Michigan. The charts show that while manufacturing has been declining steadily since 1997, the District and Michigan remain more dependent on manufacturing than the nation as a whole. The charts also illustrate that manufacturing has made somewhat of a rebound since the end of the recession. In fact, the manufacturing shares of both the U.S. and the district are very close to where they were just prior to the recession.

Chart3

Chart4

Much of the District’s growth in manufacturing output is related to growth in light vehicle sales, which reached their lowest levels in almost three decades during the 2008 recession. Still, the growth is quite impressive. Chart 5, which uses data from the Bureau of Economic Analysis (BEA), shows how the District accounts for almost half of the nation’s motor vehicle and parts manufacturing and this share has remained fairly constant over the last 15 years. Michigan accounts for more than half of the District’s and about 25% of the nation’s motor vehicle and parts output.

Chart5

Chart 6 shows that U.S. light vehicle production fell about 6.0 million units from the peak in 2000 to just 5.6 million units in 2009. Between 2009 and 2013, light vehicle production rebounded by 5.2 million units or 94%. This would do a lot to explain the District’s manufacturing growth over the past four years.

Chart6

Motor vehicle and parts employment has been declining for a number of years, due to outsourcing and increased use of automation in vehicle assembly plants. As Chart 7 shows, a simple calculation of dividing the total U.S. motor vehicle and parts employment by the number of light vehicles produced in the U.S. reveals that in 2013, there were only about 74% of the number of employees it took to produce the same number of vehicles in 2006. Since the economy started to recover in 2009, the motor vehicle and parts sector has seen an increase of about 140,000 employees, while increasing total vehicle production by 5.2 million units.

Chart7

Based on projections from Ward’s Automotive, light vehicle production is expected to increase another 800,000 units by 2015. If these projections are achieved, this will certainly help the District’s overall economic output, but its impact on total employment will be more modest than that seen from 2009 to 2013. Still, we can expect the overall economic impact from the growth in production to be positive for the Seventh District and Michigan.

What’s after Bankruptcy? Lessons in Governance Reform and Financial Planning from Other Cities

By Martin Lavelle

On November 7–8, 2013, the Federal Reserve Bank of Chicago, Detroit Branch and the Citizens Research Council of Michigan hosted a two-day symposium on municipal bankruptcy, with the aim of uncovering what could be learned from cities that have experienced and are currently experiencing fiscal struggles. Local experts were given the chance to comment on presentations by national experts regarding Detroit’s July bankruptcy filing. This blog summarizes key information from the conference.

Day One

The first day’s discussion centered on the current state of local governments that have already gone through financial difficulties and lessons that could be learned from past crises.

Michael Pagano, College of Urban Planning & Public Administration, University of Illinois–Chicago, argued that Detroit’s case is unique and isn’t necessarily the beginning of a wave of municipal bankruptcies. Cities are still required to balance their budgets annually. Part of the budget pressure Detroit currently faces stems from cuts in state revenue sharing, which began in 2000. Further pressure on Detroit’s finances came from drops in property values which, combined with drops in sales and income tax revenues, put major constraints on Detroit’s budget.

According to CLOSUP’s September survey of municipal governments, fewer jurisdictions are reporting declines in state aid, though almost half still report decreases in state revenue sharing, according to Debra Horner, CLOSUP, University of Michigan. With property tax revenue growth flat, local governments are reducing their spending through shifting more health care costs to employees and increasing intergovernmental cooperation. Between 25% and 50% of Southeast Michigan’s local jurisdictions are less able to meet their fiscal needs, fewer than Saginaw (more than 50%), but more than Western Michigan (fewer than 25%). Fewer than half of Michigan’s local jurisdictions feel they can’t meet future needs within their current spending structure, with fewer reporting they can improve their service delivery and that significant structural reform to public finance is needed.

Robert Inman, Wharton School, University of Pennsylvania, argued that Detroit has to set up the right set of institutions and incentives that will create the appropriate fiscal culture. Inman said fiscal crises result from weak demographics, a weak economy, and weak public policies. Wage and benefit increases without compensating marginal productivity increases is a “recipe for disaster,” said Inman, something Detroit pensioners face under Chapter 9 bankruptcy. Detroit’s decaying infrastructure (physical and human) equates to borrowing money indirectly while contributing to losses in property values. Detroit and other fiscally troubled cities should have the option to privatize when necessary, Inman said, and to create neighborhood and business improvement districts but not tax businesses to cross-subsidize residential services.

Municipalities should devote more time to place-making, according to Anthony Minghine, Michigan Municipal League. When municipalities diminish their service level in order to pay workers’ pensions, it leads to lower property tax revenues, which further erode service delivery. Minghine said the municipal government financial model is broken, except in high-income areas. He added that Michigan’s emergency manager law is a law of destruction, not construction. Once a municipal government starts to experience financial difficulties, it becomes hard to end that cycle of financial dysfunction.

Frank Shafroth, George Mason University, said state governments can and should play an important role in preventing municipal bankruptcies. Prevention should come through preemptive responses to deteriorating financial conditions, not through reactions to already dire financial situations. In the case of Central Falls, Rhode Island, it has been more expensive for the state after the bankruptcy filing because state law did not require Central Falls to accept state assistance. Even though Rhode Island volunteered help by offering the expertise of former city managers for no charge, it wasn’t enough to prevent Central Falls’ bankruptcy. Shafroth expressed concern that Michigan’s current intervention system with local governments will not begin soon enough.

Joyce Parker, The Municipal Group, brought Ecorse, MI, successfully out of her emergency management through place-setting and engaging the community in the place-setting process. Parker was able to get city residents to overcome the anger and distrust that sometimes accompanies the appointment of an emergency manager and contribute to the process of setting Ecorse on a sustainable financial course. While serving as Ecorse’s emergency manager, Parker did have to decrease staffing levels, but was able to accomplish some cost-cutting by sharing resources with other local governments.

Day Two

The second day’s discussion turned to the impact a municipal financial crisis can have on investors and how state governments might intervene in local governmental finances.

Lisa Washburn, Municipal Market Advisors, reported that Detroit’s financial troubles did not surprise investors because the city had been plagued by out-migration, high poverty, significant tax burdens, structural budget deficits, and political corruption, thereby prompting state assistance. However, Michigan’s unwillingness to provide direct monetary assistance surprised the investor community, because the state had a long history of credit oversight and of prioritizing debt repayment. Investors questioned how the state could execute such a poor communication strategy and get involved too late in Detroit, seemingly encouraging Detroit to go bankrupt and default. After Detroit’s bankruptcy filing, some Michigan municipalities’ debt issuances were forced to accept higher yields and even higher risk spreads, yet Washburn argued that Detroit’s bankruptcy does not pose systemic risk to the municipal bond market. She noted it may be harder for Detroit to reenter the municipal bond market because of its debtor-in-possession financing and the time it may take the city to emerge from bankruptcy.

From a neighborhood investor’s perspective, Bill Pulte, Pulte Homes, who has done extensive work in removing blight from Detroit’s Brightmoor neighborhood, said Detroit must be cleaned up before any turnaround plan can work. Pulte reported that no one can make a profit currently in Detroit’s real estate market, in part because of Detroit’s 100,000 vacant structures and its 100,000 vacant parcels. In the past, federal funds for demolition went to many contractors, working in different parts of Detroit. Now, Detroit will receive $52 million from the state and $150 million to accelerate blight demolition in an effort that will be more coordinated.

When it comes to state intervention in municipal finances, Stephen Fehr, Pew Center for the States, indicated that 19 states can intervene in distressed localities, but only a handful of these states are really active. States should oversee local governments in order to ensure public safety, avoid negative stigma, and block the distress from spreading to neighboring towns, Fehr said. He noted that Detroit is similar to Camden, NJ, in that both cities have been the focus of various state and federal efforts, as well as service sharing. New Jersey’s state government, under Governor Chris Christie, approves local budgets and debt payments.

North Carolina arguably has the most effective intervention program, which resulted from bankruptcy filings by multiple local governments in the early 1940s. An outside board reviews data sent in periodically by local governments. A state commission then reports on the status of local governments. The board recommends that local governments maintain an 8% fund balance. If the fund balance falls short of that target, warning letters go out to those governments.

Eric Lupher, Citizens Research Council of Michigan, pointed out that since the 1960s, Michigan has had legislation that allows for state intervention into local government finances, but not state monitoring. Public Act 436, passed into law by Michigan’s State Legislature late in 2012, allows the state to take some initiative when intervening into local government financial dealings. Lupher asked whether the scoring of local governments’ fiscal conditions should be taken over by an outside firm, like Munetrix. He said state governments should want to prevent local government finances from worsening because of the economic impacts financial struggles have on cities and the state. One way to protect against financial emergencies could be for the state to teach local governments best budgetary practices. In the case of Detroit, Lupher argued that the state should uphold its constitutional pledge and protect pensions through the creation of a Michigan Benefit Guaranty Corporation. [1]

Arguably, the biggest takeaway from the conference was that states should be more involved with local government finances so financial emergencies can be avoided. Intervening too late in a municipal government’s financial emergency may be more costly for state government post-crisis. Also, state governments should want to be informed about the condition of municipal governments’ finances, particularly in the larger population areas that help drive economic growth. It is very difficult for Michigan to achieve strong state-wide economic growth if its largest city, Detroit, is experiencing significant financial distress.

[1] A Michigan Benefit Guaranty Corporation would be similar to the Pension Benefit Guaranty Corporation (PBGC), which protects more than 40 million American workers in more than 26,000 private-sector defined benefit pension plans. The PBGC is headed by a director who is appointed by the President and confirmed by the Senate (pbgc.gov).

November Light Vehicle Sales Reach Seven Year High

U.S. light vehicle sales for November jumped to 16.3 million units on a seasonally adjusted annual rate (SAAR) basis. This makes November the largest sales month on a SAAR basis since February, 2007. Some analysts attribute November’s strong performance to a month-end surge in sales and to the fact that Black Friday landed on the final weekend of the month. Among the automakers, GM remained in the lead with an 18.0% market share year-to-date. The remaining leaders were Ford (15.7%), Toyota (14.4%), Chrysler (11.5%) and Honda (9.8%). Chrysler Y/Y sales increase of 15.8% was the largest of top five manufactures. Fuel prices fell again in November; down 6.1% for regular fuel all grades on a year over year basis, helping to keep pickup truck and SUV sales strong. Lower fuel prices also helped push the YTD combined Detroit Three market share up to 45.2%, its highest level since calendar year 2007. In addition, the YTD share of domestically produced light vehicles (those produced in North America) increased to 78.0%, its highest level since calendar year 2005.

Comparing Detroit’s Commuting Patterns with Other Cities’

By: Martin Lavelle and Emmanuel Ogbonna

According to the U.S. Census Bureau, the average one-way commute time for U.S. workers increased by almost three minutes between 1990 and 2000. However, since 2000, this commute time has fluctuated between 25 and 26 minutes, even with the numbers of drivers continuing to increase. Why hasn’t the average commute time increased further? For one, U.S. roadways have also expanded since 2000—which likely helped ease some traffic congestion. Moreover, changes in the mode of transportation—such as the greater use of public transportation and carpooling—may also have helped to relieve congestion. Other possible explanations are that workers relocated closer to jobs or that jobs relocated closer to workers. In this blog entry, I examine the commuting patterns of city of Detroit and compare them with those of other cities in Michigan and across the Midwest; I also look at Detroit’s commuting patterns in comparison with those of other Rust Belt cities and similar industrial cities in different parts of the country. I present these comparisons in the hope that they will lend some insight into the ongoing and forthcoming challenges Detroit faces, including those related to improving its transportation infrastructure and broadening its economic base. Such efforts are important to Detroit as it attempts to rival cities that have turned themselves around at least to some degree (e.g., Pittsburgh and Baltimore).

The city of Detroit typifies U.S. suburban and exurban sprawl, with some job holders in the area commuting as long as 75 minutes one way from Jackson and Lansing, Michigan, regularly.[1] By way of explanation, some analysts have attributed Detroit’s current commuting situation to the presence of the domestic auto industry headquarters and the absence of a suitable regional public transportation network. Indeed, the lack of a coordinated regional transit network—with the exception of a (somewhat unreliable) bus system—makes it difficult for Detroit’s job holders and residents to move inside and outside the city to their places of employment. The commuting conditions for Detroit workers and residents look even more challenging when compared with those of other major cities. The U.S. Census Bureau’s On The Map tool helps researchers analyze the commuting patterns of states, metropolitan areas, cities, and other places. I use this tool to generate the tables that follow. Table 1 presents where the jobs of Detroit residents employed in 2011 were located.

Table 1

Focusing first on the central city of Detroit, we can see that 37.7% of the job holders who lived in the city of Detroit also worked there in 2011 according to the work destination report, meaning that the remaining 62.3% of Detroiters who were employed that year commuted into Detroit’s suburbs (or farther afield) for work. The main pattern that can be discerned from the table is that if one draws arcs connecting the suburbs around the city of Detroit according to the degree to which Detroiters were employed there in 2011, the primary “ring” formed would contain Southfield, Livonia, and Dearborn and the secondary ring formed (a bit farther out from Detroit) would include Farmington Hills, Royal Oak, and Warren (see the map below).

Map

Table 2

Taking a different approach, we can examine where workers reside in the Detroit metro region. Table 2 presents information on where people who worked in the city of Detroit in 2011 lived. In 2011, 28.3% of the jobs in Detroit were occupied by workers who also lived there, meaning that 71.7% of workers employed in Detroit lived outside of the city. This 71.7% figure has most likely increased since 2011 because of the ongoing movements of people and businesses into Detroit’s Downtown and Midtown neighborhoods from outside the city.

How do these findings for the city of Detroit compare with those of other Michigan cities? Table 3 shows (employed) city residents by the share of them who work outside of their city of residence. As a rule of thumb, we might expect that larger cities to have lower shares of their residents working outside the city boundaries. But that does not necessarily hold true in Michigan. For instance, the largest city, Detroit, had 40% of its (employed) residents working within its own boundaries in 2011, leaving 60% of them working outside the city. In contrast, the much smaller Michigan city of Ann Arbor had almost 60% of its (employed) residents with jobs based within its city limits as of 2011.

Table 3

This finding is not all that surprising if we look more closely at Ann Arbor’s economic makeup. Many people are drawn to both live and work in Ann Arbor (rather than just live there) because it hosts the University of Michigan, Google, and Ann Arbor SPARK (an organization that assists local businesses and entrepreneurs) and features several attractive amenities (such a bustling downtown).

The shares of residents who were not employed where they lived largely held steady for the major cities of Michigan between 2002 and 2011. Detroit, Ann Arbor, Flint, and Grand Rapids only saw small changes in their shares, while Michigan’s capital city, Lansing, experienced a larger decline in its share, possibly because of the shrinking of state government, which forced labor force participants to look for job opportunities outside the city limits.

Table 4 presents the percentage of Michigan cities’ work forces commuting into these cities from outside their boundaries. The table shows that larger shares of workers with jobs in major Michigan cities commuted from outside the city limits in 2011 than in 2002. Urban business districts often offer more opportunities for high-skilled workers, and the Michigan cities compared below are no exception. In recent years, Detroit’s Downtown area has seen an influx of large businesses, including Quicken Loans, Blue Cross & Blue Shield, and Chrysler’s executive office, coming from the surrounding suburban areas; and several small businesses have established themselves in Detroit’s Midtown area. In addition, Ann Arbor has seen several venture capitalists and entrepreneurs, along with Google, locate their operations there, providing economic growth on top of that delivered by its mainstay, the flagship campus of the University of Michigan. Grand Rapids’ growing reputation as a conference destination has brought more economic activity to its downtown. Flint’s University of Michigan campus has expanded its downtown presence. And as the state capital, Lansing will always be a commuting destination.

Table 4

In the Michigan cities compared in Tables 3 and 4, the majority of each city’s own working residents were commuting outside of the city for work in 2011 (with the exception of Ann Arbor), while the majority of city-based employers had employees who lived outside of the city that year. These trends are in stark contrast with those of the mid-twentieth century—when city residents could find work easily inside their respective cities, often at one of the many manufacturing facilities. Nowadays, given the loss of manufacturing jobs and the deterioration of city residents’ job skills, residents must often look outside the city limits to find job opportunities and employers must be able to draw workers from outside the city in which they’re based.

For Detroit, Lansing, and Flint, Table 4’s results for both 2002 and 2011 most likely reflect people wanting to live outside the city because of a combination of negative housing conditions, poor public service delivery, low school quality, and overall low quality of life. But in Ann Arbor and Grand Rapids—two cities with more positive reputations—the results from Table 4 may reflect people having gained employment in these two cities but deciding to commute there from their residences outside the respective city limits.

Table 5

So, how does Michigan’s story compare with those of other major cities in the Seventh District? Of the major Seventh District cities featured in Table 5, only Chicago and Milwaukee have extensive mass transit systems (something in addition to buses). Seeing that more Indianapolis residents worked within the city in both 2002 and 2011 may be surprising, but the city encompasses most of Marion County, which has a large surface area. Over the past few years, Des Moines has seen an increase in commuter traffic from the city to its suburbs, particularly West Des Moines, as they become more popular for businesses and residents. The 10 percentage point increase in (employed) city residents not working where they live for Des Moines between 2002 and 2011 is likely reflected in this increase in commuter traffic. This percentage did not change as dramatically for the other Seventh District cities studied.

According to Table 6, 46% of people who worked in the city of Chicago in 2011 did not live there. Indianapolis’s suburbs such as Brownsburg, Zionsville, and Fishers have seen population increases over the past few years, which may explain why a higher share of its city work force lived outside of the city limits in 2011 than in 2002. All of the Seventh District’s major cities have the infrastructure to handle more inbound traffic from their suburbs—namely, extensive freeways systems—so the commuting patterns shown in Table 6 should not be all that surprising.

Table 6

Tables 7 and 8 compare Detroit with other cities that are looking to redefine (or have already redefined) themselves as places where high-skilled workers will want to not only work but live. Before going over the results of the tables, let me provide a little background for each city. Pittsburgh is arguably the U.S. city most discussed as a model of economic transformation—it went from being a city reliant on steel manufacturing to one that is strongly associated with the higher education and health care industries. Through this transformation, Pittsburgh has also achieved a high quality of life for its residents. Cleveland has begun its efforts to mirror Pittsburgh’s downtown revival by implementing a rapid bus transit system; the hope is that this system will connect its University Circle neighborhood—a center of innovation and a place with young demographics—with other parts of the city. Birmingham has been referred to as the “Pittsburgh of the South” on account of the steel industry’s presence there. Despite the presence of some regional banks and universities, Alabama’s Jefferson County, whose county seat is Birmingham, is currently involved in bankruptcy proceedings. Baltimore famously made over its downtown with a new baseball stadium and a new football stadium, attracting people, especially young professionals, back to its Inner Harbor area. Buffalo is attracting young people back by developing residential and commercial areas around its downtown medical campuses.

Table 7 shows that shares of (employed) residents who were not working where they lived held fairly steady for the cities sampled between 2002 and 2011. In 2011, Pittsburgh remained the only city in the sample that saw a majority of its residents with jobs not commuting outside of the city. The other cities listed in Table 7 saw more of their respective employed residents leave the city limits to go to work in 2011. As these cities became more decentralized in the last quarter of the twentieth century, suburban job clusters were created that remain popular places in which to work and live.[2] Detroit’s and Cleveland’s freeways are now lined with business centers, industrial parks, and suburban skyscrapers; such developments led to the creation of school districts that remain among the best in Michigan and Ohio, respectively.

Table 7

While each of these cities is seeing more of its work force commute from the suburbs (or farther afield), the recent pace of out-migration from Detroit to its suburbs becomes more evident in Table 8. Of the cities in Table 8, only Detroit and Birmingham have mass transit systems limited to traditional buses. Pittsburgh and Cleveland have recently expanded their mass transit systems, allowing more workers to commute into the city using light rail and rapid buses. The numbers in Table 8 may reflect the effect of years of population migration from the central cities to their respective suburbs.

Table 8

Conclusion
Detroit exhibits commuting inflow/outflow ratios that somewhat resemble those of other Seventh District and Rust Belt cities. Detroit’s ratios differ from other cities’ ratios mostly likely because of the following factors. The jobs found in the city of Detroit are more suitable for members of a high-skilled work force, who mostly live outside the city’s boundaries. Meanwhile, the population residing in the city of Detroit is mainly made up of low-skilled workers who must look outside the city limits for gainful employment. In all likelihood, Detroit residents will have a more difficult time finding gainful employment than residents of other decentralized manufacturing cities because of Detroit’s large geographical size and unreliable public transportation system.

If the city of Detroit were to see an increase in the percentage of its population both living and working within its boundaries, this would most likely come about because the city had diversified its economy and because it had become a more attractive place for young people to begin their careers—key achievements made by many other Rust Belt cities that have transformed themselves in recent years.

[1] This estimate is based on my personal experience and my talks with other Michigan residents who commute to Detroit. Also, according to the U.S. Census Bureau’s OnTheMap tool, almost 700 people travel from Grand Rapids, Michigan, to Detroit for work—a one-way commute of two-and-a-half to three hours.
[2] Decentralized manufacturing cities indicate cities where an urban population and the manufacturing industry have been largely redistributed to suburban areas.

Michigan Automotive, More Than Production

By Thomas Walstrum and Bill Testa

The dispersion of auto assembly line-type jobs from Michigan to the rest of the U.S. has been widely discussed. But it may be important to examine whether other jobs in the automotive value chain have also dispersed, particularly R&D and headquarters-administrative jobs. It is possible that a sizable part of automotive R&D and administration are spatially separable from production, with important implications for the economic health and growth prospects of Michigan.

To shed some light on this, we use microdata from the IPUMS CPS to track trends in production, office, and R&D jobs in both Michigan and the rest of the U.S. We sort any individual who reports working in the auto industry into one of these three occupational categories.1 For example, we classify engineers and technicians as R&D and assembly line workers as production workers. (We further classify as “other” those occupations that could fall into multiple categories, such as security or janitor).

Figure 1

Figure 1 shows that total employment in the automotive industry has been relatively steady in Michigan, averaging 413,000 from 1970 to 2005. Since then, there has been a distinct decline; by 2012, Michigan’s auto employment was 262,000. In contrast, auto employment steadily increased in the rest of the U.S., rising from 588,000 in 1970 to a peak of 974,000 in 2007. The rest of the U.S. also saw heavy losses in the second half of the 2000s, with auto employment at 710,000 in 2012.

Figure 2

Trends in the R&D segment of the auto assembly are quite different. As figure 2 shows, R&D employment in Michigan grew steadily until the 2000s, from 28,000 in 1970 to a peak of 90,000 in 2001. Growth in R&D jobs in the rest of the U.S. generally kept pace, though with the exception of a couple years in the early 2000s, the majority of R&D jobs have resided in Michigan.

And so we see that R&D employment has made up an increasing share of overall auto employment in Michigan. In 1970, 6 percent of Michigan’s auto employment was found in R&D. By 2012, this share had climbed to 22 percent. This contrasts sharply with the rest of the U.S., where the proportion of auto employment in R&D grew from 1 percent in 1970 to 6 percent in 2012. Looking more broadly, 46 percent of Michigan’s employment is in either R&D or office occupations, compared with 24 percent in the rest of the U.S. At least by this measure, Michigan remains the nerve center and the creative engine of the U.S. auto industry, even as production jobs have dispersed.

Figure 3

This glimpse of the changed employment composition of Michigan’s auto assembly sector raises further questions. In particular, what is the outlook for Michigan’s R&D activities in light of the shifting geography of auto production activities? And what, if any, public policies might be influential to R&D’s continued success in the state?

Footnotes:
1 cps.ipums.org. IPUMS CPS provides an occupation variable that is unified across changing occupational coding schemes from 1968 to present. The CPS survey combined Michigan and Wisconsin from 1968 to 1976. To allow the time series to extend back to 1968, we calculated by employment category the proportion of worker-years Wisconsin contributed to combined MI-WI totals from 1977 to present. We then used that proportion to scale down the pre-1977 MI-WI employment numbers to represent only Michigan and to scale up the ROUS numbers so to include Wisconsin.

The Energy Industry’s Positive Contribution to the U.S. Economy

The U.S. Census Bureau announced in August in its U.S. International Trade in Goods and Services Report for June 2013 that the petroleum deficit had fallen to its lowest level ($17.4 billion) since August 2009 ($17.9 billion).1 This decline was the result not only of declining imports but also of an increase in exports. The petroleum trade deficit was reported to be down $34 billion dollars, year over year, through June. The use of new technology and techniques to extract natural gas and other petroleum products has allowed the U.S. to go from being a net importer of refined petroleum to being a net exporter. What impact will this new technology have on U.S. economic growth in the years to come?

According to an August 18, 2013, Financial Times article, “the value of petroleum and coal exports more than doubled from $51.5 billion in the year to June 2010 to $110.2 billion in the year to June 2013.” To look deeper into the role the U.S. will play in the future in the global energy markets, we constructed a combined energy trade category using U.S. Census Bureau’s trade data by North American Industry Classification System (NAICS), among other sources.2 Chart 1 shows just how much the balance in energy related trade has changed since 2002 by quarter.

Chart 1

Based on this total energy trade category, the United States imported about 10 times more petroleum related products than it exported in 2002, as indicated by the bars in the chart. This ratio of imports to exports grew to as high as 14 in the fourth quarter of 2005. The lines in the chart show that this happened while exports and imports grew by relatively the same ratio compared with 2002. However by 2006:Q4, this relationship started to change. Even with the sharp decline in both imports and exports during the recession in 2008, the ratio of imports to exports continued to decline. The latest data for 2013:Q2 indicate that the U.S. is exporting about 12 times more energy related products than it did in 2002, bringing the import to export ratio down to 2.8. This represents a 360% reduction in the trade deficit for these combined categories, with almost all of that achieved in the past six years.

According to the U.S. Energy Information Administration (EIA), the U.S. is one of the world’s leading producers of crude oil and petroleum products. Table 1 below shows the total value of exports and imports by NAICS classification and their share by category for calendar years 2002 and 2012.

Table 1

Although the deficit did grow from 2002 to 2012, in 2002 crude petroleum and natural gas accounted for almost 85% of the total trade deficit, while petroleum refinery products accounted for about 70% of exports. Also in 2002, coal was the only product of the four NAICS classifications that made a positive contribution to the trade balance.3 By 2012, crude petroleum accounted for almost the entire energy-related trade deficit, while the contribution to the deficit from liquid natural gas had fallen to just 0.3%. In addition, petroleum refinery products’ positive contribution to the trade balance jumped past coal’s to reach 81% of the total energy-related export products.

So far in 2013 the picture has improved even more. The following charts show just how much faster the exports of each of these energy-related products have grown relative to imports to the degree that three of the four categories shown here had a positive contribution to the trade balance in Q2 2013 evidenced by the exports to imports ratio of less than one. In fact, in Q2 2013 the U.S. exported three times more liquefied natural gas than it imported. In addition, the exports of petroleum refinery products have grown by an astonishing 1,380% since 2002.

Charts 2-5

Coal exports, which had grown 1,000% by 2011, around 700%have slowed more recently, likely reflecting slowing economic growth in China and falling prices in Asian markets.4 As the chart 6 suggests, U.S. energy exports and the pace of emerging market growth have gone hand in hand in the past.

Chart 6

Given the somewhat slower global growth expectations for this year and next, it is reasonable to assume that U.S. energy exports are being somewhat limited, by the global slowdown of emerging economies, in particular, implying that the U.S. trade deficit reduction might otherwise have been even greater this year.

For January through June 2013, the petroleum trade deficit was reported to be down $34 billion dollars, year over year. If we include coal and refined petroleum products, the trade deficit decline was somewhat smaller at $31 billion, when adjusted for inflation, mostly due to a slowing global demand for coal. However, this trend is expected to reverse itself in the near future, according to the EIA International Energy Outlook for 2013. The EIA forecasts that global demand for all types of energy will continue to grow at an annual rate of 1.5% for the next 30 years; and that, by 2015, the world’s demand for energy will increase by 9.1% compared with 2010 and an additional 10.1% by the year 2020.5 Also, by 2015, global demand for natural gas and coal is expected to increase by 9.3% over 2010 levels and an additional 9.5% by 2020. All of this is good news for the U.S. trade balance, because most of the growth in demand is expected to come from other countries. Based on EIA’s 2013 projections, non-OEDC countries will account for 86% of the total increase in energy consumption between 2015 and 2040.

Through the first two quarters of 2013, the U.S. economy is thought to have grown by just $227.2 billion compared with the first half of last year, while energy trade accounted for a $31 billion reduction in the trade deficit for the same period. This means that through the first half of 2013, while the total U.S. economy is estimated to have grown by just 1.5%, the increase in energy exports accounted for 13.6% of total growth in this period by significantly reducing the trade deficit.

Since 2008, the global demand for energy has continued to increase; it is presently expected to grow by 1.2% in 2013 compared with just 0.7% in 2012. This projected increase in global demand for energy should contribute further to economic growth in the U.S. through additional reductions in the trade deficit.

Footnotes:
1. The petroleum products aggregated in the end-use commodity classification system include virtually the same energy related products as those aggregated in the Standard International Trade Classification (SITC). The end-use petroleum products, however, include some products such as ethane, butane, benzene, and toluene which are included in “Manufactured Goods” in the SITC.
2. The “Total Energy Trade” category contains the following NAICS series: Crude Petroleum and Natural Gas (211111), Liquid Natural Gas (211112), Coal (excluding Anthracite) and Petroleum Gases (212112), and Petroleum Refinery Products (324110).
3. Coal (excluding Anthracite) and petroleum gases will be referred to as coal throughout the remainder of the article.
4. Chen, Sarah. “China Coal Prices Fall to a Four-Year Low Amid Economic Slowdown” Bloomberg.com, Bloomberg News, 29 July 2013. Web. 28 Aug. 2013.
5. EIA Energy classifications are defined as liquids, natural gas, coal, nuclear and other.

U.S. Auto Industry Continues to Improve in Line with the Automotive Outlook Symposium Consensus Forecast

The Federal Reserve Bank of Chicago held its 20th annual Automotive Outlook Symposium (AOS) on May 30–31, 2013, at its Detroit Branch. Just a few days following the conference, light vehicle sales (i.e., car and light truck sales) for May were reported to be 15.2 million units at a seasonally adjusted annual rate. This selling rate was 9.6% higher than May 2012’s selling rate and was consistent with the AOS consensus forecast for 2013. As in past years, certain AOS participants were asked to submit their forecasts of gross domestic product (GDP) and related items, including, of course, light vehicles sales, ahead of the gathering. William Strauss, senior economist and economic advisor for the Federal Reserve Bank of Chicago, hosted the event and presented the consensus outlook. Table 1 shows the median forecast for some of the items.

AOS Table 1

Auto industry experts discussed a number of topics during this year’s two-day conference, and a few of them made formal presentations. Speakers provided a light vehicle sales outlook, a medium- and heavy-duty truck industry outlook, and automotive industry outlooks from the perspectives of the automotive parts suppliers and dealers. In addition to the economic and automotive outlooks, two speakers presented their research on financing the infrastructure necessary to support alternative fuel vehicles (i.e., vehicles running on compressed natural gas, ethanol, electricity, and hydrogen). To see a complete list of this year’s AOS speakers, as well as most of their presentations, go to http://www.chicagofed.org/webpages/events/2013/automotive_outlook_symposium.cfm#.

Of special note was a discussion on Mexico’s emergence as a global player in automotive production, which was held on the first day of the event. David Andrea, senior vice president, industry analysis and economics, for the Original Equipment Suppliers Association (OESA), presided over a panel of experts on Mexico’s growing role in North American automotive production and global automotive trade.
Chart 1 shows how automotive manufacturing capacity has grown consistently in Mexico since 2005, with the exception of a slight setback due to the 2008–09 recession. In contrast, over the period 2005–13, automotive manufacturing capacity for the United States and Canada combined fell by 21.6%. Given these two contrasting trends, it is not surprising that Mexico’s share of all light vehicles produced in North America was 19% in 2012—which was higher than Canada’s share (16%). By comparison, in 1990, only 6% of all light vehicles produced in North America were assembled in Mexico (versus Canada’s 16% share of production back then). So, clearly, automotive production in Mexico has taken great strides over the past two decades. In fact, Mexico has moved ahead of Canada in terms of the number of vehicles produced on an annual basis.

AOS Chart 1

According to projections by WardsAuto, in the years ahead Mexico will be getting most of the additional North American automotive production capacity that is planned (see Chart 2). In total, automotive manufacturing capacity for North America is projected to rise about 4.4% between 2013 and 2018, while automotive manufacturing capacity for Mexico is expected to increase by over 26.0%.

AOS Chart 2

The panel of experts that Andrea presided over at the AOS shared their analyses about Mexico’s growing importance to the North American automotive industry, which were in line with the WardsAuto data. For instance, Bill Cook, director of worldwide transportation and customs for Chrysler Group LLC, said that Mexico’s percentage of Chrysler’s total vehicle production increased over 280% from the start of negotiations for the North American Free Trade Agreement (NAFTA) in 1985 through 2012. (Of course, Mexico’s share of Chrysler’s overall vehicle production experienced its biggest gains after NAFTA was implemented in 1994.) Other topics discussed by the panel included such issues as Mexico’s role in the automotive supply chain and product and parts logistics. Thomas Klier, senior economist for the Federal Reserve Bank of Chicago, was also among this panel of experts; he shared many insights on Mexico’s growing role in the North American auto industry, which are reflected in a recent Midwest Economy blog entry and Chicago Fed Letter.