Michigan Economic Update – 2014:Q3

By Paul Traub

Michigan’s contribution to the economic wellbeing of the Seventh District increased in July to 0.11, its highest level since March 2013, according to the Federal Reserve Bank of Chicago’s Midwest Economic Index. However, positive contributions from services, manufacturing, and the consumer continue to be offset by slow growth in the construction sector. A reading above zero indicates that Michigan’s economy is expanding above its historical trend. The index is a weighted average of economic indicators from four broad sectors of the economy; manufacturing, construction and mining, services, and consumer spending.

Real per capita income in Michigan registered continued improvement in Q1:2014, up 1.4% on a year-over-year basis versus 1.6% for the nation as a whole. Since hitting its recessionary bottom in Q1:2010, Michigan’s real per capita income has increased by a total of 8.9% compared with 5.3% for the nation over the same period.

Other key indicators include:
• Michigan’s unemployment rate declined to 7.4% in August versus 6.1% for the nation.
• Michigan home prices increased 7.7% in Q2:2014 on a year-over-year basis and have finally surpassed their calendar year 2000 level.
• U.S. light vehicle sales recovered to their highest level since January 2006 on a seasonally adjusted annual rate basis.
• Michigan light vehicle production fell 3.5% August year-to-date compared with the same period last year, as Michigan’s share of total North American production dropped to 13.9% versus 15.2% in 2013.

For a more detailed look into the numbers behind Michigan’s economic performance, follow the link to Chicago Fed’s Michigan Economic Update – 2014 Q3.

The Chicago Fed’s New Survey of Business Conditions

By Rebecca Friedman

In a recent Chicago Fed Letter, Scott Brave and Thomas Walstrum discuss a business conditions survey that the Chicago Fed has been conducting in conjunction with the Beige Book since March 2013. To measure economic activity in the Seventh District, they construct a set of diffusion indexes based on survey responses (which are explained in greater detail in the article itself). Brave and Walstrum then compare their diffusion indexes with the Institute for Supply Management’s (ISM) purchasing managers’ indexes (PMIs) and the Chicago Fed’s Midwest Economy Index (MEI), and demonstrate how the anecdotal evidence collected for the Beige Book can often be helpful in understanding pivotal or special economic events .

Survey respondents come from all of the major industries in the Seventh Federal Reserve District, with manufacturing contacts composing the largest subset. Respondents come from everywhere in the Seventh District, including our Southeast and Western Michigan business roundtables that meet at designated times throughout the year in Detroit and Grand Rapids, respectively. Respondents are asked to rate the performance of their respective businesses on a seven-point scale in a series of questions covering the demand for their products or services over the past four to six weeks relative to the previous four to six weeks. A series of diffusion indexes are then calculated from the survey responses that are intended to capture changes in the prevailing direction of regional business conditions.

The figure below compares Brave and Walstrum’s Beige Book indexes against similar measures produced by the ISM. The ISM’s indexes are also calculated using a survey-based methodology allowing the authors to compare their survey responses for manufacturers and nonmanufacturers with the ISM’s national manufacturing and nonmanufacturing PMIs, as well as with a Midwest PMI (taken by averaging the ISM’s PMIs for Chicago, Detroit, and Milwaukee). Brave and Walstrum cite the strong correlation observed between their Beige Book diffusion indexes and the ISM’s national PMIs in the figure, suggesting that their indexes are capturing very similar business conditions. They also note that there may be some evidence that their Beige Book index leads the Midwest PMI.

Beige Book Indexes

The authors next examine the ability of their main Beige Book index (covering both manufacturers and nonmanufacturers) to predict non-survey-based measures of economic activity by comparing them with the MEI—a monthly weighted average of Midwest economic indicators measured relative to a trend rate of Midwest economic growth. To compare the Beige Book index with the MEI, the authors adjust their Beige Book index to be relative to survey respondents’ trend (or average) responses. Their analysis comparing the two indexes suggests that their Beige Book index may slightly lead the MEI in capturing changes in the direction of regional economic activity. Brave and Walstrum also describe two recent instances where anecdotal information collected for the Beige Book was useful in this regard: 1) discerning whether the slowdown in economic growth in the first quarter of 2014 was likely to be a temporary setback and 2) capturing the recent pickup in activity in regional labor markets.

The authors note that they continue to study the potential applications of their survey and diffusion indexes, with the intention to make their results publicly available in the future.

The impact of the changing structure of employment on wages in Michigan

By Paul Traub

As of June 2014, total nonfarm employment for the U.S. is reported to be greater than its January 2008 peak by 430,000 jobs. In contrast, according to the most recent data from the U.S. Department of Labor’s Bureau of Labor Statistics, Michigan nonfarm employment as of June 2014 is still down by 550,800 jobs or 11.7% from its previous peak of April 2000 (Chart 1). In addition, since the start of the last recession, Michigan nonfarm employment is still down 105,300 jobs or 2.5%.

Chart 1

It is important to note that since bottoming in 2010, Michigan’s job growth has outperformed the nation’s on a percentage basis, growing by 8.1% versus 7.0% for the nation. However, Michigan’s job growth since 2010 has been concentrated in nontraditional industry sectors, leading to a significant change in Michigan’s employment structure. In addition to this change in employment structure by industry, Michigan’s average weekly wage, once higher than the nation’s, has fallen below the national average (Chart 2). At $844 per week, Michigan’s average real wage in 2013 is about equal to what it was in 1999, with much of the lack of wage growth being attributed to the change in employment structure by industry sector and associated wages. This blog explores the change in Michigan’s employment structure and its impact on Michigan’s average weekly wage over the past 15 years.

Chart 2

Although job growth in Michigan has outperformed that of the nation as a whole since 2010, according to the data in Chart 2 wages in Michigan haven’t kept pace. In fact, Michigan’s positive wage gap disappeared in 2006 and has continued to turn more negative since then. Michigan’s strong job growth since 2010 started from a much lower base than any of the other states. Total U.S. nonfarm employment reached an all-time peak of 134.4 million jobs in January 2008 then fell by 6.3% to 129.7 million jobs by February 2010. However, Michigan’s employment difficulties started almost eight years earlier, just prior to the 2001 recession. Michigan’s nonfarm employment peaked in April 2000 at 4.7 million jobs, before starting to trend downward and finally leveling off in 2010. During the almost ten years of employment decline, Michigan nonfarm employment fell by 18.4 % or 861.6 thousand jobs, the biggest loss of any state in the nation. In addition, as of June 2014, Michigan’s nonfarm employment remains 11.7% below its previous peak, which gives Michigan the distinction of having the largest employment gap, defined here as current employment below a previous peak, of any state in the country. In fact, the next largest employment gap is only about half that of Michigan at 5.9% for both Nevada and Ohio.

Chart 3 shows the current percentage change in Michigan’s total nonfarm employment by major industry sector since 2000, when Michigan’s employment started its gradual decline. The two sectors that have performed the best for Michigan since the start of the recovery are leisure and hospitality and education and health services. It should be noted here that education and health services employment did not fall noticeably during the 2008 recession and, therefore, it is the only sector in Michigan that has actually sustained a positive trend of job creation since the 1990s.

Chart 3

The sectors that lost the most employment on a percentage basis were manufacturing followed closely by construction. Michigan still has one of the nation’s highest employment concentrations in manufacturing jobs but of the top manufacturing states by employment in 2000, Michigan ranks third in job loss behind only California and Ohio. While the U.S. has seen employment numbers exceed their previous peak for every sector except two (information and government), Michigan hasn’t experienced the same fortunate results.

What happened to manufacturing jobs in Michigan has been well documented. Throughout the decade of the 1990s, manufacturing employment in Michigan averaged about 20.2% of total nonfarm employment. A large percentage of those jobs were tied to the automotive industry. By 2009, manufacturing employment as a share of total nonfarm employment in Michigan had fallen to just 12.0% from 19.2% in calendar year 2000. This equates to a loss of over 433,000 manufacturing jobs in less than a decade, the equivalent of almost 23,000 jobs per year. By 2013, Michigan had recoved some of the manufacturing jobs that were lost during the recession, but manufacturing’s share of total nonfarn employment of 13.7% remained well below its share in calendar year 2000 (Chart 4). These events surrounding the loss of many automotive manufacturing jobs also explain some of the job losses in other sectors. Construction, for example, is closely tied to investment, and in Michigan much of that investment is related to the automoble industry—not only business investment on plant and equipment but also residential investment on housing and durable goods for automotive workers, some of whom lost their jobs or left the state during the recession.

Chart 4

During this time frame, Michigan’s total share of U.S. nonfarm employment fell from 3.5% in 2000 to 3.0% in 2013 (Chart 5). The decline was felt in every sector except information. Even though the infromation sector was able to gain share relative to the U.S.—going from 2.0% in 2000 to 2.1% in 2013—it actually lost share in Michigan, falling from 1.6% in 2000 to 1.4% in 2013.

Chart 5

Although there were some industry sectors that added share as a percentage of Michigan employment between 2000 and 2013, including education and health services (10.7% to 15.4%), leisure and hospitality (8.5% to 9.8%), professional and business services (13.7% to 14.7%), other services (3.7% to 4.1%), and financial activities (4.5% to 4.8%), some of these share gains can be traced back to lower overall employment. Only two of these sectors, education and health services and leisure and hospitality, have added enough employment to surpass their 2000 employment levels.

At the same time that Michigan employment was declining, so were average weekly wages. Chart 6 below shows Michigan’s average weekly wages divided by the average weekly wage for the U.S. by sector in calendar years 2000 and 2013, or the wage permium Michigan workers were earning.(1)

Chart 6

Based on the latest data from the U.S. Department of Labor’s Quarterly Census of Employment and Wages (QCEW), in calendar year 2000 Michigan’s manufacturing workers earned an average premium of 16% relative to manufacturing workers elsewhere in the country, and Michigan’s construction workers earned a premium of 15%. While workers in the manufacturing and construction industries still earn more than the national averages, their wage premiums have been reduced significantly. In addition, the ratios between wages in Michigan and the U.S. have fallen in every sector except government. As noted earlier, the manufacturing and construction sectors also had the highest percentage decline in employment since calendar year 2000 and continue to remain well below their calendar year 2000 employment levels. While Michigan workers earned a 5% premium in 2000, that premium had been entirely reversed by 2013, when Michigan workers earned about 5.0% less than the national average.

Since 2000, the structure of Michigan’s employment and average wages has changed considerably. Although Michigan has made some employment gains recently, total nonfarm employment still remains below its previous peak. But how much different might Michigan’s total employment look if we could go back to the way things were in 2000? To answer this question, I constructed a scenario in which Michigan maintained the same percentage of national employment by sector as it had in 2000. Chart 7 below shows the results of this scenario in percent change by sector from average year 2000 to June, 2004. This shows that Michigan’s total employment would be 3.2% higher than it is today and 0.2% higher than its previous peak, with the largest percentage gains coming in the mining and logging, education and health services, and leisure and hospitality sectors. However, Michigan would still have suffered significant employment declines in the manufacturing, information, and construction sectors.

Chart 7

To look at what impact Michigan’s changing employment structure has had on wages, I constructed two different scenarios. In the first wage scenario, I held Michigan’s current wage by sector constant but changed the employment shares by sector to what they were in 2000 to match what I did in the employment scenario above. In the second scenario, I held the employment shares by sector equal to what they were in 2013 but I changed the average weekly wage ratios to what they were in 2000. For each of these two wage scenarios, I then calculated Michigan’s weighted average weekly wage for all the sectors. Chart 8 shows the results of these two scenarios compared with the 2013 average weekly wage in Michigan. The first wage scenario implies that if Michigan had the same employment structure by sector that it had in 2000, the total average weekly wage would have increased by 3.0% to $933 a week. Even with this increase, Michigan’s average weekly wage would still be below the national average of $958 per week by 2.6%. In the second wage scenario, the average weekly wage in Michigan increases by 9.3% to $990 per week. This scenario places Michigan’s average weekly wages above the national average but by only 3.3% versus the 5.0% premium that existed in 2000.

Chart 8

In summary, while Michigan’s employment has made significant improvement during this economic recovery, there is still a lot of work that needs to be done. Without question, one of the most positive events pertaining to Michigan employment and wages has been the steady and long-lasting growth in the education and health services sector. The education and health sector has not only helped to offset some of the jobs lost in manufacturing and construction, but also the sector’s higher than national average weekly wage has been an added bonus to the state. Other sectors that could provide added help to Michigan’s employment structure and wage picture going forward include the manufacturing and construction sectors. Given that these two sectors still command a small wage premium, any improvement in either of these sectors would surely help total average wages for the state. However, going back to the way it was in 2000 doesn’t seem to be the remedy.

Even if Michigan could go back in time by 14 years, its employment and wage situation wouldn’t be that much different than it is today. Although total nonfarm employment would be higher today if Michigan had the same percentages of U.S. employment by sector as it did in 2000, it would only be higher by 3.2%. That would equate to an average job growth of just 0.2% per year over a 14-year span. We also saw that total average weekly wages for Michigan would seem to look considerably better if Michigan still enjoyed the same wage premiums it had in 2000, but the changes in the structure of employment by sector that have taken place would diminish some of the total wage premium. What isn’t apparent at first glance is how much more important the structural change in employment was to total wages in Michigan. Table 1 shows an estimate of total weekly wages in Michigan by multiplying total nonfarm employment by the average weekly wage for 2013 for each of the two wage scenarios discussed above. What this shows is that if Michigan maintained the same percentage of national employment by sector in June, 2014 as it had in 2000, together with the average weekly wage this assumption implies, Michigan’s total weekly wages would be greater than if the state held the same wage premiums today as it did in 2000. So even if Michigan had the same wage premiums as in 2000 and the higher weekly wage this scenario implies, total weekly wages for the state would not be as great as if the employment structure were the same today as it was in 2000.

Table 1

That’s not to say that the erosion of Michigan’s wage position relative to the national average hasn’t has a significant impact on total average weekly wages in the state, but it does seem that the wage premium change wasn’t as significant as the shift in the employment structure between sectors when taking total weekly wages for Michigan into consideration.

——————————————
(1) Calculations are based on U.S. Department of Labor’s and include only covered employment.

Economic Development in Detroit

By Rick Mattoon

Detroit is the focus of this blog examining economic development issues in the five largest cities in the Chicago Fed’s District. (For a complete profile of all five cities see “Industrial clusters and economic development in the Seventh District’s largest cities”. Relative to the other large cities, Detroit faces some special challenges. Home to the domestic auto industry, Detroit grew and flourished until increased foreign auto competition began to erode the dominant position of Detroit-based auto producers. With a challenged industrial base and increasing racial strife culminating in the 1967 riots, Detroit began a long process of population out-migration. The city’s population fell from a high of 1.8 million in 1950(1) to the most recent estimate of just under 700,000(2). This combination of industrial and population decline severely challenged the fiscal condition of the city. The city’s large geographic footprint (140 square miles) and declining tax base made it increasingly difficult to provide city services, culminating in a 2013 Chapter 9 bankruptcy filing, which is still being resolved. Not surprisingly, the city’s immediate economic development plans aim to stabilize its population, restore government services, and attract new businesses that should find its relatively low property prices attractive.
Detroit’s Industry Structure

Figure 1 shows Detroit’s employment structure and industry concentrations (location quotients or LQs) relative to the U.S. Detroit has five industries with above U.S. average employment shares and location quotients above 1. These industries are manufacturing (LQ of 1.29 or 29% above the U.S. average), professional and technical services (LQ 1.45), management of companies (LQ of 1.34), administrative and waste services (1.15), and health care and social assistance (1.09). This reflects recent efforts by the city to develop business and professional services in the downtown business district, which has led to investments by Quicken Loans and Compuware.

Figure 1
Notes: ND indicates nondisclosure rules prevent reporting of the data. * Denotes employment shares above the U.S. average.
Source: U.S. Bureau of Labor Statistics.

Economic Development Strategy in Detroit

In December 2012, the Detroit Strategic Framework Plan was released.(3) The long-term planning aspect of the report was produced by a mayor-appointed, 12-member steering committee drawn from the business, community, faith-based, government, and philanthropic communities. The Detroit Economic Growth Corporation managed the project. The plan is designed to recognize core assets that the city has and to examine ways to leverage those assets to restore and stabilize the Detroit economy. The plan creates four benchmark goals for the city to achieve by 2030.

• Stabilize the residential population at between 600,000 and 800,000.
• Increase the number of jobs available per city resident from the current level of 27 per 100 people to 50 per 100 people.
• Enhance the regional transportation network to better integrate Detroit and the rest of the MSA and develop land-reuse plans that will repurpose existing vacant tracks for new types of development.
• Establish an ongoing framework for civic involvement.
The plan also has specific economic development elements that are captured by five implementation strategies.
• Emphasize support for four key sectors with highest potential growth—education and medical, industrial, digital/creative, and local entrepreneurship. To support growth in these sectors, the plan calls for aligning private and civic investments. This includes having work force development strategies specific to these four industry clusters.
• Use a place-based strategy for growth. In practice, this would target “employment districts” where resources would be channeled to promote growth. The plan establishes seven of these districts and assumes these geographic areas have the greatest ability to bring job growth to scale. This would be complimented by growth in industrial business improvement districts and developing capacity for green business.
• Encourage local entrepreneurship and minority business participation. The strategy here is to develop local business clusters that serve the Detroit market—for example, using local suppliers to feed existing businesses as well as seeking to diversify the economic base of the city. This strategy assumes the provision of low-cost shared space and improvements in other local services that are currently being underprovided in Detroit.
• Improve skills and support education reform. Much of this focuses on improving existing work force training by linking it more closely to the private sector and aligning training to local industry needs. It also calls for better integrating work force development with transportation, encourages hiring of Detroit natives, and calls for a study designed to improve city-wide graduation rates.
• Review land regulations, transactions, and environmental actions. This is a broad land-reuse program that focuses on land banking for industrial and commercial property as well as improving development outcomes by speeding permitting in employment districts and identifying alternative sources of capital for development.

It is clear that much of Detroit’s plan emphasizes stabilizing the current economic base as a necessary step to attract new investment. The plan also emphasizes the creation of home-grown businesses, which is likely necessary to fill in declines in retail and other services found in many Detroit neighborhoods.

If we look at Detroit’s recent history of employment growth over the recent business cycle (figure 2), we see that for almost the entire 2000s, Detroit had negative year-over-year employment growth and performed significantly below the average for the Seventh District. However, emerging from the Great Recession, Detroit’s employment growth is above the Seventh District average up until late 2013 and early 2014, which happens to coincide with the bankruptcy filing. The rise coming out of the recession likely reflects the rebound in the domestic auto industry, which still exerts a heavy influence on Detroit’s economy.

Figure 2

————————————————————–
1 http://www.freep.com/interactive/article/20130723/NEWS01/130721003/detroit-city-population
2 http://www.detroitnews.com/article/20140521/METRO08/305210136
3 http://detroitworksproject.com/the-framework/

Industrial Cities Initiative Profiled in New Report

By Emily Engel and Jere Boyle

Community Development and Policy Studies at the Chicago Fed recently published profiles of a group of 10 cities that experienced significant manufacturing job loss in recent decades.
The Industrial Cities Initiative (ICI) includes, Aurora and Joliet in Illinois; Fort Wayne and Gary in Indiana; Cedar Rapids and Waterloo in Iowa; Grand Rapids and Pontiac in Michigan; and, Green Bay and Racine in Wisconsin. While each city has been blogged about before (see the “BLOG” tab), a complete set of more detailed profiles are now compiled into one report.

Collectively, the profiles provide insights from local economic development leaders on the cities’ actions in the wake of the job loss that have either helped or hindered redevelopment efforts.
The authors and contributors to the ICI do not pass judgment on individual cities. So, while we understand the temptation to simply link directly to just one city’s profile, we encourage readers to start their exploration of the ICI with the Summary.

The ICI looked at cities’ conditions, trends and experiences and concluded that efforts to improve their economic and social well-being are shaped by:

1) Macroeconomic forces: Regardless of their size or location, these cities are impacted by globalization, immigration, education, job training needs, demographic trends including an aging population, and the benefits and burdens of wealth, wages, and poverty;
2) State and national policies: State and national policies pit one city against another in a zero-sum competition for job- and wealth-generated firms; and
3) The dynamic relationship between the city and the region in which it is located: Regional strengths and weaknesses to a large extent determine the fate of the respective cities.

The ICI homepage provides access to the full ICI report, individual ICI city profiles and related research, and blogs from around the country about cities that share a manufacturing legacy.

2013 Michigan Personal Income

By Martin Lavelle

Income received by state residents remains an important and widely followed measure of economic progress.1/ Personal income is income received from all sources (net of contributions to government social insurance programs, such as Social Security and Medicare).2/ State personal income can be broken down into three categories: 1) net earnings by place of residence (e.g., wages and salaries)3/; 2) dividends, interest, and rent; and 3) transfer payments (e.g., Social Security payments). As chart 1 shows, income received by Michiganders used to mainly come from net earnings, but the other two categories, especially transfer payments, have constituted a larger share of income in recent years, particularly after the Great Recession (which started at the very end of 2007 and concluded in mid-2009)/4. After 2011 (when Michigan’s economic recovery started to accelerate), there has been little change in the composition of Michigan personal income.

Chart 1: Breakdown of Michigan Personal Income
Chart 1 Source: Author’s calculations based on data from www.bea.gov.

Personal income growth in Michigan slowed for a second straight year in 2013: Personal income increased 3.5% in 2012 and 2.5% in 2013 after rising 5.5% in 2011./5 When deflated by the Detroit area Consumer Price Index (CPI), Michigan personal income grew 1.0% in 2013, decelerating from its 1.5% growth rate in the previous year. Michigan’s real disposable personal income growth also slowed in 2013: Real disposable income grew a scant 0.1% last year, compared with 1.1% in 2012./6

Michigan’s economy and its personal income reflected national trends in 2013: Somewhat lower growth in take-home pay for employees last year relative to 2012 and the resolution of the so-called fiscal cliff in January 2013 were largely responsible for the slowdown in personal income growth./7 With the exceptions of construction, finance and real estate, and health care, private nonfarm sectors saw slower growth in work earnings in 2013 than in 2012. When weighted by sector, manufacturing was the nonfarm sector that made the largest contribution (0.52 percentage points) to personal income growth in 2013. The government sector was the nonfarm sector that made the smallest contribution (–0.25 percentage points) to personal income growth last year; this occurred mainly because of changes in personal income growth for workers in state and local governments. In addition, changes to fiscal policies contributed to slower personal income growth in 2013. Specifically, the reinstitution of the federal payroll tax rate of 6.2% for personal contributions to Social Security (from 4.2%), as well as higher capital gains and dividend tax liabilities relative to 2012, helped temper personal income growth in 2013.

With respect to personal income growth, Michigan was in the middle of the pack among Seventh Federal Reserve District states in 2013, as table 1 shows; it was also close to the national value. Since 2010, both personal income growth and disposable personal income growth in Michigan were lower than the respective national values./8 With regard to disposable income, this trend may partly reflect fiscal policy changes that occurred in Michigan. Since 2010, Michigan has revised its tax code in multiple ways, including the application of state income taxes to retiree pensions, which has dampened disposable income growth./9

Table 1: Personal Income Growth, Seventh District and United States
Table 1 Source: www.bea.gov.

Table 2 shows Michigan comparing more favorably to the United States in terms of per capita personal income growth in 2013; but Michigan still ranks in the middle of the Seventh District by this measure.
During most of the 2000s, Michigan’s economic growth stagnated, and it fell into a one-state recession between 2003 and 2009. During the recession, per capita personal income growth slowed. In 2000 (when indexed), U.S. and Michigan per capita personal income were virtually equal. Over the period 2000–07 (before the Great Recession began), U.S. per capita personal income increased 31.2%, while Michigan per capita personal income increased 18.6%. However, over the period 2010–13, per capita personal income (as well as per capita disposable income) increased at a higher rate in Michigan than in the nation as whole./10 Michigan’s higher per capita income growth rates may be in part due to changes in its household employment and labor force participation rates. Both rates have been increasing more rapidly as of late.

Table 2: Per Capita Personal Income Growth, Seventh District and United States
Table 2 Source: www.bea.gov.

Chart 2 shows what percentage of the working-age population in the United States and Michigan was employed from 1976 through 2013. The ratios of employment to working-age population in the nation and Michigan fell during the Great Recession and slightly rebounded in the last couple of years. But Michigan’s ratio of employment to working-age population fell more sharply over the past decade (despite the state having lost population) and is now below its all-time low. After losing population during the 2000s, Michigan’s population grew an estimated 0.1% since 2010./11 Meanwhile, the U.S. population has grown an estimated 0.8%.

Chart 2: Employment-to-Working-Age-Population Ratio: United States and Michigan
Chart 2 Source: www.bls.gov.

When looking at changes in per capita personal income over the past 45 years, one can see how much the United States and the Seventh District have outpaced Michigan. Until 2001, only Illinois was higher than Michigan in terms of its per capita personal income relative to the nation’s (see chart 3). Michigan’s one-state recession during the 2000s becomes evident in chart 3, when its relative measure of per capita personal income diverges from those of other Seventh District states (except Indiana’s). During the 2000s, the income disparity between Michigan and the rest of the country grew quite a bit. This may have been due in part to “brain drain” from Michigan. Research from the Cleveland Fed has found that a state’s knowledge stock—which is composed of the number of patents issued and the number of high school and college graduates—is the main factor explaining a state’s relative per capita personal income over long periods of time./12 Since the end of the Great Recession, it appears Michigan’s per capita personal income growth is at least equal to, if not slightly greater than, those of the Seventh District states and the nation as a whole, but this growth hasn’t resulted in a return to parity with most of them as chart 3 shows.

Chart 3: Per Capita Personal Income Relative to the United States’: Michigan and Other Seventh District States
Chart 3 Source: Author’s calculations based on data from www.bea.gov.

As mentioned before, transfer payments have made up a large share of Michigan personal income growth lately. Indeed, transfer payments have played an important role in lifting income levels in Michigan in recent years. But that has come with a price: Michigan’s Unemployment Insurance Trust Fund has fallen into the red. Consequently, Michigan has taken on loans from the federal government and suffered reductions in Federal Unemployment Trust Act (FUTA) tax credits./13 In addition, Michigan employers are in the process of paying off revenue bonds (issued to pay off Unemployment Insurance Trust Fund liabilities); the bonds are held by the federal government. Such liabilities likely reflect future drains on personal income to Michigan residents as the trust fund is replenished from payroll taxes. In response to stress on the trust fund, the state made other changes to its unemployment insurance program, including cutting unemployment benefits to 20 weeks from 26 weeks in 2011./14 Because employers are paying off revenue bonds, Michiganders face not only the loss of potential income but also potential income growth.

Conclusion

Michigan’s one-state recession in the 2000s lowered employment and employment participation, thereby slowing its per capita personal income growth. In regard to state per capita personal income growth relative to that of the nation’s, Michigan has now reached a point where it has clearly fallen behind most of its Seventh District neighbors. As the national economy continues to recover from the Great Recession, we can ask whether Michigan has now returned to personal income growth rates of the past for the foreseeable future. The answer is yes, but this may not be good enough. Despite the noteworthy amount of positive economic news coming from Michigan since the end of the recession (including the auto industry’s resurgence), its personal income growth has, at best, matched the long-term trend for personal income growth in the United States. At this pace, the Michigan economy is vulnerable in losing further ground during the next national downturn.

—————————————————-
1/ Variations in personal income growth between states can stem from differences in the fortunes of the local industries that are sharply concentrated within each. For example, while analyzing fluctuations in payroll by industry sector, I note that manufacturing is to Michigan as mining is to Montana or as retail trade is to Nevada.
2/ Personal income is typically not adjusted for inflation.
3/ Net earnings by place of residence = Earnings by place of work – Personal contributions for government social insurance + Adjustment to convert earnings from a place-of-work basis to a place-of-residence basis.
4/ Another reason transfer payments now constitute a higher percentage of personal income is new retirees receiving Social Security.
5/ State personal income growth figures for the year’s previous quarters are normally revised with each new quarterly data release from the U.S. Bureau of Economic Analysis (BEA). Benchmark revisions for personal income are usually done shortly after with other BEA benchmark revisions.
6/ Real disposable personal income is after-tax, inflation-adjusted income.
7/ The fiscal cliff was a combination of expiring tax cuts and across-the-board government spending cuts that were scheduled to become effective on the final day of 2012. For further details, see www.chicagofed.org/digital_assets/publications/chicago_fed_letter/2014/cflapril2014_321.pdf.
8/ In 2010–13, annualized personal income growth for the United States and Michigan was 4.3% and 3.8%, respectively. Over the same period, annualized disposable income growth for the United States and Michigan was 3.4% and 2.9%, respectively.
9/ See www.mlive.com/politics/index.ssf/2011/05/gov_rick_snyder_signs_michigan.html.
10/ In 2010–13, annualized per capita income growth for Michigan and the United States was 3.8% and 3.5%, respectively. Over the same period, annualized per capita disposable income growth for Michigan and the United States was 2.9% and 2.7%, respectively.
11/ Since 1978, there is a positive, yet somewhat weak, correlation (0.35) between Michigan real gross state product (GSP) growth and population growth.
12/ See www.clevelandfed.org/research/workpaper/2006/wp0606.pdf.
13/ Go to journals.gmu.edu/newvoices/article/download/67/65.
14/ Ibid.

Michigan increases minimum wage

By Paul Traub

On May 27, Michigan Governor Rick Snyder signed legislation that would increase Michigan’s minimum hourly wage, making Michigan one of seven states together with the District of Columbia that have passed legislation to increase their minimum wage this year. The other six states are Connecticut, Delaware, Hawaii, Maryland, Minnesota, and West Virginia. In addition, 32 other states have considered minimum wage legislation during 2014, with 28 of those considering increases to their minimum wage. 1/ As of June 1, 22 states and the District of Columbia have state minimum wages above the federal minimum hourly wage of $7.25 (see map).

US Map

On September 1, Michigan’s minimum wage will increase from $7.40 to $8.15. As shown in table 1, under the new law Michigan’s minimum wage will continue to grow through 2018 until it reaches $9.25 per hour. From that point forward, the wage will continue to increase by the rate of inflation for Midwestern states up to a limit of 3.5%, so long as the unemployment rate is at or below 8.5% in the prior year.

Table 1

The new law is thought by some to be a compromise by Michigan legislators aimed at preempting a November ballot initiative asking voters to raise the minimum wage to $10.10 per hour, including for those workers eligible to receive tips. Under the new Michigan law, workers who are eligible to receive tips must be paid a wage equal to at least 38% of the minimum wage and will start by receiving $3.10 per hour, rising to $3.52 per hour by 2018. Many employer groups, including the Michigan Restaurant Association, that were opposed to the ballot proposal seem to see the new Michigan legislation as a workable compromise.

Since 1980, Michigan workers have seen the minimum hourly wage increase only six times. Chart 1 shows Michigan’s minimum wage in both nominal and real terms from 1980 through 2014.

Chart 1

After adjusting for inflation, using the personal consumption expenditures (PCE) price index, the minimum wage for 2014 comes out to $6.78 per hour, which is below 1980’s real hourly wage of $7.05 per hour. Throughout the years, increases in the minimum wage have repeatedly done no more than to return the real wage back to where it was in 1980, only to see it fall behind again as inflation ate away at the purchasing power of minimum wage workers. The biggest decline in purchasing power occurred during the 15 years between 1980 and 1995, when the real minimum wage fell by 38%.

One of the biggest complaints about the new minimum wage is that it will hurt small business owners the most. Because higher wages will increase the cost of labor and business owners may not be able to pass all of the increased cost on to their customers, their profits may be adversely affected. Some business owners say that in response to their declining profit margins, they will be forced to cut back on employee hours worked or the number of employees in total. Chart 2 below shows the annual percentage change in the new minimum hourly wage adjusted for inflation. The wage is adjusted using PCE price index estimates of 1.8% for 2014–15 and 2.0% for subsequent years. At first glance, it looks as if wages are going to increase substantially, increasing 8.3% the first year.

Chart 2

In purchasing power terms, Michigan’s real minimum wage has fallen more over the past three decades than it has increased. The new legislation will increase the real minimum wage by 2018 (give the above-mentioned assumptions) to an estimated $7.85 in 2009 dollars, which is equal to a compound annual growth rate of 0.3% since 1980. So one way to look at the most recent increase in the minimum wage is that it will bring the real wage back to where it was 35 years ago. Going forward, the wage is tied to inflation or 3.5% (whichever is lower), helping to a somewhat stable real income for minimum wage workers and protecting their buying power in the process.

1/ David Baily, Karen Pierog and Mary Wisniewski, 2014 “Michigan, in bipartisan move, raises minimum wage”, Reuters, chicagotribune.com, May 27, 2014.

Wells Fargo Chief Economist Gives Economic Outlook at Latest DABE Meeting

By Martin Lavelle

At the latest Detroit Association for Business Economics (DABE) meeting of the 2013–14 season, John Silvia, chief economist, Wells Fargo, presented his outlook on the economy.
Silvia said that he expects the annualized rate of real gross domestic product (GDP) growth to be 2.8% for the remainder of 2014, with the pace of growth accelerating slightly to 3.1% in 2015. According to Silvia’s outlook, the economy is expected to continue to experience steady private sector demand while government consumption and investment rebound with the elimination of some public sector headwinds (e.g., no government shutdown or prolonged debt ceiling debate). However, Silvia noted that one major risk to his forecast is the recent slow growth in labor productivity and real disposable income per capita. If labor productivity growth does not rebound to pre-recessionary rates, future real disposable income growth will be limited, hindering consumer demand, he explained.

In regard to employment, Silvia said he puts added importance on the weekly unemployment initial claims series, which continues to move downward; this trend bodes well for the labor market. Silvia noted he is also optimistic about future employment growth because the employed-to-population ratio has apparently bottomed out and the unemployment rate has generally declined over the past few years. Labor market improvements should help the housing market, which is expected to improve; more specifically, housing starts are anticipated to hit their long-run trend of 1.5 million units in 2018, according to Silvia’s outlook.
Silvia said that he does not expect inflation to pose a threat to the Federal Reserve’s current stance of expansionary monetary policy; he noted that “headline” inflation as measured by the Personal Consumption Expenditures Price Index is not expected to reach the Federal Reserve’s price stability target of 2.0% until next year. However, Silvia pointed out that since the beginning of the deceleration of the current monetary stimulus program, the yield curve has shifted up as medium- and long-term interest rates (including mortgage rates) have increased. /1 This shift in the yield curve has slowed the housing market’s rebound. In addition, Silvia said he is worried that the end of the expansion in the Federal Reserve’s balance sheet will coincide with a drop in stock prices, which would hurt investment.

In closing, Silvia highlighted some short- and long-run fiscal issues that remain risks to his outlook. In the short run, increases in the number of student loan delinquencies are concerning as household formation and consumption may be delayed because of high student debt levels, Silvia said. Additionally, the current decision to not address entitlement programs, such as Social Security and Medicare, poses long-run risks to the country’s economic growth, he argued.
Silvia’s presentation is available here. 2014 05 13 Detroit NABE

/1 A yield curve is the line plotting the yields (or interest rates) of assets of the same credit quality but with different maturity dates at a certain point in time. These assets (e.g., U.S. Treasury securities) typically yield incrementally more at longer maturities.

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.