Detroit’s economic activity improved in March

By Paul Traub

In the spring of 2017, the Federal Reserve Bank of Chicago published a Chicago Fed Letter article that introduced an index that was developed to track the economic activity in the city of Detroit. This new index was called the Detroit Economic Activity Index (DEAI), and it was also briefly discussed in an earlier Michigan Economy blog entry dated April 27, 2017. The DEAI uses 23 Detroit-specific data series to capture economic activity in four major categories: income, labor, real estate, and trade. The index is calibrated so that Detroit’s average historical economic trend growth equals zero and is measured in standard deviation units from this long-term trend. This means that an index value greater than zero implies that Detroit’s economic activity is growing faster than its trend and a value less than zero implies that the city’s economic activity is expanding below its trend. An extremely negative index value, such as those during the 2001 and 2008–09 recessions, would likely imply the city’s economy is contracting.

Detroit Economic Activity Index

According to the latest information from the Federal Reserve Bank of Chicago’s Detroit Economic Activity Index, Detroit’s economic activity grew faster than its historical average in March. The complete history of the index through March 2018 is shown below (chart 1).

The March value of 1.02 is the index’s strongest reading since it debuted in April 2017, indicating an improved economic environment for Detroit following a slowing in the pace of economic activity in 2017. When Michigan’s contribution to the Chicago Fed’s Midwest Economy Index (MEI) is compared with the DEAI, it appears that Detroit’s economy was actually performing better than Michigan’s economy as a whole through the end of 2017 (chart 2).

While this assessment based on the index readings is accurate, it is important to remember that these indexes are stated in standard deviations from trend and that relative to Michigan as a whole, Detroit was recovering from a much lower baseline, as the city endeavored to emerge from bankruptcy. The fact is that since 1997 the average economic growth rate for Detroit has been very close to zero. This can be seen more clearly when comparing Michigan’s gross state product (GSP) and Detroit’s estimated gross city product (GCP), both indexed to 1997 as the base year (chart 3). Over the past 20 years, Michigan’s economic output has increased just 13.9% and Detroit’s economy has only improved a meager 0.9% (both values have been adjusted for inflation). March marked the first month since August 2017 that all four categories that make up the DEAI made positive contributions to the index: income’s contribution came in at 0.03; real estate’s, at 0.04; trade’s, at 0.03; and most importantly, labor’s, at 0.91. Given that all four categories of the index provided positive contributions to the March DEAI, the question that needs to be addressed is what caused the DEAI to turn negative in December 2017.

Labor’s contribution to the DEAI

A closer examination of the DEAI data points to the significant role that changes in labor played in both the January decline in the index and the February and March recovery that helped to push the index back into positive territory (chart 4).

Data from the U.S. Bureau of Labor Statistics point to the fact that the seasonally adjusted number of employed persons living in the city of Detroit since the 2010 U.S. Census peaked in September 2017 at 226,400 and then began to decline through January 2018 before bottoming out at 223,300 employees. This decrease in employed residents contributed significantly to January’s negative DEAI value of –0.7, the index’s lowest level since October 2013. After January 2018, employment rose for two consecutive months, and so in March, employment was back up close to its September 2017 level. While the contributions from the other three categories look to be relatively minor, the overall improvement in the data for these categories has been significant, especially after Detroit exited bankruptcy in December 2014.

Real per capita income

A recovery in employment not only plays an important role in improving economic output; it also significantly supports income growth. Since the DEAI is constructed using a mixed-frequency model, annual observations for real per capita income (PCI), available through the U.S. Census Bureau, can be included in the calculation. While the city’s income data is released at a significant lag, it is still an important indicator of economic performance. The most current data for Detroit’s per capita income are only available through 2016. However, the model is capable of predicting low-frequency variables from the information gained from high-frequency data. In March 2017, the model was used to predict Detroit’s 2016 real per capita income: This forecast was $16,085. The actual number that was released a few months later was $16,784, which made the DEAI model’s forecast appear to be quite reasonable. Based on the most recent DEAI calibration, real per capita income for 2017 is projected to be $17,500, a 4.3% increase from the 2016 level. The Detroit’s projected real PCI compares unfavorably with the nation’s ($44,723) and Michigan’s ($40,165)—which were up 0.7% and 0.6%, respectively. While Detroit’s real PCI is lagging those of the U.S. and Michigan significantly, the rate of increase in recent years has been encouraging (chart 5).

Detroit’s real estate market continues to improve

While it is true that prices for single-family homes in Detroit are still well below their housing bubble peak reached in 2003, their average was up an estimated 80% in March 2018 relative to December 2014. This is according to data provide by Realcomp, Michigan’s largest multiple listing service. As for commercial real estate, CoStar data indicates that the vacancy rate for commercial property in Detroit had fallen to 5.9% in the first quarter of 2018 from 9.1% in the fourth quarter of 2014. During the same time period, overall asking rent for non-office commercial properties increased by 47%—from $4.58 per square foot to $6.74 per square foot—and rent on office space increased 6.5%—from $16.03 per square foot to $17.07 per square foot.

Trade activity rebounds

One of Detroit’s most important characteristics is its location relative to Canada. Detroit is one of only a few spots in the continental U.S. where Canada is south of the U.S. border, and the city hosts one of the busiest ports in the United States given its proximity to Canada. Detroit currently has two tunnels and one bridge to Windsor, Canada, that are used to transport goods worth billions of dollars into and out of the nation. According to U.S. Census Bureau data, almost $150 billion in trade crossed through the Port of Detroit in 2017, up from just $98.1 billion in the 2009 (trade activity’s most recent trough at the port, reached during the Great Recession) (chart 6).

That said, the current level of trade activity is stretching the limits of Detroit’s current port capacity. This has created a need to construct a second bridge to Canada, which will raise the total number of border crossings between Detroit and Windsor to four. Construction on the Gordie Howe International Bridge is projected to begin this summer, and this bridge is planned to open as early as 2020. This project is expected to create thousands of construction and operational jobs in Detroit and Windsor.

Summary

While the DEAI is indicating that economic growth in Detroit has slowed from its 2017 peak, some solace can be taken from the fact that the index is predicting that 2018 will continue the city’s economic expansion that started back in 2011. Based on data through March 2018, Detroit’s economy is expected to grow by 0.7% in 2018, which would mark the eighth consecutive year of above-trend growth for the city. We will continue to track the Detroit economy with the DEAI and other tools, and report on the city’s progress regularly. Starting soon the DEAI will be accessible through the Federal Reserve Bank of Chicago’s website on the Data Releases page and here on the Michigan Economy blog. Readers will be able to see the DEAI together with other national and regional economic indexes produced by the Federal Reserve Bank of Chicago. Because the DEAI is a mixed-frequency model and much of the underlying data is not monthly, the DEAI will be updated quarterly and published together with a quarterly release. For more information on this and other economic indexes provided by the Federal Reserve Bank of Chicago, go to our website or contact Paul Traub at paul.traub@chi.frb.org.

Has Targeting Specific Detroit Neighborhoods for Public Investment Resulted in Higher Home Values?

By Martin Lavelle

In this blog entry, I look at whether targeted public investments in certain Detroit neighborhoods has helped produce higher homes values in those parts of the city. Before going over the results of such efforts, first let me explain why some have considered targeted investments to be a worthwhile approach to addressing some of the city’s problems.

In 1950, Detroit’s population reached its peak of 1.8 million.(1) At that time, Detroit’s land area of 140 square miles seemed appropriate for its population. Since then, Detroit has suffered a significant loss of population (a well-documented long-term trend). The U.S. Census Bureau’s 2016 estimate put Detroit’s population at 672,795.(2) Detroit’s population hasn’t been that low since the 1910s (over that decade, it more than doubled from 466,000 in 1910 to 994,000 in 1920).(3) Nowadays, Detroit’s footprint seems to be far too large for its number of residents. Moreover, dense clusters of population can be hard to find in Detroit’s 100-plus neighborhoods.

Over the past decade, the Detroit city government has undertaken many efforts to promote population density in the city’s neighborhoods. In 2010, then-Mayor Dave Bing announced the start of the Detroit Works Project—an effort to come up with both short- and long-term plans to improve the city. Included in this project was the provision of financial incentives for residents to relocate to more stable neighborhoods in order to deliver city services more efficiently.(4) After that part of the initiative was vociferously opposed by city residents, Mayor Bing decided in 2011 to focus on a couple of smaller initiatives. First, Detroit police officers were provided financial incentives to relocate to the Boston–Edison and East English Village neighborhoods.(5) Second, later in the year, Mayor Bing designated three Detroit neighborhoods as Detroit Works “demonstration areas,” which would receive increased city services. Those three demonstration areas were Bagley, Boston–Edison, and Hubbard Farms.(6)

So, for over six years now, the four neighborhoods of Bagley, Boston–Edison, East English Village, and Hubbard Farms have received increased investments from the city government. Arguably, the increased government service delivery and/or police presence should have made those neighborhoods more desirable places to live. And the greater desirability of these areas should be reflected in their having higher home values now. In this blog entry, I examine the changes in home sale prices in those four neighborhoods since 2011 (when Mayor Bing began his initiatives). I also explore changes in home sale prices in the neighborhoods adjacent to the four that received investments from the city since 2011 to see if targeted neighborhood funding has made a difference.

Profiles of Detroit demonstration neighborhoods(7)

For those unfamiliar with Detroit neighborhoods, I provide here brief profiles of the four neighborhoods of interest. For the sake of simplicity, I will refer to all four as “demonstration neighborhoods” (though technically speaking, East English Village was only targeted with incentives to bring in more police residents and not designated by the Bing administration as a “demonstration area”).

Bagley

The Bagley neighborhood is located in northwest Detroit, bordered by 8 Mile Road to the north, McNichols to the south, Wyoming to the west, and Livernois to the east. The neighborhood anchors are Sinai-Grace Hospital, Marygrove College, and the University of Detroit Mercy. Across Livernois Avenue from Bagley are the even more stable, relatively higher-income Sherwood Forest and Palmer Woods neighborhoods, which border the Detroit Golf Club. After targeted by Mayor Bing for demonstration area funding in 2011, the Detroit Future City plan highlighted northwest Detroit and the Bagley neighborhood as a primary employment area with the potential for larger-scale job growth.

Boston–Edison

Boston–Edison is bordered by Woodward Avenue to the east, Linwood Avenue to the west, Glynn Court to the north, and Edison Avenue to the south. This neighborhood was established shortly after the turn of the twentieth century, after Detroit’s elite made the trek north up Woodward Avenue from Brush Park.(8) Boston–Edison is situated about halfway between struggling Highland Park and the northern edge of vibrant Midtown. Known for its wide, tree-lined avenues and large green public spaces, the neighborhood includes the Motown Mansion, the property built and lived in by Berry Gordy, Jr., when he ran Motown Records.(9)

East English Village(10)

East English Village was originally established in northeast Detroit as five ribbon farms in the 1800s. However, it wasn’t until the 1930s when home construction and migration into the neighborhood accelerated. The neighborhood’s boundaries are those that were laid out in the 1800s: Harper Avenue to the north, Mack Avenue to the south, Outer Drive to the west, and Cadieux Road to the east. East English Village is situated near the Grosse Pointes. A new secondary school, the East English Village High School, was constructed there in 2012.(11)

Hubbard Farms(12)

Hubbard Farms is situated in southwest Detroit, and is bordered by Vernor Highway to the north, Interstate 75 to the south, Clark Avenue to the west, and Grand Boulevard to the east. Hubbard Farms is named after Bela Hubbard, a geologist who became a lawyer and real estate developer. The majority of Hubbard Farms was developed in the late nineteenth and early twentieth centuries.(13) The early residents of Hubbard Farms were industrial workers who worked in Detroit factories.(14)

Background

Before diving into the analysis, I want to provide some sense of the state of Detroit’s housing market. To this end, I present details on the types of transactions conducted in the demonstration neighborhoods and outline Detroit’s home assessment process.

Table 1. Summary statistics of home purchases in select Detroit neighborhoods, 2010–15
Note: REO means real estate owned, and refers to property owned by a lender (typically, a bank or government entity) following an unsuccessful sale at a foreclosure auction.
Source: Author’s calculations based on data from CoreLogic Real Estate.

Table 1 provides some color on home sales in Detroit. Not surprisingly, all but a few of the transactions involved existing homes. Additionally, the majority of the sales involved foreclosed homes (real estate owned, or REO, sales) and was paid for with cash. Interestingly, a higher percentage of home sales involved mortgages in the demonstration neighborhoods than in the nondemonstration neighborhoods. A further look at the mortgage data reveals that, overall, home sales involving mortgages made up a higher percentage of transactions in the demonstration neighborhoods after the city government filed for bankruptcy (in July 2013) than before it did.(15) A greater share of home sales involving mortgages and a lower percentage of foreclosed sales in the demonstration neighborhoods relative to the nondemonstration neighborhoods may show the degree of stability already present in the former before Mayor Bing’s initiatives began in 2011. Also, a deeper dive into the transaction data reveals that sales rose in all but one of the neighborhoods analyzed in the period 2010–15 after Detroit entered into bankruptcy protection in July 2013.

Before sharing my full analysis of the demonstration neighborhoods, I will describe the assessment process that determines the market values of homes and its implementation in Detroit. All Detroit properties are required to be assessed annually. And 30% of Detroit properties require annual on-site visits.(16) Each property is assessed a reasonable market value based on local real estate market conditions. The study of housing market includes the inspection of new construction, analysis of market conditions, and observation of neighborhood advantages and disadvantages. Market conditions take into account property, neighborhood, and homeowner characteristics. Property characteristics include the age of the house, total living area, and lot size. Neighborhood characteristics consist of the number of sales, the percentage of nonresidential properties, the percentage of mixed-use properties, and other economic and social characteristics. Homeowner characteristics include whether or not the homeowner is an in-state or out-of-state owner and if the home is the owner’s primary residence.

In recent years, Detroit struggled to conduct assessments consistent with the practices outlined in the previous paragraph. In addition to the inconsistent and/or unsound practices followed by city assessors, the unhealthy local housing market contributed to the recent erratic assessments of Detroit properties. The Detroit city government was slow to react. Finally, in 2012, the Detroit Auditor General indicated layoffs in recent years and the lack of other resources contributed to the overassessments of home values.(17) However, it wasn’t until after the Detroit News reported on the overassessments in 2013 that the Michigan Tax Commission opened a probe into Detroit’s assessment process. The probe, which found that the average Detroit property hasn’t been assessed in 30 years,(18) resulted in the city’s effort to complete its first city-wide reassessment of property values since the 1950s. The probe finished earlier in 2017. The completion of the citywide assessment will most likely lower most of Detroit home market values further.(19)

Analysis

Chart 1 shows the median home sale prices in the demonstration neighborhoods versus such prices in the adjacent neighborhoods. The demonstration neighborhoods are depicted by the darker shades of colors in the graph.

Chart 1. Median home sale price, 2015: Detroit and select Detroit neighborhoods
Source: Author’s calculations based on data from CoreLogic Real Estate.

Median home sale prices of the demonstration neighborhoods were not only well above those of the adjacent neighborhoods but that of Detroit as a whole. Not surprisingly, the largest gap in median home sale prices between a demonstration neighborhood and an adjacent neighborhood is for Boston–Edison and LaSalle Gardens. As mentioned earlier, Boston–Edison was a destination for Detroit’s elite in the early twentieth century. Even during Detroit’s tougher times, Boston–Edison was still a desirable neighborhood. Meanwhile, the gap in median home sales prices between Bagley and its two adjacent neighborhoods can be explained by their respective proximity to Bagley’s neighborhood anchors (such as Sinai-Grace Hospital) and the quality of homes in each neighborhood. All four demonstration neighborhoods possess relatively strong homeowners’ associations.

Chart 2 shows the change in median home sales prices between 2010 and 2015. I use 2010 as the starting point because it is the first full year of data available.

Chart 2. Percentage change in median home sale price, 2010–15: Detroit and select Detroit neighborhoods
Source: Author’s calculations based on data from CoreLogic Real Estate.

During the period 2010–15, Detroit’s median home sale price rose 21%. Over those years, Bagley and East English Village saw home prices increase more percentage wise than the city as a whole.(20) Median home sale prices in all four demonstration neighborhoods outperformed those of their adjacent neighborhoods. Only four neighborhoods saw positive changes in their median home sale prices. Median home sale prices for three of the four demonstration neighborhoods (the exception being Boston–Edison) were higher in 2015 than in 2010 (before Mayor Bing’s initiatives began). The same can only be said of one of the neighborhoods used for comparison, Pembroke, which is south of Bagley in northwest Detroit. Despite these findings, it should be noted that the demonstration neighborhoods began the period with higher home sale prices than the neighborhoods adjacent to them.

Conclusion

The City of Detroit announced in 2011 that specific neighborhoods would be designated as demonstration areas receiving increased city services. That year, the city government also announced certain neighborhoods would be targeted with incentives for police to relocate to them. Following the implementation of both of those initiatives, the median home sale prices in what I’ve referred to as the “demonstration neighborhoods” rose through 2015, outperforming median home sale prices in adjacent neighborhoods. This fact does not necessarily mean that targeted neighborhood funding was entirely successful. The demonstration neighborhoods could still be benefiting substantially from their strong historical roots, which made them desirable before any city investments took place. Also, Detroit’s housing market conditions (e.g., fairly low sales activity with continued prevalence of cash and foreclosure sales) may have slanted the data in favor of the demonstration neighborhoods. However, one could argue these results helped persuade current Detroit mayor, Mike Duggan, to pursue similar initiatives in the Clark Park, Fitzgerald (analyzed above), and West Village neighborhoods.(21)

(1) See https://www.census.gov/population/www/documentation/twps0027/tab18.txt.
(2) See https://www.census.gov/quickfacts/fact/table/detroitcitymichigan/PST045216.
(3) See http://www.mlive.com/news/index.ssf/2017/05/detroit_population_drops_again.html.
(4) See http://www.mlive.com/news/detroit/index.ssf/2010/02/detroit_mayor_dave_bing_reloca.html.
(5) See http://www.mlive.com/news/detroit/index.ssf/2011/02/detroit_to_renovate_boston-edi.html.
(6) See http://www.crainsdetroit.com/article/20110727/FREE/110729908/detroit-works-project-to-be-measured-in-three-demonstration-areas.
(7) Neighborhood geographic boundaries were determined by the author using information from https://localwiki.org/detroit/Detroit_Works_Project, https://en.wikipedia.org/wiki/List_of_neighborhoods_in_Detroit, and https://detroit.curbed.com/2013/8/20/10206758/finally-a-complete-attempt-at-mapping-detroits-neighborhoods. The neighborhoods chosen to be compared with the demonstration areas are largely residential and are not separated by a significant natural or man-made (expressway) barrier.
(8) See https://www.historicbostonedison.org/History.
(9) See https://www.historicbostonedison.org/Musicians-&-Artists-of-BE#gordy.
(10) See http://www.eastenglishvillage.org/history.php.
(11) See http://detroitk12.org/schools/eevpa/.
(12) See http://www.detroit1701.org/HubbardFarms.htm.
(13) See http://www.detroit1701.org/HubbardFarms.htm.
(14) See http://www.detroit1701.org/HubbardFarms.htm.
(15) The City of Detroit filed for municipal bankruptcy protection in July 2013 (and officially exited bankruptcy in December 2014).
(16) See p. 6 of http://www.detroitmi.gov/Portals/0/docs/Auditor%20General/Performance%20Audits/2012/Finance_Assessment_Performance_07-2008_06-2011.pdf.
(17) See https://www.metrotimes.com/detroit/could-detroits-tax-foreclosures-be-unconstitutional/Content?oid=4522278.
(18) See p. 9 of http://www.detroitmi.gov/Portals/0/docs/Auditor%20General/Performance%20Audits/2012/Finance_Assessment_Performance_07-2008_06-2011.pdf.
(19) See http://www.detroitnews.com/story/news/local/detroit-city/2017/08/30/state-lifts-oversight-detroit-property-assessments/105130886/.
(20) When 2016 data are included, Boston-Edison falls into this category as well.
(21) See http://www.crainsdetroit.com/article/20170324/NEWS/170329889/study-detroiters-must-travel-outside-neighborhoods-for-groceries.

A Look into Changes in Home Prices in Detroit and Wayne County, Michigan, Between 1991 and 2016

By Martin Lavelle and Dan McMillen

Since the early 1990s, the housing market in Wayne County, Michigan, whose county seat is Detroit, has experienced substantial price swings. Housing market volatility has varied by municipality (and by neighborhood within Detroit). Changes in the Wayne County housing market show us which areas have thrived and which have struggled in the past quarter century or so. In this blog post, we take a look at how home prices across the county have changed between 1991 and 2016, with a focus on changes in the Detroit housing market.

Analysis of maps

We used a nonparametric procedure to estimate hedonic price indexes for each census tract (or neighborhood in Detroit) for five-year intervals throughout the overall sample period between 1991 and 2016.(1) The nonparametric procedure uses the census tract (or Detroit neighborhood) centroids as target points, and then just uses weighted least squares with more weight on sales near the target points.

Before going over each of our five maps individually, we want to highlight a few aspects common to all of them. The numbered and colored axis on the right of each map shows the five-year percentage change in home sale prices. Broadly speaking, red areas indicate relatively hotter housing markets (within Wayne County), while blue areas indicate relatively cooler housing markets. The darker a shade of red an area is, the relatively more positive (or less negative) the change in home sale prices; the darker a shade of blue an area is, the relatively less positive (or more negative) the change in home sale prices.

Each map covers all of Wayne County. Wayne County’s boundaries are the Detroit River to the east; 8 Mile Road to the north; Napier Road and Rawsonville Road to the southwest; and Oakville-Waltz Road, Will Carleton Road, and the Huron River to the south. The Grosse Pointe communities begin in the northeastern corner of Wayne County. In each map, the city of Detroit’s borders appear as thick black lines. Going west from Detroit’s city center, one would encounter Redford Township, Livonia, and Plymouth. Going southwest from Detroit’s city center, one would travel through Dearborn, Metro Airport, Wayne, Belleville, and Canton Township. South of Detroit lie Allen Park, plus the Downriver communities that include Lincoln Park, Trenton, and Woodhaven.

The two smaller areas demarcated with thick black lines within Detroit’s borders are Highland Park and Hamtramck; both cities were outside of Detroit when they were originally founded, and they decided to remain incorporated after Detroit expanded further northward in the first quarter of the twentieth century.(2) The white areas just outside of Southwest Detroit are Ford’s corporate headquarters and its Rouge River plant and associated industrial areas.

Map 1. Home price changes in Wayne County, Michigan, 1991 to 1996
Source: Authors’ calculations based on data from CoreLogic Real Estate.

In the first half of the 1990s, much of Wayne County saw increases in home sale prices. Notably, there isn’t much variance in home sale price changes in map 1. There were areas both inside and outside Detroit that experienced the greatest relative increases in home sale prices. Within the city, Midtown and northwest Detroit saw the largest positive changes in home sale prices. Outside of Detroit, the exurban areas of Plymouth and Canton Township experienced the greatest positive changes. With the exception of Dearborn, which on the map appears to be poking Detroit’s southwest border, Detroit’s first ring of suburbs experienced increases in home sale prices that were at the lower end of the spectrum of gains.

The results in map 1 are in line with Detroit’s economic narrative at the time. Detroit enjoyed an economic boom in the first half of the 1990s (following the brief national recession of 1990–91). One factor that specifically helped Detroit back then was low oil prices, which boosted sales of sport utility vehicles (SUVs) made by the Detroit Three automakers (Chrysler, Ford, and General Motors). Higher profits at the Detroit auto manufacturers had a positive ripple effect on the local and regional economies. Another factor helping the Detroit area was stable public finances. An often overlooked achievement of the 1990s was the fact that Mayor Coleman Young’s administration balanced Detroit’s budget before his tenure ended in the mid-1990s.

Map 2. Home price changes in Wayne County, Michigan, 1996 to 2001
Source: Authors’ calculations based on data from CoreLogic Real Estate.

During the latter half of the 1990s and the beginning of the twenty-first century, Wayne County continued to see widespread increases in home sale prices, though with slightly greater variance than in first half of the 1990s. Large home sale price increases were found throughout Detroit. During the late ‘90s, government payrolls were expanded, adding to Detroit residents’ disposable incomes. An increase in local government jobs, combined with the surging automotive industry and general economy, led to a sharp decrease in unemployment in Detroit: The city’s unemployment rate averaged 6.6% in 2000, a significant drop from the 1990 average of 15.0%.(3) Meanwhile, Detroit’s first ring of suburbs witnessed a slight pickup in growth in home sale prices. However, Wayne County’s exurban areas saw a modest deceleration in their rate of growth in home sale prices. Overall, the Wayne County housing market was strong throughout the 1990s.

Significant changes were made to how state and local revenues would be collected and used between 1996 and 2001. Dennis Archer replaced Coleman Young as the mayor of Detroit (in 1994) and added to city payrolls, which raised the disposable income of the city at the cost of unbalancing Detroit’s budget. Also, Proposal A, Michigan’s large school-reform bill,(4) flushed Detroit Public Schools with additional cash, adding to the district’s appeal. And state revenue sharing hadn’t been cut yet, giving city government additional resources for services. A lot of economic and fiscal factors worked in Detroit’s favor during the 1990s, most likely making positive impacts on the city’s housing market. However, the next decade would reveal the mistakes of increasing government spending as Detroit’s population (i.e., its tax base) continued to shrink.

Map 3. Home price changes in Wayne County, Michigan, 2001 to 2006
Source: Authors’ calculations based on data from CoreLogic Real Estate.

Home sale price appreciation endured through 2006 across Wayne County, though with slightly greater variance compared with the appreciation seen in the previous five-year interval. Again, the largest relative gains in home sale prices were in Detroit. Gains in home sale prices flattened in the first ring of suburbs, whereas some exurban areas saw a slight pickup in growth. From looking at map 3, one might conclude that the Detroit and Wayne County economies had stayed the course and built on the 1990s expansion. Unfortunately, that wasn’t the case. After the turn of the millennium, the subprime housing crisis began. During the early 2000s, Detroit didn’t see the massive boom in homebuilding or the surge in home values seen in places such as Las Vegas, Phoenix, Tampa, and southern California. That said, Detroit home values remained elevated as a result of the U.S. housing bubble.

After falling to a low of 3.7% in 2000, Michigan’s unemployment rate rose to 7.2% in 2003.(5) The state’s unemployment rate bounced around that rate until it began to rise again with the beginning of the U.S. Great Recession in December 2007. Many analysts have contended Michigan’s economy fell into recession sometime late in 2003, as the boom in SUV sales receded with the rising price of fuel. Then, beginning in 2005, layoffs and voluntary buyouts of long-tenured employees of the Detroit Three automakers began, helping to slow economic activity further. Simultaneously, Detroit’s economic momentum was halted. Detroit residents were already weighed down by high city income tax rates, and revenues from its local casino wagering taxes began to wane. Moreover, the city’s unemployment rate rose quickly after hitting its 2000 low; it reached 14.1% in 2004, and lingered there until late 2007.(6)

Map 4. Home price changes in Wayne County, Michigan, 2006 to 2011
Source: Authors’ calculations based on data from CoreLogic Real Estate.

After experiencing widespread home sale price increases between 1991 and 2006, home sales price decreases permeated throughout much of Wayne County between 2006 and 2011. Of all the Wayne County municipalities, Detroit suffered the most from the popping of the housing bubble. Even areas of the city that one might assume would be more stable than others (for instance, Midtown Detroit) suffered sizable home sale price decreases. The further out one went from the city, the lesser the decline in home sale prices. However, almost no area was spared. One can almost divide the map into auto-industry-dependent, blue-collar areas and relatively more diversified, white-collar areas (the blue areas were the former, the red areas the latter). Another thing to keep in mind is that outmigration accelerated during this time. Economic misfortunes, early retirements, and the aging of the population persuaded many to leave and seek residence elsewhere.

Map 5. Home price changes in Wayne County, Michigan, 2011 to 2016
Source: Authors’ calculations based on data from CoreLogic Real Estate.

The year 2011 marked a turning point for Wayne County’s economy. In that year, Dan Gilbert moved the headquarters of Quicken Loans downtown and started incentivizing his employees to live there as well. Also in 2011, Gilbert began buying downtown real estate. Now, Gilbert owns over 90 buildings downtown. The year 2011 was also when Mayor Dave Bing announced his intention to supply additional funding to certain stable neighborhoods of Detroit that were deemed “demonstration areas.”(7) The Detroit neighborhood of Boston–Edison (one of the demonstration areas) shows up in map 5 as a lighter red area (indicating it had modest home price increases). Bagley (another demonstration area) is one of the lighter blue Detroit neighborhoods (indicating a slight rebound in home values there).

In map 5, Detroit’s Downtown, Midtown, and Corktown, plus their surrounding areas, show signs of life. As we mentioned, Dan Gilbert was the catalyst for downtown investment. And it turns out that Midtown Detroit, Inc., was the catalyst for Midtown investment. In 2011, Midtown Detroit, Inc., Detroit Medical Center, Wayne State, and Henry Ford Health Systems announced the start of the Live Midtown program, which provided monetary incentives for people to move to Midtown.(8) This program helped increase the rental occupancy rate in Midtown Detroit to nearly 100% in 2014.(9) And high occupancy rates have endured in Midtown even with the additional living capacity built over the past few years.(10) In Corktown, the owners of Slows BBQ helped draw new investment to other vacant Michigan Avenue storefronts, improving the neighborhood’s attractiveness.

Conclusion

During the late 1990s and early 2000s, home sale prices rose much more rapidly in (already relatively low-priced) Detroit neighborhoods than in many other parts of Wayne County (see map 2). However, these same Detroit neighborhoods were the areas where home prices fell more significantly as Michigan endured its one-state recession from around 2003 through 2009 and as the U.S. housing bubble burst in 2006 (see map 4).

Map 5 (which describes the five-year home price changes between 2011 and 2016) almost perfectly demonstrates the argument that there are now “two Detroits,” as public and private investments to date have helped only some parts of Detroit to revitalize and raise their home values. The areas in red are where the bulk of Detroit’s revitalization is taking place, while the areas in blue are the neighborhoods still waiting to participate in the city’s rebound. At this point, the blue areas in Detroit are vastly outnumbered by the red ones. But many public sector and private sector efforts are under way to improve the city’s living conditions, which may lead to higher home prices (and, in turn, higher tax receipts and perhaps expansions of city services to draw more people). So, in the coming years, Detroit may start to see its red neighborhoods outnumbering its blue ones.

(1) Nonparametric regressions are used when the relationship between the independent and dependent variables aren’t already known. The regression analysis from the data provided determines the relationship between the independent and dependent variables. A hedonic price index identifies price factors (the characteristics of the good itself and the external factors affecting its sale). (For more on census tracts, see https://www.census.gov/geo/reference/webatlas/tracts.html.) Details on our procedure are available upon request.
(2) For details, see https://wdet.org/posts/2014/09/19/80119-why-do-hamtramck-and-highland-park-exist-inside-the-city-of-detroit/.
(3) Author’s calculations based on data from the U.S. Bureau of Labor Statistics.
(4) See http://www.mlive.com/education/index.ssf/2014/04/a_brief_history_of_proposal_a.html.
(5) Author’s calculations using data from the U.S. Bureau of Labor Statistics
(6) U.S. Bureau of Labor Statistics.
(7) See http://www.crainsdetroit.com/article/20110727/FREE/110729908/detroit-works-project-to-be-measured-in-three-demonstration-areas.
(8) See https://www.freep.com/story/news/local/michigan/detroit/2015/11/01/midtown-incentives-boost-diversity/74014992/.
(9) See http://www.mlive.com/business/detroit/index.ssf/2014/04/with_shortage_of_housing_optio.html.
(10) See https://detroit.curbed.com/2018/2/20/17031664/report-apartments-downtown-highest-average-rent-detroit and https://www.freep.com/story/money/business/2017/02/18/detroit-apartments-real-estate/97640058/.

Potential Seventh District Contenders for Amazon’s HQ2

By Martin Lavelle

In September 2017, Amazon announced its search for a second North American headquarters location. Ultimately, 238 North American metropolitan areas submitted bids within the six-week allotted period, including several in the Seventh District (1). In this blog, I examine the potential Seventh District contenders based on some important criteria relating to logistics, business environment, and labor force.

Amazon’s request for proposals laid out its location preferences:
• Metropolitan areas with more than 1 million people
• A stable and business-friendly environment
• Urban or suburban locations with the potential to attract and retain strong technical talent
• Communities that think big and creatively when considering locations and real estate options

In the Seventh District, the metropolitan areas with a population of greater than 1 million are Chicago, Detroit (2), Grand Rapids, MI, Indianapolis, and Milwaukee.

Logistics

The table below shows that each of the Seventh District’s metropolitan areas with more than 1 million residents fulfills most or all of Amazon’s other logistical preferences, though to varying extents.

Table 1: Seventh District MSAs and Amazon’s Logistical Requirements (3).

Chicago possesses the flexibility for Amazon to locate anywhere in its metro area because of the various modes of mass transit available to Chicagoland commuters. Milwaukee’s bus rapid transit lines offer some flexibility as well as to potential HQ2 locations. Chicago and Detroit provide an adequate number of air connections to Amazon’s most important North American metropolitan areas. In addition, O’Hare and Detroit Metro Airports are large enough to potentially adjust operations and increase connections.
Logistics also include freeway networks and the ability of employees to navigate freeways. The work/life balance is disrupted the longer one spends stuck in traffic. The table below shows how the Seventh District metropolitan areas with more than 1 million people rank relative to other major North American metropolitan areas with regard to how many hours one
spends in congested traffic annually.

Table 2: Select North American Metro Areas by Traffic Congestion (4)

While it may not seem like it, especially during road construction season, Seventh District metropolitan areas rank favorably on congestion, relative to population size. What Detroit and Indianapolis lack in mass transit, they compensate for with the number of freeway connections. However, according to the 2015 American Community Survey (ACS), Chicago and Detroit have higher drive and total commute times than the national average in each category. Per the ACS, the percentage of Chicago commuters that utilize some mode of mass transit is slightly above 10%, similar to that of Seattle.

Business Environment

Amazon’s second location requirements include a stable and business-friendly environment. States with more business-friendly tax climates tend to use their corporate tax structure as an incentive to attract new business. The table below shows how Seventh District states rank in the 2017 Overall and Corporate Business Tax Climate Index.

Table 3: Ranking of Select U.S. States in the 2018 Overall and Corporate Business Tax Climate Index (5)

Source: https://statetaxindex.org.

The overall rankings of the Seventh District states compare favorably relative to some states with sites that are considered top contenders for Amazon HQ2 such as Minneapolis, MN and Washington D.C., which are included in the above and remaining tables. Indiana and Michigan rate in the top half, helped by the fact they have the lowest flat individual income and corporate income tax rates among the Seventh District states (6). Illinois fell out of the top half in the most recent annual update to the rankings. Meanwhile, Michigan has moved into the top 10 overall.

Theoretically, business activity levels should increase if the state is relatively friendlier to business. One could surmise that a greater number of businesses would place their corporate headquarters in a state that ranks as more accommodating to business. The chart below plots a state’s corporate tax climate ranking versus the number of Fortune 500 companies headquartered in that particular state.

Chart 1: Corporate Business Tax Climate Index Ranking vs. Actual and Predicted Fortune 500 Headquarters

Sources: https://www.ceo.com/entrepreneurial_ceo/two-charts-showing-states-with-the-most-fortune-500-companies and https://statetaxindex.org.

As shown by the green trend line on the chart, there’s actually a slight positive relationship between a state’s corporate tax climate index ranking and the number of Fortune 500 companies headquartered there. The lower the state is ranked, the greater the number of corporate headquarters located in that particular state. That’s the opposite of what one would expect, which is the red dotted line on the chart above.

So if a state’s overall business tax climate doesn’t impact where a corporation will locate its head offices, what variable does influence those decisions? Another example of a state with a business-friendly environment is one that offers incentives to help influence companies’ location decisions. The table below displays how the Seventh District states with eligible metropolitan areas compare with others in that dimension.

Table 4: Annual Business Incentives Per Employee

Source: Moody’s Analytics

By this measure, Michigan ranks highly relative to sites in states that many analysts think have major contenders to land Amazon’s HQ2 such as Austin, TX; Philadelphia, PA; Boston, MA; Portland, OR; Denver, CO; Atlanta, GA, San Francisco, CA; Raleigh, NC; and Salt Lake City, UT. Michigan is noticeably more generous with incentives than other Seventh District states. A major reason companies seek incentives is to offset tax liabilities. The Upjohn Institute created a database with national tax and incentive data, as well as state tax and incentive data for 33 states across 45 industries over the past 26 years. From the database, one can determine the magnitude of a state’s tax liability and incentive for a given industry as a percentage of that industry’s economic value-added. Then, by taking the incentive percentage (of its value-added) for a given state and dividing that by its tax percentage (of its value-added), one can determine to what extent a state’s incentives offset an industry’s tax liabilities in that specific state. The table below compares state tax liabilities and incentive offerings as a percentage of their respective value-added, along with the percentage of state tax liabilities covered by incentive offerings for some of the Amazon HQ2 contenders and the U.S. overall.

Table 5: Incentives and Taxes by U.S. and Select State, 2015 (7).

Source: Tables 10, 13, and 15 of http://research.upjohn.org/cgi/viewcontent.cgi?article=1228&context=reports.

Except for Illinois, the Seventh District states rank favorably relative to other states when looking at incentives as a percentage of state’s value-added and as a percentage of a state’s gross taxes. Having a greater percentage of its gross tax liabilities offset by incentive offerings would likely make a state more attractive to a business. Another takeaway from the table is that it doesn’t follow the previous table that showed incentives per job. Texas may have the highest incentive per job, but its incentive offerings constitute a relatively low percentage of its value-added. Conversely, Indiana possesses a relatively low incentive amount per job, but incentives offset almost 60% of its gross taxes. Lastly, Washington stands out for being a relatively high tax, low incentive state that lags significantly behind the other contending states.

Talent

Amazon has stated that it “will hire as many as 50,000 new full-time employees with an average annual total compensation exceeding $100,000 over the next 10-15 years, following the commencement of operations.” (8) In order to fill that many positions, Amazon will need to attract and retain highly skilled workers. That requires access to a college-educated population, including a substantial number with degrees in science, technology, engineering, or math (STEM) fields. The table below compares the Seventh District candidate metropolitan areas with other contenders on the relative education level of the adult population, as well as the percentage with a science or engineering background.

Table 6: College-educated Population in Select U.S. Metropolitan Areas

Source: 2016 American Community Survey, Seventh District locations are highlighted.

Among the group above, the Seventh District metropolitan areas don’t match up well. The Michigan metros don’t rank well when looking at the percentage of the population that possesses a bachelor’s degree. Grand Rapids ranks last when looking at the percentage of population with an advanced degree. Some of the areas known for their ability to retain and attract talent stand out in the table above. Washington D.C., San Francisco-Oakland, Raleigh, and Boston have world-class universities and globally renowned employers that require and need the best and the brightest.

Of course, not all STEM fields require a bachelor’s degree. Certain occupations in manufacturing and information technology only require a two-year degrees or specific certification. The table below shows the Seventh District candidate cities’ STEM employment relative the same group of U.S. cities listed in the previous table.

Table 7: Percentage of Employees in STEM (9) Occupations; Seventh District and Select U.S. Metropolitan Areas

Source: Author’s calculations based on data from the U.S. Bureau of Labor Statistics, Occupational Employment Statistics database, available at www.bls.gov/oes/tables.htm. Seventh District locations are highlighted.

By this broader measure, the Seventh District metropolitan areas compare more favorably with their peers. Detroit, Indianapolis, and Milwaukee have higher percentages of employees in STEM occupations than the U.S. average. Of the group of metro areas listed above, Detroit ranks behind just five of them.

An important factor in attracting talent is a relatively low cost of living. The next table examines the gross median rent in the Seventh District metro areas and select U.S. metros. Also, the table lists the gross median rent as a percentage of median household income in each metro area.

Table 10: Median Rent and its Percentage of Median Household Income

Source: Author’s Calculations Using Data from the 2016 American Community Survey. Seventh District locations are highlighted.

While there’s a noticeable disparity in the monthly rents among the metro areas, the range considerably tightens when looking at the percentage of household income that is devoted to rent. Detroit has one of the lowest monthly rents, but it comprises a relatively high percentage of household income because of Detroit’s relatively low median household income. Meanwhile, the Washington D.C. metro area, known for its relatively high housing costs, has a median rent almost twice that of Detroit, but it comprises a lower percentage of the metro’s median household income because the metro area has a higher median household income. Among the Seventh District metro areas, rents in Grand Rapids make up the lowest percentage of household income.

Potential Amazon Sites in the Seventh District Cities

Do you have an eight million square foot piece of land to spare in your metro area? That’s what Amazon is asking for their HQ2 site. Amazon requires an initial space of 500,000 square feet that can expand to as large as eight million square feet in order to accommodate the number of employees they plan to have working at their HQ2. Where would Amazon place their HQ2 in each of the Seventh District’s large metro areas? Potential Seventh District contenders have suggested particular sites that could accommodate Amazon’s HQ2.

Chicago

Chicago proposed ten sites that could accommodate Amazon’s new headquarters. They were revealed to the public and can be viewed here. A couple of the sites stand out for different reasons. The Downtown Gateway District site, which includes the old Post Office building, contains move-in-ready buildings, but would also allow Amazon to design its own headquarters. Outside of Downtown, the River District site would also give Amazon some autonomy in designing its headquarters without having to undertake the kind of massive redevelopment effort that some of the other proposed sites would require.

Detroit

The executive summary of Detroit’s Amazon proposal offers few surprises. Dan Gilbert, Chairman and Founder of Rock Ventures and Quicken Loans, was appointed to lead Detroit’s bid for Amazon, which includes Windsor, Ontario, Canada, just across the Detroit River. Gilbert owns 95 Downtown Detroit buildings, giving Downtown Detroit flexibility to move things around if it were to be chosen by Amazon. One potential complex is the now open space that was supposed to have Wayne County’s new jail, and then was bought by Gilbert with much talk surrounding a soccer stadium. With the old jail site on one end and Gilbert’s proposed skyscraper on the old Hudson’s department store site on the other, this location could be attractive. Of course, Detroit doesn’t have a shortage of vacant space that Amazon could build to use. However, Detroit doesn’t have the extensive mass transit system that would allow relatively easy access to some of the larger vacant sites.

Grand Rapids

Grand Rapids hasn’t given any clues publicly as to where it has proposed Amazon would locate within the area. However, the relatively small size of the metro area means it only takes 15-20 minutes to drive from any corner of Greater Grand Rapids into downtown. The metro area includes plenty of space around Holland, only a 35 minute drive from Downtown Grand Rapids, and Grand Valley State University in between.

Indianapolis

Indianapolis didn’t make their Amazon bid public either. Indianapolis may arguably have the most shovel-ready location that would not just fulfill Amazon’s initial 500,000 square foot requirement, but go a long way toward hitting the eight million square foot target. The site used to have a General Motors stamping plant, which it was demolished in 2013. It is located in Downtown Indianapolis on the White River, just across from the central business district and IUPUI, and has relatively easy access to the city’s freeway system. The old GM site has been talked about publicly by city stakeholders. (10) As with Detroit, in Indianapolis, a less extensive mass transit system limits where Amazon could go.

Milwaukee

Milwaukee’s bidding group didn’t reveal its Amazon bid publicly. However, according to the local press, two sites in Walkers Point were included.(11) Walkers Point lies immediately south of Milwaukee’s central business district, contains old industrial sites, and provides access to freeways and Milwaukee’s bus rapid transit system. In addition, one would expect potential locations to be identified in the vicinity of Milwaukee’s airport, which is south of the central business district.

Conclusion

If Amazon were to choose a Seventh District location for HQ2, where would it be? Looking at all of the variables, the most likely Seventh District metro area to attract Amazon would seem to be Chicago. However, if Amazon wanted to transform a community, then Detroit or Milwaukee might be more appealing. If Amazon preferred the most shovel-ready site, then Indianapolis could merit greater consideration. Grand Rapids could emerge as a candidate if Amazon were to place greater weight on its ability to work with local stakeholders, as well as having their employees enjoy a relatively low cost of living. Amazon plans to make an announcement sometime in 2018. (12)

Foot Notes

1 – The Seventh Federal Reserve District serves a five-state region, comprising all of Iowa and most of Illinois, Indiana, Michigan and Wisconsin.
2 – Although Detroit submitted a joint regional bid with Windsor, Ontario, Canada, the statistics I cite here are for the Detroit MSA.
3 – See Information on Airport Hub Size Type from the FAA, number of Direct Flights from October 24, 2017 using the By Route tab at http://www.panynj.gov/airports/flight-status.html?view=DEPARTURE&apt=EWR. Airport data includes all commercial metropolitan airports, i.e., New York consists of Kennedy, La Guardia, and Newark airports. Seventh District locations are highlighted.
4 – Population data from the U.S. Census Bureau, Traffic data from inrix.com/scorecard. Seventh District locations are highlighted.
5 – The overall ranking of the State Business Tax Climate Index is derived from five components: state income tax, sales tax, corporate tax, property tax, and unemployment insurance tax. The corporate tax has the third heaviest weight of the five components at 19%. The corporate tax subindex is divided into three of its own subindexes. The first subindex revolves around the structure of a state’s corporate tax rate, its level, and how many brackets and how quickly does a corporation’s tax liability reach the highest bracket. The second subindex examines variables related to the corporate tax base, such as the caps and number of years allowed for carryback and carryforward, gross receipts tax deductions, and whether or not the state has an alternative minimum tax. The final subindex studies the size and effectiveness of tax credits. Seventh District locations are highlighted.
6 – See p. 59 and p. 64 of https://files.taxfoundation.org/20171016171625/SBTCI_2018.pdf.
7 – Table reports present value of incentives, gross state and local business taxes, and net business taxes after incentives, all calculated as percent of present value of value-added. All incentive and taxes are weighted average, using value-added weights, across all 31 export-base industries, for a new facility starting up in 2015. Table also reports the state’s share of private value-added, which is used to create national averages across these states. Incentives as a percent of gross taxes are simply ratio of the two other columns. All present value calculations use 12 percent real discount rate, and consider facility with life of 20 years. The U.S. incentive percentage is weighted by a state’s gross state product. Seventh District locations are highlighted.
8 – See p. 2 of https://images-na.ssl-images-amazon.com/images/G/01/Anything/test/images/usa/RFP_3._V516043504_.pdf.
9 – The criteria to define STEM- and non-STEM-related occupations were taken from the U.S. Census Bureau. See www.census.gov/people/io/files/STEM-Census-2010-occ-code-list.xls.
10 – See https://www.indystar.com/story/money/2017/09/28/if-amazon-chooses-indianapolis-heres-where-h-2-q-should-go/685599001/.
11 – See http://www.tmj4.com/news/local-news/making-a-pitch-possible-locations-for-amazons-hq2-site.
12 – See p.1 of https://images-na.ssl-images-amazon.com/images/G/01/Anything/test/images/usa/RFP_3._V516043504_.pdf.

Is Michigan’s Low Unemployment Rate Misleading?

By Martin Lavelle

In a blog entry last year, I investigated the tightness of Michigan’s labor market after the state’s unemployment rate had reached its lowest point since 2001. More recently, in June 2017, Michigan’s unemployment rate achieved yet a new low during the current expansionary cycle, falling to 3.8%. The summer of 2000 is the last time Michigan’s unemployment rate fell below 4%. How does Michigan’s current labor market compare with that of 2000?

Analysis of Michigan Household Survey Data

Among popular labor market indicators, the unemployment rate is far and away the most recognized.(1) The unemployment rate is calculated by dividing the number of working age unemployed persons by the total labor force (i.e., unemployed plus employed). These readings of the total labor force are determined from the “household survey” (more details here). For one to be included in the labor force, one has to be 16 years or older and either employed or actively seeking employment.

So this excludes working age adults who are neither employed nor unemployed. This is why when we assess labor market conditions; we often look at the labor force participation rate. The labor force participation rate (LFPR) is measured by dividing the total labor force (employed plus unemployed) by the working-age population. Generally, a high or rising LFPR indicates a more robust labor market. At first blush, one might expect that an improving labor market would raise employment, lower unemployment, and grow the labor force, thereby decreasing the unemployment rate and increasing the labor force participation rate. But it is also possible for these two prominent indicators to move in opposite directions. As one example, if employment remained constant or slightly decreased, but unemployment fell at a slightly faster pace (so that the labor force contracted), the unemployment rate would decrease, a positive indicator, while the labor force participation rate would also decrease, a negative indicator.

As it turns out, these conditions have prevailed in Michigan. The chart below compares household employment and labor force levels going back to 2000.

Chart 1: Michigan Household Employment & Total Labor Force, Index: Aug. 2000=100: 2000-present

Source: Author’s calculations using data from the Bureau of Labor Statistics.

As we can see, both Michigan household employment and the state’s labor force are roughly 6% below summer 2000 levels. Except for a brief period in early 2001, Michigan’s labor force levels haven’t exceeded summer 2000 levels. In addition, while household employment is well above the lows hit during the Great Recession, only recently has the level of Michigan’s labor force recovered to recessionary lows, which occurred in September 2008.

Further, the next chart examines the level of unemployment and the labor force in Michigan back to 2000.

Chart 2: Michigan Household Unemployment & Total Labor Force, Index: Aug. 2000=100: 2000-present

Source: Author’s calculations using data from the Bureau of Labor Statistics.

Unemployment peaked in Michigan at the trough of the Great Recession in June 2009.(2) At that time, Michigan’s unemployment levels had almost quadrupled since August, 2000. Only by June 2017 did total unemployment in Michigan fall below its August 2000 level.

Since June 2009, while household employment increased almost 10%, unemployment dropped 75%. With the labor force staying relatively flat, Michigan’s labor force participation rate has fallen since the end of the Great Recession, from 63.8% to 61.4% presently, as shown in the next chart.

Chart 3: Michigan and U.S. Labor Force Participation Rates: 2000-present

Source: Haver Analytics.

Conclusion

Whereas Michigan’s unemployment rate is now recorded at its lowest since the summer of 2000, other labor market measures compiled through the household survey indicate Michigan’s labor market has not recovered to its 2000 condition. In August 2000, when Michigan’s unemployment rate last reached 3.8%, the state’s labor force participation rate reached 68.5% compared with 61.4% today. Why has the state’s labor force participation rate fallen so far? Some of it is demographics—an aging population. The national LFPR has also fallen for this reason, from 67.3% in January 2000 to 62.9% today.(3) However, Michigan’s falling LFPR also reflects more troubling developments, such as the loss of manufacturing jobs and the movement of working age population to other states. Michigan has 286,300 fewer manufacturing jobs now versus July 2000, helping to prompt the migration of almost 800,000 Michigan residents to other states since 2000. Accordingly, despite its low unemployment rate, it will most likely be some time before Michigan’s labor market will reclaim the level of health it recorded during the summer of 2000.

1-The unemployment rate that is referred to throughout the blog is the U-3 unemployment rate. The Bureau of Labor Statistics reports on other unemployment rates. See https://www.bls.gov/opub/btn/archive/the-unemployment-rate-and-beyond-alternative-measures-of-labor-underutilization.pdf for alternative measures of the unemployment rate.
2-See http://www.nber.org/cycles.html.
3- See https://www.chicagofed.org/~/media/publications/economic-perspectives/2014/4q2014-part1-aaronson-etal-pdf.pdf.

Autonomous and electric vehicles: Two potentially disruptive forces in the transportation sector

By Thomas Klier and Martin Lavelle

On June 1–2, 2017, the Federal Reserve Bank of Chicago held its 24th annual Automotive Outlook Symposium (AOS) at its Detroit Branch.1 In this blog entry, we cover the first day’s panel, which was on autonomous vehicles and battery electric vehicles (BEVs).2 The panel’s three experts focused on how these types of vehicles might affect personal mobility and the organization of our society; automotive manufacturers’ product planning; and energy usage. All of the speakers agreed that these innovations have the potential to play significant and disruptive roles in the automotive industry’s future. Yet, they all conceded that the speed at which these new technologies will be rolled out is still uncertain.

Autonomous vehicles and their potential impact on society

James Sayer, University of Michigan Transportation Research Institute (UMTRI), discussed how the wide use of autonomous vehicles could affect society as a whole. To begin, Sayer said vehicles can be divided into “levels” based on the degree of autonomy they possess. A table describing the different levels of vehicle autonomy is shown below.3

Sayer said he sees great potential benefits from the wide adoption of autonomous vehicles (i.e., those in levels 3–5). For example, autonomous vehicles could be used to transport lower-skilled workers to more workplaces than they can presently access, increasing their employment opportunities. That said, autonomous vehicles could displace millions of workers who now earn livings as taxi drivers, chauffeurs, bus drivers, and delivery drivers. So, there may also be significant societal costs that cancel out some of the benefits we get from autonomous vehicles being integrated into everyday life.

In addition, Sayer wondered aloud how our time spent in vehicles—particularly during our commutes—might change once consumers have access to autonomous vehicles. Because they won’t have to drive their cars, vehicle users could use their commuting periods to increase their labor productivity as well as decrease stress. Among other things, that would allow for longer commuting distances for more workers, which would increase energy usage. In addition, empty vehicles would likely drive to a parking lot after having dropped off their passengers and drive back to the workplace to pick them up for the return trip. On net, that would likely increase congestion and total miles travelled, Sayer contended. If autonomous transportation became more widely used, it seems that people might, on balance, spend more time in vehicles, said Sayer. That could translate into less time spent exercising or engaging in other activities that address a person’s well-being. After discussing these possible changes in societal patterns, Sayer raised the related question of vehicle ownership. The traditional model of owning vehicles outright might well change to one where some (possibly many) people forgo individual ownership and participate in ride-sharing and vehicle-sharing programs.

The technical challenges for autonomous vehicles remain substantial, Sayer observed. For instance, developing better sensors and algorithms to improve autonomous transportation is very important. However, he argued that the greatest challenges for the wide adoption of this technology are social, behavioral, and legal in nature. These types of challenges related to autonomous cars are not getting enough attention, at least compared with the technical ones, Sayer argued. When thinking about how to integrate autonomous vehicles into our societies, driver accountability should be near the top of the list. Who’s responsible in an accident involving an autonomous vehicle, especially when it’s not operated by a human at the time of the accident? Does the responsibility fall on the owner of the vehicle, the manufacturer, or the developer of the software system used in the vehicle? Because there’s still so much learn about how autonomous vehicles operate in the real world, Sayer said a good implementation plan would be to deploy them in small numbers at first. This way they will be refined before they’re more widely deployed. The very ways in which societies and their economies are organized will be transformed if autonomous vehicles become ubiquitous, but we still have much to learn about how best to integrate this innovation into our daily lives.

Autonomous and electric vehicles from a manufacturer’s perspective

Jeff Mazoway, Hyundai/Kia, presented the challenges automotive manufacturers will have to overcome in order to successfully bring substantial amounts of autonomous and electric-powered vehicles to the market. At the outset, he said that vehicle autonomy and electrification will likely be introduced in conjunction with each other. To address the question of consumer acceptance of a technology as disruptive as autonomous vehicles, Hyundai and others have been conducting much research. Mazoway discussed survey results showing that currently just over half of consumers wouldn’t buy an autonomous vehicle because of concerns about the safety of the new technology. More worrisome to automotive manufacturers is that at present, Generation Z consumers4 are more concerned about autonomous vehicle safety than the average consumer. This is troubling because Generation Z is considered the intended audience for this technology given the time it will take to implement fully autonomous driving (level 5 in table 1). In addition, Mazoway said that these safety concerns have opened the door to tech companies, such as Apple and Google, to compete with traditional automotive manufacturers for the autonomous vehicle market; many consumers simply do not trust the traditional carmakers to come up with safe and reliable autonomous vehicles. Engineering trust among consumers and automobile manufacturers (whether they’re from Detroit or Silicon Valley or elsewhere) will be vital to complete the transition to fully autonomous vehicles.

According to Mazoway, fully autonomous vehicles with a human still needed to drive under certain circumstances or conditions (level 4 in table 1) are projected to be introduced to the market by 2025. Today, vehicles capable of performing at least a couple of automated functions, such as cruise control and lane centering (level 2), are widely available. In other words, the vast majority of vehicles are one level away from partial autonomy (level 3) and two levels away from full autonomy, though still with a steering wheel for a human to be able to take control (level 4). To get us to wide use of vehicles with level 4 autonomy by 2025, Mazoway said technologies to facilitate vehicle-to-vehicle communication need further improvements (specifically, further advances in artificial intelligence capabilities and information technology).

Meanwhile, Mazoway said he projects that BEVs will increase their market share of all new vehicle sales from 3% in 2022 to 27% by 2040, as seen in the chart below.

Chart 1. U.S. electric vehicle sales forecast, 2015–40

Note: ICE means internal combustion engine; HEV, hybrid electric vehicle; EV, electric vehicle; and PHEV, plug-in hybrid electric vehicle.
Sources: IHS Markit and Bloomberg New Energy Finance.

Presently, the majority of consumers don’t view electric vehicles as a compelling option, specifically because gasoline prices remain quite low. However, Mazoway said consumers’ concerns for the environment and the fuel cost savings from owning and operating an electric vehicle do give him reasons to be optimistic about electric vehicles gaining market share in the future. One additional contributing factor to this optimism is the expectation that battery costs will drop by two-thirds before 2030. Also, as battery electric vehicles increase how far they can go on a single charge, more consumers will show interest in that technology, Mazoway contended. Mazoway indicated that a 300-mile driving range for a BEV as the tipping point for buyer interest. To help make battery electric vehicles more financially appealing, automotive manufacturers are engaging in creative selling practices, which include leasing, reimbursing down payments by covering them with the California clean vehicle rebate, and other innovative marketing techniques. According to Mazoway, the average price for battery electric vehicles is projected to be on par with that for gasoline-powered vehicles by 2025. It will be a significant moment for auto manufacturers and consumers whenever those two prices actually do match.

BEVs and long-range energy forecasts

John Staub, U.S. Energy Information Administration (EIA), said he doesn’t see battery electric vehicles gaining as much market share as Mazoway does by 2040. His forecast is for BEVs to reach one-sixth of all new vehicle sales by that year. Displayed in the chart below are Staub’s forecasts for battery costs. According to his projections, there will be a sizable drops in battery costs that will lead to more battery electric vehicle sales. In addition, state-level programs such as California’s Zero Emission Vehicle (ZEV) program are expected to incentivize additional BEV sales.5

Chart 2. Projected lithium-ion battery costs, 2010–40

Note: PHEV10 means plug-in hybrid electric vehicle with a range of 10 miles on electricity alone; PHEV40, plug-in hybrid electric vehicle with a range of 40 miles on electricity alone; EV100, electric vehicle with a range of 90 miles; EV200, electric vehicle with a range of 200 miles; and AEO2016 EV100, the EIA’s 2016 Annual Energy Outlook for electric vehicles with a range of 90 miles.
Source: U.S. Energy Information Administration (EIA).

Staub said the EIA expects battery electric vehicle sales to jump from 100,000 units presently to around 900,000 units by 2025. Thereafter, the pace of increase in battery electric vehicle sales is expected to slow, with sales anticipated to reach only about 1.1 million units by 2040.6

While BEV sales are projected to grow over the forecast horizon, gasoline-powered vehicles are still expected to dominate the new vehicle market for quite some time, Staub commented. Additionally, light truck sales are projected to continue to make up over 55% of new vehicle sales until at least 2040. Even so, fuel economy for all vehicles is still expected to improve because micro hybrid7 systems will be incorporated into a larger number of vehicles from 2020 onward.

Staub said the EIA projects oil prices to jump to $75 per barrel by 2020,8 but slow their pace of increase thereafter. According to the EIA, gasoline prices are expected to increase at a slow and steady rate, not rising above $3 per gallon until 2030, Staub reported.9 Notably, the EIA’s projections for battery electric vehicle sales (mentioned earlier) generally follow its projections for energy prices.

Conclusion

There are many open questions regarding the future of autonomous vehicles and battery electric vehicles. Some of these were raised at the AOS: What societal issues are autonomous vehicles capable of addressing? When will autonomous vehicles be feasible for wide public use? How much market share can autonomous vehicles and battery electric vehicles take? These questions are beginning to receive more media attention. For instance, one recent Detroit Free Press article explored how Downtown Detroit parking might change with, among other things, the introduction of autonomous vehicles. And another story, from the Associated Press, reported that UK automotive parts maker Delphi and French transportation company Transdev would be deploying autonomous taxis without backup drivers as early as next year in order to conduct road testing. Over the coming years, auto producers and policymakers will have to carefully consider how autonomous vehicles and battery electric vehicles will become integrated into people’s daily lives.

Footnotes
1. The agenda and some materials presented at the event are available at https://www.chicagofed.org/events/2017/automotive-outlook-symposium.
2. The rest of the most recent AOS will be summarized in an upcoming Chicago Fed Letter article by William Strauss and Thomas Haasl.
3. This table was compiled by the blog entry authors (not any of the panelists). It was a common point of reference for the panel. The two charts in this blog entry are from panelists’ presentations.
4. Generation Z is the generation after the millennials (or Generation Y). While there is no true consensus yet, Generation Z is typically thought to begin with those born in the mid-1990s to the early 2000s.
5. See p. 98 of https://www.eia.gov/outlooks/aeo/pdf/0383(2017).pdf. Also, for more details on California’s ZEV program—which has been adopted by nine additional states—see https://www.arb.ca.gov/msprog/zevprog/zevprog.htm.
6. See p. 97 of https://www.eia.gov/outlooks/aeo/pdf/0383(2017).pdf.
7. Micro hybrid systems are automated engine start–stop systems, which reduce engine idling time.
8. Brent Crude oil price in 2016 dollars. See p. 27 of https://www.eia.gov/outlooks/aeo/pdf/0383(2017).pdf.
9. See p. 49 of https://www.eia.gov/outlooks/aeo/pdf/0383(2017).pdf.

The Detroit Association of Business Economists Talks Wine

By Paul Traub

At the final event of its 2016–17 events calendar, the Detroit Association of Business Economists (D.A.B.E.) hosted three presentations on what it takes to own and operate a vineyard (where grapes are grown) or winery (where grapes are processed into wine) in Michigan. The event took place on May 11, 2017, at the Detroit Branch of the Federal Reserve Bank of Chicago. While it may sound romantic to live on a vineyard, the attendees of this event learned that growing grapes and operating a winery is a tremendous amount of work. Thomas Smith, associate director of the Institute of Agricultural Technology, moderated a panel of three speakers—Karel Bush, executive director, Michigan Grape and Wine Industry Council, Dave Youngblood, owner and operator of Youngblood Vineyards, and Cristin Hosmer, VESTA and the Michigan Wine Collaborative.

Vineyards and wineries represent a growing part of Michigan’s economy. Michigan’s terroir or natural environment for producing wine features favorable factors such as good soil and topography together with a growing climate that gives its wine a unique taste. There are three main types of grapes grown in Michigan—classic European varieties called vinifera, native varieties including Concord and Niagara, and hybrids, which are a botanical cross between vinifera and native varieties. Because of Michigan’s harsh winters, most of its grapes grow within 25 miles of Lake Michigan, where the moderating “lake effect” protects the vines. The lake effect produces snow in the winter, protecting vines from early spring frosts that can damage the grape buds and lower production. In addition, the warmer air off the lakes in the early fall helps protect against freezing, thereby extending the growing season by up to four weeks. According to the Michigan Grape and Wine Council, Michigan has 13,700 acres of vineyards, making it the fourth largest grape-growing state in the country. While most of Michigan’s vineyard acreage grows juice grapes, about 2,850 acres are devoted to wine grapes, making Michigan the fifth largest wine-grape producer in the nation. Michigan grows about 20 types of wine grapes, but the top five account for almost 65% of total production by acreage. They are: riesling (27.9%), pinot noir (10.2%), chardonnay (9.6%), pinot gris (9.6%), and cabernet franc (7.1%).

Michigan’s vineyard area has more than doubled over the past ten years and the state now has 131 commercial wineries bottling more than 2.4 million gallons of wine annually. In fact, Michigan’s wine production has increased by 34% over the past five years, making it tenth state in the nation in wine production. Growth in wine production is expected to continue, with new hybrids allowing for production in areas of the state that were not previously hospitable to wine grapes. An added bonus for Michigan’s economy is that wineries are popular tourist destinations, attracting more than two million visitors annually. The wine industry directly contributes $300 million annually to Michigan’s economy, and the combined wine, grape, and juice products and related industries add nearly $790 million in total economic value to the State of Michigan. To learn more and to review the complete presentations, click on the links below.

The History and Economics of Michigan’s Wine Industry, Karel Bush, Michigan Grape and Wine Industry Council

Economics of a Vineyard, Dave Youngblood, Youngblood Vineyards

The Economics of a Winery, Cristin Hosmer, VESTA and the Michigan Wine Collaborative

The Detroit Economic Activity Index is released by Federal Reserve Bank of Chicago

by Paul Traub

People often ask me, “How is Detroit doing since its exit from bankruptcy?” I usually go into a long explanation of how there have been several signs of improving economic conditions since late 2014, when Detroit emerged from bankruptcy. However, some people would prefer a brief, yet economically meaningful, answer to their question. This has led me to believe that having all of these signs combined into a single easy-to-grasp index of Detroit’s economy would be beneficial.

In collaboration with my Chicago Fed colleague Scott Brave, I came up with a new measure of Detroit-specific economic conditions dubbed the Detroit Economic Activity Index (DEAI). The DEAI is constructed using a mixed-frequency dynamic factor model, but includes 23 Detroit-specific data series capturing income, employment, residential and commercial real estate activity, electric customer counts, tax revenues, and port activity. For a more thorough explanation of the construction of the DEAI, see our Chicago Fed Letter article titled “Tracking Detroit’s economic recovery after bankruptcy with a new index.” In our new research, by using this index (and other measures), Scott and I do an analysis of the city’s economic performance from 1998 through the present day. Eventually, we expect to make the DEAI’s results publicly available on a regular basis, but for now, we will continue developing the index. If interested, we’ll announce the availability of the DEAI on the Chicago Fed website and here in this blog.

U.S and Michigan Economy Webinar

By: Paul Traub

On Tuesday, February 28, I hosted a 30-minute webcast on the current state of the U.S. and Michigan economies. This blog provides a summary of the webcast.

A year-over-year comparison of some main economic indicators for the U.S. economy (table 1) shows that the U.S. economy continued to expand in 2016 at a moderate pace and labor markets continued to improve, but inflation remained below the Federal Open Market Committee’s 2% longer-run objective.

Table 1: U.S. Main Economic Indictors

Indicator    2014    2015    2016
Gross Domestic Product 1 2.4% 2.6% 1.6%
Unemployment Rate 2 6.2% 5.3% 4.9%
Participation Rate 2 62.9% 62.7% 62.8%
Nonfarm Job Growth 3 2,558 2,876 2,493
PCE Core Inflation 4 1.6% 1.4% 1.7%
  1. Year-over-year
  2. Annual Average
  3. Annual Average Employment – Y/Y Change in thousands
  4. Annual Average PCE Core Inflation – Percent Change Y/Y

 Consumer spending (personal consumption growth in chart 1) made the largest contribution to U.S. economic growth in 2016. Improved labor conditions and growing personal income facilitated U.S. consumers’ ability to purchase U.S. goods and services. Consumers contributed 1.8% to total GDP growth of 1.6% for the year. Total GDP growth ended up lower because of negative contributions from gross private domestic investment and net exports. While domestic residential investment added 0.2%, offsets from nonresidential (-0.1%) and inventory investment (-0.4%) pushed the total sector’s contribution into negative territory (-0.3%). In addition, a stronger trade-weighted U.S. dollar made U.S. goods and service more expensive overseas, helping to increase the trade deficit by $21.7 billion in 2016 on a year-over-year basis, its highest annual level since 2008. Government investment and consumption added just 0.15% to GDP for 2016, most of which came from state and local governments (0.11%).

The data from Michigan (through Q3) suggest that Michigan’s economy may have increased at a faster rate the nation’s in 2016 (table 2.). Stronger growth is supported by the increased growth in Michigan’s employment in 2016 versus 2015, while the nation recorded a decline in labor growth. Michigan’s demand for labor also increased. . While the civilian participation in the labor force for the nation grew by just 0.1%, Michigan experienced a 1.0% increase in its labor force participation rate in 2016. This helped Michigan’s nonfarm labor force grow by 2.1%, versus 1.8% for the national nonfarm labor force. This is significant because output can increase in one of two ways: increased productivity or increased labor. The stronger growth in labor helps to explain why Michigan’s economy may prove to have grown faster than that of the nation in 2016 once all the data are made available later this year.

Table 2: Michigan Main Economic Indictors

Indicator 2014 2015 2016
Gross State Product 1 1.9% 1.6% 2.1%
Unemployment Rate 2 7.1% 5.4% 4.7%
Participation Rate 2 60.5% 60.3% 61.3%
Nonfarm Job Growth 3 78.1 63.2 90.6
CPI – All Items 4 1.0% -1.3% 1.7%
  1. Year-over-year
  2. Annual Average
  3. Annual Average Employment – Y/Y Change in thousands
  4. Annual Average – Detroit-Ann Arbor-Flint, MI (CMSA)

 One of the biggest drivers behind Michigan’s improving employment and economic performance has been the recovery in light vehicles sales, which has set new records for the past two consecutive years, coming in at 17.4 and 17.5 million units for 2015 and 2016, respectively. Almost 20% of Michigan’s GSP currently comes from manufacturing, not counting engineering and technical support, and almost half of Michigan’s manufacturing is in the motor vehicle and parts industry.

One of the biggest drivers behind Michigan’s improving employment and economic performance has been the recovery in light vehicles sales, which has set new records for the past two consecutive years, coming in at 17.4 and 17.5 million units for 2015 and 2016, respectively. Almost 20% of Michigan’s GSP currently comes from manufacturing, not counting engineering and technical support, and almost half of Michigan’s manufacturing is in the motor vehicle and parts industry.

For more information on the U.S. and Michigan economies and to see the complete presentation, go to the Recent Presentation tab on the Michigan Economy Blog and click on the February 28 U.S. and Michigan Economic Update.

Recap of the Automotive Insights Conference sponsored by the Federal Reserve Bank of Chicago–Detroit Branch, Detroit Association of Business Economists, and WardsAuto

By Martin Lavelle

On January 12, 2017, the Federal Reserve Bank of Chicago’s Detroit Branch, the Detroit Association of Business Economists (DABE), and WardsAuto hosted the inaugural Automotive Insights Conference. The conference was an expansion of the DABE’s annual Bob Fish Memorial Automotive Luncheon. As did the luncheon, the conference provided an opportunity for auto industry analysts to share their insights and forecasts for the coming year. The expanded conference format allowed for additional presentations that covered powertrain production schedules and upcoming regulatory requirements for new vehicles.

Sales Outlook

Haig Stoddard (WardsAuto) said that new light vehicle sales reached 17.5 million units in 2016, eclipsing the previous record of 17.4 million units set in 2015. The surge in new light vehicle sales seen in the fourth quarter of 2016 was correlated with the aggressive incentives offered by auto companies. New auto sales have now increased for seven consecutive years—the longest such streak since before the Great Depression. Against this backdrop, Stoddard forecasted a slight step back in sales to 17.3 million units in 2017.

Consumers are in a better position to enter the market for new vehicles, contended Paul Traub (Federal Reserve Bank of Chicago–Detroit Branch). He showed that consumer sentiment has been improving, indicating the people are becoming more open to buying new vehicles. In addition to the aggressive incentives offered by auto dealers, loans with longer terms than normal (typically lowering the monthly payments), falling household debt, and fairly easy access to auto credit are facilitating new car purchases. Stoddard and Traub argued the pent-up demand for new vehicles stemming from the Great Recession has been satisfied.

Stoddard’s long-term sales outlook called for a further slide in light vehicle sales in 2018 followed by a rebound. While Stoddard’s outlook did not include a recession, he indicated that if a mild recession were to occur, new light vehicle sales would be 1.5 million to 2.0 million units lower four years from now. Stoddard said the long-run trend for new light vehicles sales would reach 17.0 million units by 2025. That sales level would then become the new standard for whether or not it was a good year for new light vehicle sales. New light vehicle sales will exceed long-run expectations if consumer demand for the latest vehicle technology accelerates. In contrast, new light vehicle sales will fall short of long-run expectations if consumers are enticed by deals for used vehicles, young people continue to delay household formation (on account of student debt and other reasons), and telecommuting becomes even more popular than it is today, among other factors.

Future Direction of Vehicle Production

Little to no growth in new light vehicle production is expected for the U.S. over the next few years, with gains made elsewhere, according to Stoddard and John Sousanis (WardsAuto). Stoddard predicted that North American production will rise over 500,000 units over the next seven years because of increased production of small cars and crossover utility vehicles in Mexico and lower production in Canada. Sousanis also said he projected the light vehicle production share of cars and trucks to stay the same globally over the coming years, but these shares are anticipated to vary more by region. Turning to his forecasts for auto parts manufacturing, he said that more than 50% of the growth in powertrain production over the next seven years will occur in China. Moreover, internal combustion engine displacement and the average number of cylinders in a vehicle should continue to move downward, but remain relatively higher among vehicles sold in the North American market. Slightly more diversification among transmission types is expected among future vehicles, stated Sousanis.

The diversity in transmission production will partially result from manufacturers employing different technologies to comply with the federal government’s corporate fuel economy (and emissions) requirements by model year 2025. (1) Brett Smith (Center for Automotive Research) outlined how the auto industry is trying to meet these standards. By utilizing different technologies, the auto industry is innovating faster than originally anticipated by regulators. For instance, battery cell producers have lowered their cost structures earlier than anticipated—with much less capital and smaller economies of scale than thought necessary. (2) Yet, the current pace of innovation is not sufficient, according to Smith, as the auto industry is still “nowhere near” on track to achieve the 2025 fuel economy goals.

To help manufacturers meet the fuel economy standards, Smith contended that regulators need to provide more incentives and infrastructure that support consumer demand for battery electric and hybrid vehicles. Additionally, the federal government should offer more “emissions credits” for introducing electric or hybrid technologies, off-cycle technologies, (3) and similar innovations in their vehicles than at present. In general, Smith said further discussions about the timetable for achieving the 2025 fuel economy targets should be held between industry representatives and federal regulators. In response to some of Smith’s points, Sousanis said perhaps the federal government might consider differentiating fuel economy standards by vehicle class (e.g., subcompact, mid-size and standard sport utility vehicle).

Concluding the conference was a conversation between Dave Andrea (Center for Automotive Research) and Joe Anderson (TAG Holdings). The conversation centered on the leadership style of Anderson, who serves as TAG Holdings’ chairman and CEO, and his 30-plus years of experience in the auto industry. Anderson said he always learned a lot about each business he purchased before setting expectations for his staff. Those expectations focused on the following aspects of the business: product quality, cost, technology, and delivery.

Focusing on the first item on his list, Anderson said he believes quality control systems should be installed before the production process begins. This way the quality control process won’t be perceived as just a corrective experience. According to Anderson, quality control processes, while costly in the short run, will have long-term positive impacts on throughput and financial performance. In closing, Anderson advised those in the audience to design and engineer their products to fit their consumers’ preferences.

Conclusion

Consumers are in a more favorable position to buy vehicles today than they were shortly after the Great Recession. This has boosted analysts’ short-term forecasts for automotive sales. However, the long-term sales outlook is less certain. While there’s proven demand for the latest vehicle technology, especially among young consumers, they may delay their new vehicle purchases because many of them have yet to form their own households. On the production side, growth is expected in Mexico and China. But not much production growth is expected for the U.S. Vehicle producers are striving to hit federally mandated fuel economy (and emissions) standards by model year 2025, but this goal currently seems unattainable. Despite producers’ ability to innovate more quickly than expected, they remain “nowhere near” on track to hit the 2025 fuel economy targets. More dialogue between auto producers and regulators is needed to ensure that the fuel economy standards are met in a timely and reasonable fashion. Finally, greater dialogue between management and workers, as well as between automakers and consumers, can help improve product quality and customer satisfaction.