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.

Important Findings from the Reinventing Our Communities Conference: What’s Happening in Detroit Versus Other Cities across the Country

By Martin Lavelle

In my previous blog post, I discussed some of the comparative analysis on Philadelphia and Detroit that I did before (and after) the Seventh Biennial Reinventing Our Communities Conference—which took place on September 21–23, 2016. Here I want to recap what was shared at the conference. I got a lot out of attending this conference, which focused on urban economic development. The conference afforded me the opportunity to compare what’s happening in Detroit with what’s occurring in the other cities. More specifically, I learned much about how other cities are tackling issues such as affordable housing, workforce development, and the use of vacant land and buildings. And I considered how these strategies might be applied in Detroit or compared them with what’s already under way in Motown. What follows are some of the general takeaways I gleaned from the conference. Please note that throughout the conference, several panels occurred concurrently; I’ll be reporting only what I observed in the panels I participated in.

Day 1

The conference opened with a panel that discussed building an inclusive, transformative economy. The panel centered on the idea of inclusion, particularly as it pertains to an urban economy. Cities are often incubators of growth. But panelists argued cities must remain affordable, so that their populations, specifically, their lower-skilled segments, can benefit from urban economic growth. Also, the panelists reiterated that investments in different types of infrastructure lead to better employment and income outcomes. Finally, the panel contended that the largest barriers to inclusive economic growth are ineffective coordination or the lack of coordination between different levels of government. Southeast Michigan’s current bus system immediately came to mind as an example of ineffective regional policy. (1)

The first day of the conference concluded with a panel that discussed how institutions that anchor certain communities can address social issues better and boost local economic growth even further. Drexel University—which helps anchor the University City neighborhood in Philadelphia—is taking a significant step toward these goals with its Dornsife Center for Neighborhood Partnerships. The primary goal of the Dornsife Center is to build social cohesion by addressing instability that originates from problems in families, neighborhoods, and institutions. To do this, it provides enrichment classes, community meals, workforce development programs, and educational programs for students from pre-K to college. To me, what’s happening at the Dornsife Center sounds similar to what Detroit’s Neighborhood Service Organization is doing at its Bell Building. In closing, the panelists agreed that multiyear grants don’t bring sustainable changes to communities; more permanent programs are needed to provide long-lasting positive changes to communities in need.

Day 2

My second day of the conference began with a panel that examined where education and employment opportunities intersect. After experiencing a decline in its adult enrollment, Monroe County Community College in Michigan has shifted gears in order to engage more high school students and graduates, according to one of the panelists. Its career technology center (CTC) includes an innovation and entrepreneurship center and provides week-long programs that expose students to the technology used at the CTC. It is hoped that this exposure will steer participants toward good career pathways. Monroe County Community College also offers a “middle college program” that allows students to earn a high school diploma and an opportunity to earn college credits that can be put toward an associate’s degree in a health science or STEM (2) field. (3) As another panelist shared, in Pennsylvania, the Lehigh Valley Career & Technology Center is preparing students to join the workforce in a different fashion. The center’s curriculum is based on industry suggestions made through a forum of occupational advisory committees. Moreover, the center’s equipment mirrors that of an industry setting. However, such a setup is expensive, which has led the center to seek funding from private sources. A representative of the Philadelphia Youth Network (PYN) explained how it is educating students previously disengaged from school because of a major life event and placing them into service industry jobs. In order to graduate from PYN, students must earn one industry certificate or credential. To track its own effectiveness, PYN follows up with former students one year after they’ve graduate to see if they are employed and have advanced in their jobs. PYN’s tracking of graduates has succeeded because it has used effective ploys to keep in contact with graduates, such as providing them monthly transportation passes in exchange for information on their employment status.

The next panel I sat in on during the second day looked at how vacant land can be reused in lower-income neighborhoods. “Pop-ups” are a fairly novel way to use vacant space and show the space’s potential if something permanent were to move in. In some cases, truly temporary pop-ups are welcomed, while in others, pop-ups that have the potential to become permanent fixtures are preferred. MILES.CITY works with tenants and landlords to bring retailers into spaces temporarily. While in their pop-ups, the retailers are educated on how to become financially viable and how to cultivate their business while minimizing risk. According to the founder of MILES.CITY, the average length of time retailers pop up in a vacant space is around ten days. That said, as another panelist noticed, Philadelphia has beer gardens pop up in vacant spaces and remain in those spaces if development isn’t ready to occur.

Efforts to revitalize vacant land in Cleveland and Memphis were also highlighted in the panel. Students at the Cleveland Urban Design Collaborative at Kent State University design projects to be installed in vacant spaces. Community members assist these students by providing feedback on the planning before the projects are actually set up in the neighborhood. The aim of these projects is to foster social cohesion through welcoming design and interactive spaces. The challenges confronting the design collaborative include the lack of resources and the inability to deal directly with the roots of social problems that trouble the community. In Memphis, MEMFix projects are trying to revitalize parts of the city; typically, these projects are one-day events that showcase a city block’s potential. MEMFix’s success led to increasing involvement from local government officials. MEMFix staff learned that revitalization efforts are more effective when the neighborhood’s leadership is strong and the revitalization efforts are close to other such efforts (clustering breeds success). One of the panelists, the executive director of the Community Development Council of Greater Memphis, reported that ioby (a “crowd-resourcing” tool) has been effective for building small-scale projects, training neighborhood teams, and facilitating collaboration across income groups.

A panel held during the afternoon of the second day highlighted three cities that have transformed their previously unattractive business climates. Philadelphia almost went bankrupt in the 1990s, but is regaining its reputation as the “Workshop of the World,” with the creation of multiple innovation hubs within the city that relate to one another. As one example, Philadelphia is turning its North Third Street into “Nerd Street” (N3RD Street). Additionally, despite its loss of population and business over the past few decades, St. Louis is still seen as an attractive area for talent, innovation, and entrepreneurship because of its strong universities, relatively low cost-of-living, and civic and nonprofit leadership. Chattanooga was cited as the dirtiest U.S. city in the 1960s, but through renovation and beautification initiatives and the establishment of the CO.LAB (Company Lab) public/private incubator and city-wide broadband service, Chattanooga improved its economic prospects. Chattanooga and Detroit are similar in many ways. Detroit is overcoming its own negative reputation through similar initiatives to renovate and beautify many of its neighborhoods. Public/private partnerships are expected to play an important role in many of these initiatives. Additionally, city-wide broadband will eventually become a reality in the Motor City. The hope is that all these efforts will draw more residents to Detroit and allow the city to return to its entrepreneurial roots.

Day 3

The final day of the conference began with stories about the transformation of several communities across the country. These stories covered a wide range of strategies that are being used to improve cities’ economic prospects. Pittsburgh’s East Liberty Development, Inc., figured out where crime existed in its mixed-income neighborhoods and hired off-duty police officers to patrol their properties, which improved the attractiveness of these properties. Helena, Arkansas, created a start-up incubator that, with the help of graphic designers, improved the marketability of its downtown. The New Hampshire Community Loan Fund provides financing to residents in manufactured housing co-ops so they can purchase the home’s land. Rochester, New York, lowered its poverty rate through investments in health care that included coordinating existing services, leveraging community data, increasing support for early childhood education, and confronting structural racism and trauma. In Minnesota, First Children’s Finance subsidized rent payments for child care providers inside school buildings; through this financial support, child care became more widely available within rural communities. And lastly, The Food Trust in Philadelphia improved residents’ access to high-quality food by providing more nutrition education and increasing the supply of healthy foods in corner stores.

Economic revitalization and philanthropic investment in small and mid-size cities was the focus of the third day’s morning panel. The president and CEO of the Danville Regional Foundation argued that the “arc of growth” should intersect with the “arc of opportunity.” He claimed that when these two arcs do intersect, poverty becomes less concentrated, efforts to recruit and retain businesses are more effective, downtowns are revitalized without sacrificing affordable housing, and leaders are developed. Also, the panel discussed the difference between charity and philanthropy: The key distinction between the two was that charity addresses suffering by itself, whereas philanthropy tackles the causes of suffering. The panel also indicated that business recruitment efforts now include expectations of civic contributions. In Detroit, the Kresge Foundation is doubling down in its philanthropic efforts to help Detroit progress in its rebound. Specifically, over the next few years, Kresge will focus on building up neighborhood capacity; creating comprehensive, integrated business opportunity areas; improving early childhood development; and promoting artistic and cultural programming.

The conference concluded with the presidents of the Federal Reserve Banks of Atlanta, Cleveland, and Philadelphia sharing their perspectives on the Federal Reserve’s role in transforming communities. One thing the presidents said the Federal Reserve could do is increase small business representation at community development meetings. Another thing the presidents noted the Federal Reserve could do was more intensely study the connection between income inequality and economic growth. A subject the presidents explained the Federal Reserve should strive to improve on (though some progress has already been made) is studying transition periods (shifting from recessions to recoveries, for example) within the economy and the driving forces behind them. The presidents also said they have noticed a growing disconnect between human capital development and the demands of modern employment.

References
(1) See http://www.freep.com/story/news/local/michigan/detroit/2015/02/06/robertson-car-commuter-detroit/22988565/.
(2) STEM is an acronym for science, technology, engineering, and math.
(3) See http://www.monroeisd.us/departments/curriculum/middlecollege/.

Comparing the City of Brotherly Love with Motown: Reflections on How to Effectively Transform Urban Economies

By Martin Lavelle

When I think of Philadelphia, the following subjects come to my mind: Benjamin Franklin, Betsy Ross, the Liberty Bell, Independence Hall, the Declaration of Independence, and the Constitution. Also, being a sports fan, I think of what a great sports city it is: There’s quite a passionate fan base for its professional teams, as well as Big 5 college basketball at the Palestra. Admittedly, as someone who works in and studies Detroit, it doesn’t naturally occur to me to compare Detroit and Philadelphia like I would Detroit and Pennsylvania’s other major city, Pittsburgh, with its historical reliance on one manufacturing sector, steel. However, as I looked more deeply into Philadelphia’s history, I found myself drawing multiple parallels between the Motor City and the City of Brotherly Love.

On September 21–23, 2016, the Federal Reserve Bank of Philadelphia, other Federal Reserve Banks, and additional sponsors and supporters convened the Seventh Biennial Reinventing Our Communities Conference. The theme of this year’s conference was how to transform our economies. The conference’s sessions covered topics such as how to increase access to capital, how to supply a greater stock of affordable housing and address workforce needs, and how to make philanthropic foundations play a more effective role in communities’ economic transformations. This conference provided an opportunity for me to learn about initiatives in other communities and compare them with developments in Detroit. This will be the first of two blog entries in which I discuss the conference and some of my own analysis inspired by it. Here I will draw some historical and current comparisons between Detroit and Philadelphia. In my follow-up blog post, I will recap the conference and compare Detroit’s efforts to transform its economy with ongoing efforts occurring across the country.

Background

As part of my usual preparation for a conference (especially when a city tour is included), I did a statistical comparison of Detroit and Philadelphia. The table below shows the statistical similarities and differences I found most interesting between the two cities.

portland-chart-1

Note: MSA means metropolitan statistical area.
Source: QuickFacts Beta, U.S. Census Bureau.

The population figures stand out for many reasons. First, it’s easy to forget that back in 1950, when their populations peaked, Detroit and Philadelphia were similarly sized cities. Nowadays, just six and a half decades later, Philadelphia has almost two and a half times as many people as Detroit. Back in the middle of the twentieth century, the population of each city made up around 57% of its respective metropolitan area. But as of last year, Philadelphia’s population share of its metropolitan area (26%) was noticeably larger than Detroit’s population share (16%) of its metropolitan area. The fact that Philadelphia’s population increased over the past 15 years boosted the divergence in population trends. Over the period 2000–15, Philadelphia added almost 50,000 people, while Detroit lost 274,154 people. In terms of demographics, Philadelphia is much more diverse. Also, a higher percentage of Philadelphia’s population has attained a bachelor’s degree or higher—thanks in part to the University City neighborhood, anchored by the University of Pennsylvania and Drexel University, and the presence of many other institutions of higher learning within the city’s limits. Given the divergence in demographics, the difference in home values isn’t surprising, but it still jumps off the page.

Philadelphia’s Financial Challenges

Like Detroit, Philadelphia has encountered fiscal challenges. And like Detroit, Philadelphia’s financial problems simmered for many years before boiling over in the early 1990s. The City of Brotherly Love became the first U.S. city to impose an income tax when it did so in 1939. (1) Philadelphia’s income tax remained in a range of 1.0% to 1.5% until the 1960s, when it started to increase, eventually reaching 3.0% in 1970 and almost 5% in 1985. (2) The increase in the city’s income tax rate was one of the leading factors in city residents deciding to leave for suburban communities. Philadelphia’s fiscal crisis peaked in 1990–91 when a structural budget deficit of $154 million was revealed, with expectations of deeper budget deficits in future years. (3) The city received financial assistance in the form of the Pennsylvania Intergovernmental Cooperation Authority (PICA). PICA sold bonds on Philadelphia’s behalf. It also required the city to adopt a five-year financial plan that had to be approved in order to gain access to capital markets and state funding. (4) Led by Mayor Ed Rendell, the city followed its five-year plan while privatizing selected services, introducing more competitive bidding for city projects, and freezing wages for city employees, all of which helped lead to Philadelphia’s recovery in the late-1990s. (5) Philadelphia also began lowering its commuter tax in 1995, converging city and suburban residents’ respective tax burdens. (6) It has been estimated that increases in Philadelphia’s city wage tax cost the city 207,000 jobs from 1973 to 2003. (7) Two separate tax commissions created in the 2000s concluded Philadelphia’s tax system was outdated and needed to be reformed. (8) In 2014, the Greater Philadelphia Chamber of Commerce released a public/private collaborative plan with the aim of organizing growth-based activity in and around Philadelphia. The chamber’s plan called for improving the city’s competitiveness, producing a well-educated workforce, creating an environment for business growth, and enhancing Philadelphia’s infrastructure. Such efforts will have a familiar ring to Detroiters too.

West Mount Airy: A Gift to Philadelphia from Detroit

The conference began with a tour of Philadelphia’s West Mount Airy neighborhood, one of the nation’s first intentionally racially integrated neighborhoods. The effort to preserve racial diversity within West Mount Airy was led by West Mount Airy Neighbors (WMAN). WMAN was founded in 1959 to deal specifically with the issue of racial integration. (9) One of the founders of WMAN was George Schermer, who tried to organize a similar effort in Detroit before coming to Philadelphia.

After Detroit’s 1943 Belle Isle uprising, Mayor Edward Jeffries formed an Interracial Commission and appointed Schermer as its director. (10) In the early 1950s, Schermer lobbied for an integrated housing development in Detroit’s west side. The development was to be called Schoolcraft Gardens. The Schoolcraft Gardens development attracted private funding and the United Auto Workers (UAW) as a partner. (11) Unfortunately, multiple forces prevented the integrated development from taking shape. First, the neighboring, all-white Tel-Craft homeowners association opposed the Schoolcraft Gardens development. Also, later on, a different Detroit mayor, Mayor Alfred Cobo, vetoed the approval of the development project. Soon afterward, the Interracial Commission was dissolved and replaced by the Commission on Community Relations, whose members would be appointed and could be removed without cause by the mayor. (12) Not surprisingly, when the City of Philadelphia offered Schermer the opportunity to head its newly created Commission on Human Relations, Schermer left Detroit. (13)

Under Schermer’s leadership, WMAN fought housing and education policies that advocated for segregation. WMAN and the neighborhood itself consisted of high-achieving, well-educated, progressively minded people, who were the demographic they looked to attract to the neighborhood. One might argue this allowed integration to work, whereas Detroit saw comparatively less educated groups across different races compete for similar jobs and economic standing, putting the groups at odds with each other.

Impressively, the commitment to diversity in West Mount Airy remains strong. Since 1980, at least 40% of West Mount Airy’s residents have been African Americans. (14) According to Sarah Zelner, who presented background information about West Mount Airy during the conference tour, the neighborhood has a strong LGBTQ presence, in addition to being diverse in terms of race and education. Efforts to maintain the neighborhood’s diversity and affirm its commitment to open dialogue include the long-running Mt. Airy youth baseball league and, more recently, monthly conversations about racial issues. In the evening of the day of the tour, the neighborhood’s main thoroughfare shut down and turned into a street fair that showcased West Mount Airy’s diverse restaurant community.

All that said, the neighborhood isn’t without its challenges. Between 1950 and 2010, West Mount Airy lost around half of its population. This loss in population has impacted the dynamics of the neighborhood in many ways, especially in terms of its educational offerings. The high school located in West Mount Airy closed in 2013—a direct result of the population loss, as well as more-affluent students enrolling in private schools in other neighborhoods. In addition, while the overall racial diversity of West Mount Airy has been maintained, African Americans have been clustering closer to the East Mount Airy and East Germantown neighborhoods, which are both predominantly black. (15) While traveling through the area, I noticed a contrast between West Mount Airy with its homes constructed of stone native to the area and East Mount Airy with housing stock of relatively poorer quality. To combat population loss and preserve the neighborhood’s identity, West Mount Airy is trying to attract more immigrants, highlighting the neighborhood’s cultural history and mixed small business community as selling points.

Gifts in Return from Philadelphia? Possible Lessons for Detroit

The background material I read on Philadelphia’s West Mount Airy neighborhood discussed housing density (as measured, for example, by homes per city block) and its correlation with racial integration. The material cited multiple studies that suggested lower housing density is more amenable to achieving greater racial diversity. (16) This might be one lesson from Philadelphia’s experiences that Detroit might want to apply as it remakes itself. The Motor City is seeking to create dense and diverse population centers within its borders, as it once had decades ago. Part of this goal is being achieved by removing blight. But as neighborhoods are reorganized, city officials may want to keep in mind how racial integration was achieved in Philadelphia and not make the housing density of newly configured neighborhoods too high. Striking the right balance between population and housing density to achieve better racial integration and higher-level services for all citizens than at present will be a challenge, but Detroit can look to some of Philadelphia’s neighborhoods for some examples to follow.

Widening the focus back to the entire city, I think the topic of city residents’ tax burdens should be explored in greater depth. As mentioned previously during my review of background material on Philadelphia and as discussed somewhat during the conference, Philadelphia has reformed its tax system in order to have the tax burden of its citizens be more similar to that of residents in the surrounding suburbs. This is yet another lesson Detroit officials might learn from Philadelphia in order to draw more people to reside within its borders. Indeed, Detroit may want to look to reform its tax system as well. When studying the tax burdens of the largest city in each state and Washington, DC, (17) the total tax payments expected from Detroiters as a percentage of their income rank in the top five. (18) When breaking down tax payments by category, Detroiters’ income tax burden ranks near the top for families making $50,000 or more, and their property tax burden is the highest among the states’ largest cities and Washington, DC. (19) While Detroiters’ sales, use, and gasoline tax burdens rank relatively low, significantly high auto insurance premiums more than make up for it. Detroiters pay more than twice as much as the next city (New Orleans) and over three and a half times more than Philadelphia, which ranks tenth. (20) Current Detroit Mayor Mike Duggan has proposed legislation that would create an auto insurance product specific to Detroit, though this proposal has its critics. (21)

Following what initiatives are and aren’t working in other cities and informing city officials and stakeholders about the results of those different initiatives is important to Detroit’s rebound. This is one of the main reasons why I attended this year’s Reinventing Our Communities Conference. The Detroit Branch of the Federal Reserve Bank of Chicago serves the function as information gatherer for the mayor’s Post-Bankruptcy Working Group, as well as the city’s group that works on affordable housing efforts. Efforts to strengthen communities in Detroit and elsewhere through philanthropic, private, and public partnerships have become more widespread in recent years. The Federal Reserve—especially the Detroit Branch of the Federal Reserve Bank of Chicago—has played a major role in bringing different types of organizations together generate solutions that will benefit those communities for years to come.

Read my next blog entry to get more details on the conference panels that I participated in.

References
(1) See p. 3 of http://economyleague.org/uploads/files/783716581668902685-the-sterling-act-a-brief-history.pdf
(2) Ibid.
(3) See p. 5 of https://www.philadelphiafed.org/-/media/research-and-data/publications/business-review/1992/brso92rl.pdf?la=en.
(4) See p. 1 of http://www.picapa.org/docs/SRFYP/SRFYP_FY16FY20.pdf.
(5) See http://www.nytimes.com/1994/05/22/magazine/mayor-on-a-roll-ed-rendell.html.
(6) See p. 31 of http://www.philadelphiafed.org/research-and-data/publications/business-review/2003/q2/brq203ri.pdf.
(7) See p. 27 of http://www.philadelphiafed.org/research-and-data/publications/business-review/2003/q2/brq203ri.pdf.
(8) See p. 15 of http://www.centercityphila.org/docs/CCR14_employment.pdf.
(9) See p. 42 of Barbara Ferma, Theresa Singleton, and Don DeMarco, 1998, “Chapter 3: West Mount Airy,” Cityscape: A Journal of Policy Development and Research, Vol. 4, No. 2, pp. 29–59, https://www.huduser.gov/Periodicals/CITYSCPE/VOL4NUM2/ch3.pdf
(10) See p. 1 of https://libdigital.temple.edu/pdfa1/Oral%20Histories/AOHWMPJZ2015030001Q01.pdf.
(11) See p. 76 of Lloyd D. Buss, 2008, “Chapter 2: City Influences Religion’s Response,” The Church and The City: Detroit’s Open Housing Movement, University of Michigan, PhD dissertation, https://deepblue.lib.umich.edu/bitstream/handle/2027.42/61748/ldbuss_1.pdf?sequence=1&isAllowed=y.
(12) See Buss (2008, p. 77).
(13) See Ferma, Singleton, and DeMarco (1998, p. 42).
(14) The share of African Americans residing in West Mount Airy was 41% as of the 2010 U.S. Census.
(15) See http://philadelphiaencyclopedia.org/archive/mount-airy-west/.
(16) See Ferma, Singleton, and DeMarco (1998, p. 41).
(17) See pp. 12-21, 24 of http://cfo.dc.gov/sites/default/files/dc/sites/ocfo/publication/attachments/2014%2051City%20Study.final_.pdf.
(18) This ranking does not apply when examining families making less than $50,000 per year. A family is assumed to be made up of two income earners and one school-age child. See p. 13 of http://cfo.dc.gov/sites/default/files/dc/sites/ocfo/publication/attachments/2014%2051City%20Study.final_.pdf.
(19) See pp. 16, 31 of http://cfo.dc.gov/sites/default/files/dc/sites/ocfo/publication/attachments/2014%2051City%20Study.final_.pdf.
(20) See https://www.nerdwallet.com/blog/studies/expensive-cities-car-insurance/.
(21) See http://www.detroitnews.com/story/opinion/2016/03/23/detroit-insurance-cut-rate-policy/82194396/.

Auto Insights Conference

Co-Sponsors Federal Reserve Bank of Chicago-Detroit Branch, DABE and WardsAuto

Automakers and suppliers have long faced the need to adapt to ever-changing global competition, customer preferences and industry regulation. Up to now, automakers have been resilient in their ability to adapt, controlling costs while at the same time adhering to customer-driven performance requirements.

As always, a new year brings with it many uncertainties and questions for the automotive industry. Have light vehicle sales already peaked or will they continue to rise? What does the sales outlook mean for North American production volumes in the short and long run, respectively? Moreover, how might possible changes to CAFE regulation impact engine technology? Will possible changes in trade regulations be a positive or a negative for the OEMs and their suppliers? In an effort to get insights into these questions and much more, the Federal Reserve Bank of Chicago—Detroit Branch and Detroit Association of Business Economists (DABE) together with WardsAuto will host a half-day conference on these important issues and much more.

The conference will be held Thursday, January 12, 2017 at the Detroit Branch of the Federal Reserve Bank of Chicago. The program will begin with registration at 8:30 AM and conclude at 2:00 PM with an optional tour of the Detroit Branch Cash Visitors Center. The cost will be $30 for members and guests and will include a continental breakfast during registration and lunch at noon. A complete conference agenda is included on the conference registration page.

You can register and pay online by clicking here. Please register by Tuesday, January 10, 2017 to place your name on the security list for admission to the Fed facility, and bring a picture ID for entrance.

I believe this conference will be a worthwhile addition to this season’s DABE program offerings that I am sure you will enjoy. I hope you will plan to attend and bring a friend. As always, I want to thank you all for your continued support of the DABE and the D.A.B.E. Board wants to wish you a very Happy Holiday Season. I look forward to seeing you on January 12, 2017.

To see the Agenda and Register Now!

How Tight is Michigan’s Labor Market?

By Martin Lavelle

Michigan’s labor market continues to recover from the Great Recession that ran from December 2007 through June 2009 and its own recession that started four years prior to that. Michigan’s unemployment rate peaked at 14.9% in June 2009, coinciding with the end of the Great Recession. Since that time, Michigan’s unemployment rate has dropped steadily, reaching 4.5% in August 2016. The last time Michigan’s unemployment rate was this low was in January 2001, just before the much shorter and milder 2001 recession. (1)

While Michigan’s current labor market expansion isn’t the longest in its history, (2) the fact that the state’s unemployment rate is now lower than that of the nation makes one wonder how much longer it can last. The superior performance of Michigan’s Southeast and Western Michigan Purchasing Managers indexes relative to the U.S. measures and recent indications that auto sales may have plateaued also imply that Michigan’s labor market expansion may be near a turning point. This blog examines some of Michigan’s labor market indicators to assess whether Michigan’s labor market is at or near “full employment.”

Chart: Unemployment Rates, Annual Averages: U.S., Michigan
Analysis
1011-chart-1
Source: Author’s calculations using data from the Bureau of Labor Statistics.

The chart above shows the annual averages of the U.S. and Michigan unemployment rates, respectively. Since 1976, Michigan’s unemployment rate has generally been higher than that of the U.S., especially during the Great Recession and the severe 1981–82 recession. The two instances in which Michigan’s unemployment rate fell below that of the U.S. came during the mid to late 1990s and in recent months. The fluctuation in Michigan’s unemployment rate helps to show the cyclical nature of the state’s economy, driven by the manufacturing sector, specifically the automotive industry. The lows in Michigan’s unemployment rate came during boom times for the automotive industry and the highs came during rough times. Light vehicle sales volumes hit all-time highs last year and are just below those levels year-to-date in 2016. The majority of auto analysts feel that light vehicle sales will continue to slightly fall off of their 2015 highs in the next couple of years. With the automotive industry having peaked, does that mean Michigan’s labor market has peaked as well?

Historically, another sign of a tightening labor market are increasing wages and salaries. The chart below plots the unemployment rate versus workers’ total wage and salary income in the state.

Chart: Annual Wage & Salary Growth vs. Annual Average Unemployment Rate: Michigan
1011-chart-2
Sources: Author’s calculations using data from the Bureau of Economic Analysis and Bureau of Labor Statistics.

Over the past 40 years, changes in wage and salary income have led changes in the unemployment rate. Michigan’s unemployment rate reached its previous low in 2000, a few years after the rate of growth in wage and salary income peaked. Wage and salary income growth in Michigan bottomed out in 2008, the year before Michigan’s unemployment rate peaked. As Michigan’s unemployment rate decreased after the Great Recession, wage and salary income consistently increased, accelerating in the last two years following some slowing in 2012–13. The pace of wage and salary growth edged higher in 2015 versus 2014, signaling further tightening in Michigan’s labor market. Despite the increase in wages and salaries, however, data from the Bureau of Economic Analysis show that per capita income in Michigan remains about 12% below the national average. Since 1980, per capita income in Michigan has typically been lower than in the U.S. as a whole.

When looking at wage pressures by sector, the story becomes more muddled. The chart below examines the year-over-year percentage change in wage pressures in select employment sectors in Michigan.

Chart: Average Hourly Earnings of Michigan Production Employees by Employment Sector, Year/Year Percentage Change, Not Seasonally Adjusted
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Source: Author’s calculations using data from the Bureau of Labor Statistics.

Michigan’s manufacturing sector, especially the automotive sector, led the state into the recovery it currently enjoys. However, after increasing in 2010, wages started to fall during 2011 and into 2012 as the new labor contract with the United Auto Workers (UAW) that created a lower, 2nd tier of wage ranges took effect. (3) After rebounding in 2013–15, wages are lower thus far in 2016 than in 2015, possibly because of the 2015 UAW contract that created a lower starting point for entry-level full-time workers. (4) Plateauing production volumes as light vehicle sales level off may also be a reason for lower wages in 2016.

Some sectors do support the full employment argument with their accelerations in recent months. Since the latter half of 2015, wages have moved higher in the construction and professional and business sectors, respectively. Labor shortages in building construction and within the engineering and information technology fields of the professional and business services sector have helped to create conditions for higher, more competitive wages. Wage increases have persisted in the retail trade sector since 2013. Competitive pressures from McDonalds and Walmart, as well as legislatively mandated increases in Michigan’s minimum wage, have contributed to higher wages in the retail sector. (5)

When a labor market tightens, it also means workers are increasingly hard to find. One unique characteristic of the current labor market recovery is the elevated level of those working part-time for economic reasons or involuntary part-time workers. The chart below shows what percentage of the labor force is comprised of involuntary part-time workers.

Chart: Part-Time Employment as a Percentage of Labor Force, 4-quarter moving average: U.S., Michigan
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Sources: Author’s calculations using data from the Bureau of Labor Statistics.

As labor markets expand, the percentage of the labor force that is working part-time falls. In Michigan and the U.S., the percentage of the labor force that is working part-time continues to be higher than during the previous labor market expansion. Interestingly, the difference between the part-time segments of the labor force in Michigan and the U.S. has shrunk after widening in the months leading up to and the year after the conclusion of the Great Recession. Another interesting point is that the gap between Michigan’s current percentage of the labor force that is working part-time and the percentage working part-time in the 2000s is narrower relative to the U.S. This could mean one of two things. One possibility is part-time workers in Michigan are finding increasing success in gaining full-time employment. An alternative possibility is part-time employment was elevated during the 2000s and Michigan’s one-state recession. Therefore, part-time employment as a percentage of the labor force would have been expected to fall since the mid-2000s.

In a tightening labor market, those who found themselves unemployed for a long period of time should find their way back into the workforce. The chart below looks at the percentage of the labor force that was unemployed longer than 15 weeks.

Chart: Unemployed Civilians for longer than 15 weeks as a Percentage of Labor Force, 4-quarter moving average: U.S., Michigan
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Sources: Author’s calculations using data from the Bureau of Labor Statistics.

Mirroring the previous chart, Michigan had a greater percentage of its labor force unemployed for more than 15 weeks than the U.S., most likely a result of Michigan’s recession in the previous decade. After peaking in the 2nd quarter of 2010, the percentage of Michigan’s labor force unemployed for more than 15 weeks fell and now equals that of the U.S. Are more previously long-term unemployed workers finding work or are they dropping out of the labor force altogether? Looking at the next chart, which shows the labor force participation rates of the U.S. and Michigan, respectively, we see that Michigan has seen a higher net increase off its lows than the U.S.

Chart: Labor Force Participation Rates: U.S., Michigan
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Source: Haver Analytics/Bureau of Labor Statistics.

Finally, what about discouraged workers? If a labor market is tightening, the number of discouraged workers should be decreasing. The chart below shows discouraged workers as a percentage of the labor force in the U.S. and Michigan, respectively.

Chart: Discouraged Workers as a Percentage of Labor Force, 4-quarter moving average: U.S., Michigan
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Source: Author’s calculations using data from the Bureau of Labor Statistics.

Again, the same dynamics are in play from 2003 through the end of the Great Recession, with Michigan’s labor market relatively worse off because of its one-state recession. As shown in the previous chart, the gap between Michigan and the U.S. converged and is now all but eliminated. The current percentage of Michigan’s labor force that consists of discouraged workers equals that seen during the mid-2000s, whereas the U.S. hasn’t reached mid-2000s levels yet.

Conclusion
A strong argument can be made that Michigan’s labor market is at full employment. The unemployment rate is currently below that of the U.S. and nearing historical lows. Also, wage and salary growth is at its highest in almost 20 years, labor force participation is off its post-recession lows, and data focused on the marginally attached to the labor force in different ways indicate those numbers are near or at trend. Some anecdotal reports support the argument as well. Multiple firms have instituted significant wage and salary increases in order to keep their most talented employees, while others are giving prospective employees a second look after rejecting their original job inquiry. Finally, with the auto industry operating at peak production levels and historically high sales levels and the state still significantly dependent on the auto industry, Michigan’s robust labor demand growth may be coming to an end.

Footnotes
(1) We are addressing labor market tightness here, not growth rates, not restoration of past levels of labor force size. Out-sized outmigration of working age population in response to the state’s prolonged downturn in the last decade is being held in the background.
(2) Based on BLS data going back to 1976.
(3) See https://www.chicagofed.org/~/media/others/region/midwest-economy/dziczek-dabe-january-2012-pdf.pdf.
(4) See http://www.freep.com/story/money/cars/chrysler/2015/10/22/done-deal-uaw-confirms-ratification-fca-contract/74380230/.
(5) See http://www.mlive.com/lansing-news/index.ssf/2015/12/michigan_minimum_wage_to_incre.html.

Summit on Revisiting the Promise and Problems of Inner City Economic Development, Day 1: Setting the Stage by Focusing on Detroit

by Martin Lavelle, business economist

Introduction

In partnership with, the W.E. Upjohn Institute for Employment Research, Economic Development Quarterly, SAGE Publications and the Initiative for a Competitive Inner City (ICIC), the Detroit Branch of the Federal Reserve Bank of Chicago hosted a two-day summit on September 15–16, 2015, that studied ongoing economic development efforts within inner city neighborhoods. Experts from academia joined practitioners to discuss new research and programs that have appeared and evolved in recent years. In this blog entry, I will focus on the first day of the summit, which zeroed in on Detroit and its revitalization efforts.

Putting Detroit into Context

William Sander, professor of economics, DePaul University, and consultant, Federal Reserve Bank of Chicago, and William Testa, vice president and director of regional research, Federal Reserve Bank of Chicago, began the conference by providing insight into Detroit’s population and economy, respectively. Sander noted that in the middle of the twentieth century, many large cities in the United States started to lose population to surrounding suburban communities. Detroit was no exception to this trend: It had lost around two-thirds of its population since the 1950s. However, many cities have begun to grow in recent years, becoming increasingly attractive to college-educated households; this improvement in the business environment helps attract individual firms, supporting the assertion of Harvard economist Michael Porter that cities are ideal locations for industry clusters and other economic activities.(1)

According to Sander, despite the recent movement of some college graduates into Detroit’s trendy Downtown and Midtown neighborhoods, college graduates only make up 12% of Detroit’s population, compared with 34% in Chicago. Then, Sander pointed out that only 10% of 20-something college graduates in the Detroit metropolitan area live in the city of Detroit and that 22% of 20-something college graduates who live in Detroit also work in Detroit. Sander shared his statistical comparison of Chicago and Detroit, which found that households in the Chicago metropolitan area are more likely to live within the city limits than households in the Detroit region. Also, college graduates in Chicagoland are more likely to live in the city than in the suburbs, whereas the opposite is true for college graduates in Metro Detroit.

Testa showed the significant stress Detroit’s economy was exposed to during the 2000s. Similar to other manufacturing-centric cities, such as Pittsburgh, Buffalo, and Cleveland, Detroit experienced slower overall employment growth relative to other Midwest cities that possess more of a service-based economy. However, despite its losing millions of units of production in recent years to other vehicle-producing areas, Detroit (and Michigan in general) remains a destination for automakers and suppliers because of its concentration of facilities and talent. Although the Detroit region will most likely continue to contain a significant automotive cluster, employment levels will most likely fail to reach 2000 levels because of firms’ ability to produce more with fewer workers.

Testa argued that the Detroit economy needs to continue building on its automotive cluster while also diversifying into other sectors in which it may own competitive advantages. Those other sectors include logistics, engineering, and business services. Testa noted that multiple regional economic development corporations are trying to take advantage of Detroit’s growing tech sector in ways that other regions and states have for themselves (e.g., Silicon Valley). Such efforts have resulted in improved per capita income and quality of life for residents.

Current State of the City

Summit attendees also heard from Susan Mosey, executive director, Midtown Detroit, Inc., Martin Lavelle, business economist, Federal Reserve Bank of Chicago–Detroit Branch, and John Gallagher from the Detroit Free Press on where Detroit currently stands in its revitalization attempts. All of them expressed great enthusiasm for the efforts that have taken place so far, as well as optimism for what’s to come. Since Detroit filed for bankruptcy in July 2013, a regional lighting authority was formed and began to replace old streetlights with new LEED(2) streetlights, a regional water & sewer department authority was formed to improve the efficiency of water/sewer operations, emergency response times have improved,(3) new transit buses were purchased,(4) and programs to address Detroit’s aging housing stock(5) and blight(6) were introduced.

Significant investment was already occurring in Detroit’s Midtown neighborhood before Detroit filed for bankruptcy, and it has only accelerated since. Mosey showed the different kinds of development projects that have been completed and those now in the planning stage. Until recent months, Midtown Detroit, Inc., has focused on renovating existing space into mixed-use properties with retail space on the ground floor and residential space above it. With residential occupancy rates at almost 100% and consumer demand still high, new building projects such as businessman Dan Gilbert’s planned Brush Park project(7) are set to take off, Mosey noted.

icic_lavelle image 2Image 1: Chicago Fed Business Economist Martin Lavelle presenting at the Summit. Photo taken by Bill Testa.

Still, as I noted at the conference, Detroit’s revitalization efforts must overcome many challenges. The investment taking place in Detroit is occurring in only select neighborhoods. The majority of Detroit’s neighborhoods are plagued by low home values, which dissuade potential new residents from moving into them. Also, concerns over the quality of public services and schools remain deterrents to population increases. Another hindrance is the absence of a more extensive, intermodal public transportation system that would better serve and connect Detroit residents with potential places of employment and the surrounding area in general.

Detroit: Up Close and Personal

One of the attractions of the summit was the chance for attendees to take a tour of some of Detroit’s areas. Along with representatives of Midtown Detroit, Inc., the Chicago Fed‘s Detroit Branch staff (including Desiree Hatcher, community development and Michigan director, Community Development and Policy Studies Division; Paul Traub, senior business economist; and Martin Lavelle, business economist) guided the tour around Detroit and provided greater insights into Detroit’s turnaround.

The bus tour highlighted Detroit’s cluster activity, including the food cluster present in Detroit’s Eastern Market where the tour stopped first. Dan Carmody, president, Eastern Market Corporation, expounded on how Eastern Market’s role in the city’s rebound continues to grow. Tour goers learned about Eastern Market’s initiative to provide healthy foods (especially for students) and food education, as well as its continued promotion of local food entrepreneurs. Tour goers also learned about Eastern Market’s involvement in projects such as the extension of the Dequindre Cut bikeway and other infrastructure improvements that will better connect the market with other parts of Detroit.

icic_carmody image 1Image 2: Eastern Market Corporation President Dan Carmody presenting during the Summit’s Tour of Detroit. Photo taken by Bill Testa.

After leaving Eastern Market, the tour got a closer look at areas where investment is occurring. Attendees were able to see some of the finished and proposed projects in Midtown that Mosey highlighted in her earlier presentation. One highlight of the Midtown tour was the TechTown campus that now supports Detroit’s automotive and logistics clusters as well as the efforts to bring back Detroit’s main retail corridors. Upon leaving Midtown, the tour made its way to the historic Boston-Edison neighborhood—an area that has rebounded significantly since it was marked as a “demonstration zone” for concentrated revitalization efforts in 2011 by then-Detroit Mayor Dave Bing. (8)

icic_traub image 3Image 3: Senior Business Economist Paul Traub describing the current state of Detroit during the tour. Photo taken by Bill Testa.

The final part of the tour reminded attendees of the challenges that Detroit’s revitalization efforts face. Tour attendees were exposed to neighborhoods where little to no investment has occurred, resulting in blight, low population density, and poor infrastructure. Attendees also saw marks of Metro Detroit’s sometimes scarred past when division and discrimination overshadowed attempts at regional collaboration. The tour ended with a drive down Jefferson Avenue along the Detroit River, which provided tour goers the opportunity to see the Jefferson-Chalmers neighborhood (which has benefited from burgeoning investment) as well as the beautiful Detroit Riverwalk. Overall, the tour showed the progress of Detroit’s turnaround, as well as the challenges that must be met if the city’s stakeholders want to continue its revitalization.

Conclusion

Based on Michael Porter’s criteria for inner cities, Detroit could be regarded as a developing economy because of its low local skill levels, limited access to capital, shortcomings in technology, poorly developed public service departments, and engagement in monopolistic behavior, which retarded cluster development.(9) In addition, using Porter’s work, one could argue Detroit’s economy possesses many competitive disadvantages, which include the aforementioned attributes as well as the city’s poor quality of infrastructure and attitudes concerning the city.(10)

However, Detroit is beginning to reverse its competitive disadvantages, as the presentations at the summit and the tour of the city showed. Detroit’s Downtown and Midtown neighborhoods have become strategic locations in which to conduct business. Moreover, Detroit’s industry clusters increasingly interact with other regional clusters, overcoming past regional rivalries. Also, city government has become less of an impediment to cluster development, encouraging and convening forums to engage in dialogue that centers on improving Detroit—as Porter has recommended for other developing economies.(11)

The overarching goal of the first day of the summit was to show the Detroit as it actually is today. As evident from the summit discussions and the tour, many parts of Detroit are trending upward, generating much enthusiasm for the city’s prospects following its emergence from bankruptcy. However, city stakeholders must confront numerous persistent challenges in order for the entire city to enjoy what’s transpiring in those particular neighborhoods.

References
(1) See https://hbr.org/1995/05/the-competitive-advantage-of-the-inner-city.
(2) LEED stands for Leadership in Energy & Environmental Design, and is a green building certification program.
(3) See http://www.mlive.com/news/detroit/index.ssf/2014/10/detroit_residents_wait_less_fo.html.
(4) See http://www.freep.com/story/news/local/michigan/detroit/2015/09/17/vp-biden-speaks-detroit-public-transportation/32564385/.
(5) See http://www.detroithomeloans.org/.
(6) See https://www.theblightauthority.com/.
(7) See http://www.freep.com/story/news/local/michigan/detroit/2015/05/06/gilbert-brush-detroit/70887884/.
(8) See http://www.mlive.com/news/detroit/index.ssf/2011/07/dave_bing_detroit_works_projec.html.
(9) See Michael E. Porter, 1998, “Clusters and competition: New agendas for companies, governments, and institutions,” Harvard Business School, working paper, No. 98-080, March, p. 24.
(10) See p. 61–65 of https://hbr.org/1995/05/the-competitive-advantage-of-the-inner-city.
(11) See Porter (1998, p. 34).

Recap of the Federal Reserve Bank of Chicago’s 29th Annual Economic Outlook Symposium

By Martin Lavelle

On December 4, 2015, the Federal Reserve Bank of Chicago hosted its 29th annual Economic Outlook Symposium (EOS). The EOS allows economists, business leaders, financial analysts, and other experts to gather and share their respective views on the U.S. economy and individual sectors especially important to the Midwest economy. Also, EOS participants are given the chance to submit their respective projections for the year ahead. These projections are subsequently used to come up with a consensus (median) forecast for real gross domestic product (GDP) and related items.
This blog entry is a summary of what was presented at the latest EOS. For a more in-depth look into what was presented, please click here to read the Chicago Fed Letter for the event. Most of the presentations that were delivered during the EOS can be found here.

• 2015 forecast review: Real GDP growth in 2015 was slightly weaker than expected in the consensus outlook from the previous EOS held in December 2014. Growth in real personal consumption expenditures was slightly higher than anticipated, partly because of stronger than expected growth in light vehicle sales. However, real business fixed investment grew at a significantly slower rate than predicted. New home construction just missed forecasted activity levels. The unemployment rate was lower than originally projected, while inflation (as measured by the Consumer Price Index) came in well below the predicted rate.

• Outlook for consumer spending: According to Scott Brown (Raymond James & Associates), consumer spending is forecasted to slightly decelerate in 2016 in part because of headwinds from rising energy prices (he expected oil prices to average around $50 per barrel by year-end). The pace of job growth has been strong, but is expected to moderate this year.

• Outlook for financial services: Brown also noted that credit conditions are fairly tight, but they should ease. The (then-anticipated) interest rate hike in December by the Federal Open Market Committee (FOMC)—the Federal Reserve’s monetary policymaking arm—shouldn’t dampen lending for a while, Brown said.

• Auto industry outlook: According to Yen Chen (Center for Automotive Research), U.S. light vehicle sales and production are expected to peak in 2018 (at around 18.6 million units and 12.2 million units, respectively) before falling slightly. Auto loan debt is expected to surpass student loan debt as the highest form of household debt, excluding mortgage and home equity debt, over the coming years. Meanwhile, Mexican light vehicle production capacity is expected to increase by over 2 million units in the next seven years largely because of lower labor costs (thereby reducing the U.S. share of North American production).

• Steel industry outlook: Robert DiCianni (ArcelorMittal USA) indicated that U.S. steel consumption is projected to modestly increase in 2016, based on his analysis of several steel-intensive sectors of the economy. For instance, the pace of growth in residential construction is expected to accelerate, while year-over-year growth in nonresidential construction is anticipated to level off. Moreover, both U.S. auto sales and North American auto production in 2016 should be similar to their respective levels in 2015. Global steel consumption is expected to increase slightly in 2016 after decreasing last year. The slowdown in Chinese steel consumption has been a major factor in the decelerating rate of global steel consumption in the past few years.

• Heavy machinery outlook: Glenn Zetek (Komatsu America Corp.) stated that U.S. demand for earth-moving equipment is at healthy levels, though demand has slowed significantly in states where energy production had been intense over the past few years. Equipment demand for single-family residential and transportation projects is expected to increase in 2016. But heavy machinery demand for nonresidential projects should moderate this year; the prospects for equipment demand to complete such projects look more promising over the next couple of years, as nonresidential fixed investment is expected to move up moderately and equipment usage is near its mid-2000s peak. Equipment usage for mining, energy, and rental needs are predicted to decrease.

• State and local government debt outlook: According to John Mousseau (Cumberland Advisors), municipal bond yields for the highest-rated securities with maturities greater than ten years are higher than comparable U.S. Treasury bonds—the opposite of what’s normal. Even with Detroit’s bankruptcy and other cities’ and states’ latest financial struggles, municipal bond quality generally remains higher than corporate bond quality. Interest rate increases won’t be terrible for issuers of municipal bonds because historically, municipal bond yield increases failed to match the size of federal funds rate increases.

Conclusion: 2016 economic outlook

According to the latest EOS consensus outlook, U.S. real GDP growth in 2016 is expected to increase slightly above its historical trend. Inventory levels are expected to rise at a slower pace. Residential investment is projected to rise at a strong pace, with slow and steady improvement predicted in new home construction. Growth in business fixed investment should continue at a decent pace, with moderate growth anticipated in industrial output. The dollar is estimated to slightly appreciate versus major currencies, which should increase the U.S. trade deficit to levels not seen in the past decade. Forecasters expect interest rates to rise, but remain at relatively historical lows. The unemployment rate is predicted to edge slightly below current levels. Inflation is expected to move up (closer to the FOMC’s inflation target) as oil prices strengthen slightly.

The D.A.B.E. Hears from Macroeconomic Advisors

By: Paul Traub
On Thursday, October 15, 2015, the Detroit Association of Business Economists met at the Detroit Branch of the Federal Reserve Bank of Chicago and heard an in-depth presentation on the U.S. economy from Chris Varvares, Senior Managing Director and Co-Founder of Macroeconomic Advisors (MA). Varvares is an accomplished macroeconomic forecaster with over 30 years of experience and service as an economist.

According to Macroeconomic Advisors, the U.S. economy will continue to grow at or near its potential through 2018. MA’s estimate for growth in 2015 is 2.2% on a year-over-basis, with growth of 2.5%, 2.5%, and 2.1%, respectively, in the following three years. Varvares pointed to the following assumptions that help form MA’s view:

• China’s devaluation and global financial market turmoil raises new downside risks but does little to change the forecast
o Growth effects of higher dollar and lower equities about offset lower oil prices
o The dollar and oil reinforce a forecast of continued low inflation
o Uncertainty regarding global growth and risky asset prices create added downside risk
• Domestic final demand growth is solid and even better than originally reported
o Past fiscal headwinds could turn into a slight tail breeze as state and local government revenues increase
o Growth of private domestic sales should remain above 3.0% through 2016
o Declining net exports and inventory building are drags to growth, especially in 2015
• Unemployment rate undershoots MA’s “full employment” estimates
o MA estimates the current non-accelerating inflation rate of unemployment (NAIRU) to be 5.0%
o The unemployment rate should reach 5.0% soon and continue to fall to 4.7% by the end of 2016
• PCE inflation will move slowly to 2.0% by the end of 2018
o Core PCE 4Q/4Q should be 1.4% in 2015, increasing to 1.7% in 2016, 1.9% in 2017, and 2.0% in 2018
• Improving labor markets and continued low inflation pose new risks key to the Fed
o MA expects the first federal funds rate hike to come in December 2015 but it’s a close call
o Long rates will rise on expected policy rate increases and rising term premiums
• Equity markets will continued to be challenged by global market turmoil and rising rates

For a look at Varvares entire presentation please click here.

Preview of the upcoming Summit on Inner City Economic Development in Detroit

By Martin Lavelle

In a recent blog, I shared my observations about Pittsburgh’s efforts to revitalize its urban core. Then, I analyzed the extent to which Pittsburgh’s turnaround can serve as a model for Detroit as its city leaders and stakeholders look to revitalize the city’s urban core. While Detroit has begun to replicate the efforts of other cities, such as showcasing the city’s riverfront with the Detroit RiverWalk and collaborating with regional leaders and stakeholders, overall its efforts lag those of other Rust Belt cities. The relatively sluggish pace of Detroit’s efforts to revitalize its urban core are also reflected in the slow development of the city’s business clusters, including new business formation. Meanwhile, other parts of the Rust Belt have advanced the development of their respective business clusters, such as West Michigan’s office and institutional furniture cluster and Pittsburgh’s advanced materials and energy clusters.(1)

Policy professionals, researchers, and other experts will gather in Detroit for a two-day summit–“Revisiting the Promise and Problems of Inner City Economic Development,”—at the Renaissance Center on September 15th and the Federal Reserve Bank of Chicago—Detroit Branch on September 16th. The summit will look at new research and best practices in the field of urban revitalization. It is sponsored by the W.E. Upjohn Institute for Employment Research, the Initiative for a Competitive Inner City (ICIC), the Federal Reserve Bank of Chicago, Economic Development Quarterly, and Sage Publications. For those interested in attending, there is no registration fee but advance registration is required here.

Day 1 will focus on what’s currently happening in Detroit, with an introduction by the Chicago Fed’s Regional Research staff and a bus tour of Detroit provided by the Chicago Fed’s Community Development & Policy Studies group. The tour will highlight some of Detroit’s successes and challenges in its effort to revitalize its urban core and how the three levers of growth—business environment, clusters, and individual firms—are promoting and complementing the efforts of Eastern Market and Midtown Detroit. Eastern Market’s food cluster is expanding in part because of greater economic growth within the city of Detroit. Part of that growth is originating from the development of an innovation district along Detroit’s major boulevard, Woodward Avenue, which is helping to draw young entrepreneurs to work and live in Midtown Detroit. In addition, the tour will illuminate some of what Detroit must still overcome on the path to renewal. The first day ends with a presentation by Detroit Free Press writer John Gallagher, who will share his thoughts about the city.

The second day of the summit will feature two keynote addresses. ICIC Founder and Chairman Michael Porter will look back on his research of clusters and their competitive advantages in inner cities. Later on, Matthew Cullen, President and CEO, Rock Ventures LLC, will provide insight into how his firm has helped contribute to Detroit’s recent surge in economic development. Other featured speakers include Carol O’Cleireacain, Deputy Mayor for Economic Policy, Planning, and Strategy, City of Detroit. Sessions on the second day will examine new thinking on the competitiveness of inner cities and opportunities for business in the inner city.

References
(1)See p.5 of http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.199.4104&rep=rep1&type=pdf

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

By Paul Traub and William Testa

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

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

TSI

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

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

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

VIO

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

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

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

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

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

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

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