Economic Development in Detroit

By Rick Mattoon

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

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

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

Economic Development Strategy in Detroit

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

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

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

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

Figure 2

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

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.

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

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

US Goods Trade with Canada

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

Imports and Exports with Canada

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

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