Potential Seventh District Contenders for Amazon’s HQ2

By Martin Lavelle

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

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

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

Logistics

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

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

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

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

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

Business Environment

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

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

Source: https://statetaxindex.org.

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

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

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

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

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

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

Table 4: Annual Business Incentives Per Employee

Source: Moody’s Analytics

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

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

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

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

Talent

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

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

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

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

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

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

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

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

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

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

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

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

Potential Amazon Sites in the Seventh District Cities

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

Chicago

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

Detroit

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

Grand Rapids

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

Indianapolis

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

Milwaukee

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

Conclusion

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

Foot Notes

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

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.

Detroit area business economists present auto outlook

By Paul Traub

The U.S. auto industry has just completed its best sales year ever, reaching 17.837 million in total vehicle sales in 2015. Falling gasoline prices together with affordable finance rates helped the Detroit Three (D3) manufacturers (Fiat Chrysler, Ford, and General Motors) by making crossover vehicles, SUVs, and pickup trucks more affordable to own and operate. Chart 1 below shows how the demand for more light trucks has helped the D3 stop the erosion of their market share.

D3 Market ShareSource: Author’s calculations based on data from Wards Automotive.

During the year, the D3 manufacturers also negotiated a new contract with the United Auto Workers (UAW) union, aimed at rewarding workers for remaining loyal during the hard years of the recession while at the same time allowing the companies to remain competitive with their global counterparts. To help us understand where the U.S. auto industry is headed, DABE (the Detroit Association of Business Economists) members gathered at the Detroit branch of the Federal Reserve Bank of Chicago on Thursday, January 14, 2016, to present their annual auto outlook. The 2016 Bob Fish Memorial Automotive Industry Luncheon meeting addressed the following questions: How long will sales continue at their current pace? Will fuel prices remain low for an extended period? What happens to vehicle affordability now that the Fed has started to raise interest rates? And, how will the new UAW contract affect the competitive position of the D3? The speakers included the chief economist for General Motors, Mustafa Mohatarem and the director of the Industry and Labor Group at the Center for Automotive Research (CAR), Kristin Dziczek.

The program began with Mohatarem’s presentation, entitled “Peak or Plateau – U.S. Auto Industry Beyond 2015.” In summary, Mohaterem said that:

1. Vehicle sales and the economy in 2016 will be more or less a repeat of 2015.
2. The North American economies will grow at a slow and steady pace, with auto sales hitting a new record high.
3. The modest recovery in Western Europe will continue, along with modest growth in new vehicle sales.
4. Slowing economic growth in China will be a source of global economic uncertainty as China makes the difficult transition from
export/investment-led growth to growth in services and domestic demand.
5. The end of the commodity boom will impart significant downward pressure on many emerging and commodity-dependent economies.

Click here to see Mohatarem’s entire presentation.

The discussion continued with a presentation from Dziczek entitled “Process and Outcome of the 2015 UAW Auto Negotiations,” in which she summarized the 2015 contract negotiations, focusing on the union’s gains and losses.

The gains include:
1. Pay increases and profit sharing/lump sums (largely cash).
2. The start of phasing out tier 2 wages, while adding to the number of wage scales.
3. Maintenance of health care benefits without additional cost to the workers with the same health care for everyone at General Motors and Ford.

The losses include:
1. No reinstatements of a cost of living allowance (COLA) or JOBS bank/GEN pool.
2. No overtime after 8 hours a day, only after 40 hours a week.
3. The union did not win back a three-year grow-in to top wages or any pension increases.

In summary, most of the cost of the contract to the original equipment manufacturers (OEMs) was in the form of one-time cash payments rather than ongoing cost increases. Part of the problem faced by the UAW stemmed from the fact that younger workers wanted to see more job security and hiring as part of the contract because that would push them up the pay scale to tier 1 wages. At the same time, older workers who were already making tier 1 wages wanted to see larger pay increases and were willing to sacrifice jobs to get them. In the end, the increases in cost from this contract were kept to a minimum, compared with pre-2009 contracts.

Click here to see Dzicek’s entire presentation.

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.

Detroit Association of Business Economists – Economic Update

By Paul Traub

On February 19, 2015, the Detroit Association of Business Economists met at the Detroit Branch of the Federal Reserve Bank of Chicago to hear Chicago Fed senior economist and economic advisor William Strauss discuss the U.S. and Midwest economy. It has now been over seven years since the U.S. plunged into its worst recession in decades and there has been some debate recently as to how well the economy is currently performing. Some economic indicators that suggest the recovery is strengthening, but others imply there is still a lot of room for improvement. Following the January 28, 2015, meeting of the Federal Reserve Open Market Committee (FOMC), the Committee released a statement indicating that between December 2014 and January 2015:

1. Economic activity looked to have expanded at a solid pace.
2. Labor market conditions continued to improve with strong job growth and diminishing underutilization of the labor force.
3. Household spending rose moderately with purchasing power being boosted by falling energy prices.
4. Business fixed investment continued to advance.

However, the FOMC also noted the following less favorable indicators:

1. The recovery of the housing market remains very slow.
2. Inflation continues to be below the Committee’s long-run objective of 2%, a level of inflation that is consistent with sustainable positive economic performance.
3. The share of those unemployed more than six months remains at 31.2%, well above the pre-recession long-run average of 12.8%.
4. The number of employees working part-time for economic reasons still remains elevated.
5. And about 1.4% of the fall in the unemployment rate can be explained by workers that have left the labor force because they can’t find work or have become discouraged looking for a job.

Even in the face of this less than positive news, Strauss said that recently he has been hearing concern from some economic analysts that given the current length of this recovery, 68 months and counting, the U.S. economy could be close to heading into its next cyclical slowdown. Strauss went on to explain that even though the average economic expansion since the 1960s has been roughly 72 months, it is not the length of the recovery as much as other unexpected circumstances that predict the end of an economic expansion. For example, the 2008 recession didn’t start because the economy had been expanding for 73 months and just ran out of momentum; rather it was the result of a financial crisis that was preceded by the bursting of a housing bubble. So even though the most recent economic expansion looks to be very close to the average of past expansions, there is no reason to believe the U.S. economy will suddenly just run out of steam. Strauss went on to say that the manufacturing sector continues to expand nicely, business investment continues to advance, and the consumer looks to be benefiting from lower energy prices. He also pointed to forecasts from the consensus of the Blue Chip Economic Indicators and the FOMC for the U.S. economy to continue to grow at about 2.8% to 2.9% over the next two years, a pace slightly better than its long-run potential. For more detailed information and to see Strauss’s entire presentation, click here: Presentation to the Detroit Association of Business Economists.