Health Care in America with Nancy Schlichting

By Paul Traub

U.S. consumers are reported to be spending an ever increasing amount of their personal income on health care each year. According to Personal Consumption Expenditures data from the Bureau of Economic Analysis (BEA), consumers spent close to $2.0 trillion on health care in the United States in 2014. Based on this, spending in 2014 on health care was equal to 11.5% of total gross domestic product (GDP). The Affordable Care Act (ACA, P.L. 111-148) together with the Health Care and Education Act of 2010 (P.L. 111-152) expanded access to health care coverage for millions of Americans who were without health insurance. The ACA (also known as Obama Care) has been the center of much debate and has been cited by some as a major impediment to job creation since it requires employers with more than 50 full-time employees to provide health care insurance for their workers. Between 1980 and 2010, the compound growth rate in inflation-adjusted health care spending equaled just 4.9%./1 As Chart 1 below illustrates, in the four years since then per capita spending on health care has increased by about 10%. But should all of the concern about health care be just focused on cost or are there other issues just as important that should be discussed? In an effort to get a better understanding of the issues surrounding health care and the ACA, the Detroit Association of Business Economists (D.A.B.E.) presented a program on the state of health care in the U.S. with guest speaker Nancy Schlichting, CEO of Henry Ford Health Systems. Henry Ford Health Systems is a nationally recognized $4.0 billion health care organization with 23,000 employees.

Chart 1

Schlichting opened her presentation by pointing out that health care is one of those services about which everyone has an opinion and that opinion is often based on personal experience. While the experiences that form a person’s opinion can at times be positive, more times than not they are likely to negative. Witnessing a sick parent or family member go through a difficult time is often the experience that people remember. Schlichting highlighted three important features of health care.

First, health care matters most when you need it. Schlichting went on to explain that the perceived need for health care is much different for someone who is healthy than for someone who has experienced a debilitating illness. When people are young and haven’t experienced many medical difficulties, they often believe they are immune to illness. Older individuals, who are more likely to have seen someone else go through a medical problem, more easily recognize their own frailties. This leads people to recognize a need for insurance against the unknown. The same need to be prepared for anything is felt more strongly by someone who is the head of a family or a household more than by someone who has no dependents.

Second, a person who has never been uninsured doesn’t understand what it is like to live without health insurance. It is not widely recognized that many individuals that don’t have insurance do work, often multiple part-time jobs. Schlichting said more than 50% of the people not covered under a health care plan do work and many of them are young people.

Third, the American health care system is the most complex in the world. Consumers often don’t understand how their coverage works and what is covered and what isn’t. This complexity also adds cost to the system. It is estimated that $0.25 of every dollar spent on health care in the United States goes to cover administration costs. This complexity has also led to the need for more administrative staff than care givers in some institutions. The confusing process is also one of the reasons that uncompensated care is still rising. Consumers find it difficult to navigate through the complexity of the system of co-pays and deductibles, Schlichting argued, and often choose to ignore a bill that they believe is the responsibility of the insurance company.

Schlichting said, in her view, the passage of the ACA will be a positive for the industry in the long run. Hospitals and health care providers have been working to improve services and lower costs and are doing so by concentrating on some specific areas. Schlichting said the largest opportunities for improvements are related to the incentives the ACA provides to improve the quality of health care procedures. For example, the act imposes penalties on hospitals for readmitting patients. This is forcing providers to do a better job in caring for their patients and making sure they are ready to be released. Another way to help eliminate frequent trips to the hospital is to provide patients with the ability to share information with their care giver either by phone or email. Schlichting’s company is also trying to improve quality by studying other models of success and adopting reliable quality systems, such as the Six Sigma process, The Deming Institutes quality management principles, and Baldrige performance programs. These processes are helping to lower costs while improving the patient’s experience, which is an important aspect of success in the highly competitive health care industry.

What does the future hold? The health care industry will continue to change, Schlichting said, as providers work to reduce cost and improve care. The consolidation of hospitals, physician practices, and insurance companies will most likely continue as part of the industry’s overall efforts to cut costs. The marketing of health care services is also likely to become more important, she pointed out, as providers recognize the need to market to individuals who are opting out of group coverage and shopping for their own coverage on health care exchanges.

1/ Current dollar BEA PCE health care spending was adjusted for inflation using PCE chain-type index.

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.

Detroit Association of Business Economists 2015 Annual Automotive Outlook

by Paul Traub

On January 22, 2015, the Detroit Association of Business Economists (DABE) held its annual Automotive Outlook Symposium at the Detroit Branch of the Federal Reserve Bank of Chicago. The event was attended by approximately 50 guests, including DABE members together with other local business leaders, academics, and media representatives. I was among the speakers, as was Peter Sweatman, director of the University of Michigan Transportation Research Institute (UMTRI).

Sweatman was appointed UMTRI director in September 2004. UMTRI was created in 1965 with the main goal of improving vehicle safety and sustainable transportation in the U.S. and around the world. It currently has a staff of 102 full-time researchers, faculty, graduate students, and administrative staff affiliated with the University of Michigan, who have conducted over 1,000 research projects over the years. In its latest endeavor, UMTRI has created a public/private research and development partnership called the Michigan Mobility Transformation Center (MTC). The goal of the MTC is to be in the forefront of research and development of vehicle connectivity. This includes vehicle to vehicle (V2V) and vehicle to infrastructure (V2I) technology. As Sweatman pointed out, it’s not just about transportation but about safe and sustainable personal mobility that transcends just getting from one place to another. The vehicles of the future will free the occupants from many of the hands-on tasks and decision processes that are part of operating a vehicle today. By doing this, it is believed that the driving experience can be transformed into a much safer and more productive and enjoyable experience for the vehicle occupants. The major goal of the initiative is to make vehicles of the future much safer by adding technology that will aid in accidence avoidance. Vehicles will not only be able to communicate with one another, they will also be linked with their surrounding environment. For example, Sweatman explained that the connected vehicle (CV) technology could warn drivers before they reach areas of dangerous weather, poor visibility, or other hazardous road conditions. The vehicle could be programed to respond to these conditions on its own either by adjusting its speed or offering alternative routes or a truly autonomous vehicle could choose to take an alternative route on its own. If the driver were to decide to continue to travel on the perilous road, the CV would inform the driver of any accidents in path ahead immediately giving the driver or the vehicle time to adjust accordingly.

CV technology is in its infancy today, and there is still a lot of research and development to do before it can be implemented. To aid in this work, MTC has adopted a plan in collaboration with the Michigan Department of Transportation (MDOT). The plan has three pillars:

1. Ann Arbor Connected Vehicle Test Environment (2014+)
2. Southeast Michigan Connected Vehicle Deployment (2015+)
3. Ann Arbor Automated Vehicle Field Operational Test (2016+).

Pillar 1 of the connected vehicles (CV) pilot deployment program commenced on August 21, 2012, and included a pilot deployment of 2,836 vehicles— cars, trucks, buses and motorcycles—equipped with wireless communication devices in the Ann Arbor area. This phase ran for six months and was extended for an additional three years by the U.S. Department of Transportation.

Pillar 2 will test the rationality of connected vehicles by implementing a jump from research to regional deployment. It will include 20,000 vehicles together with 500 infrastructure nodes located based on safety and congestion needs and the installation of 5,000 vehicle and pedestrian safety devices. The U.S. has invested approximately $1.0 billion dollars over a ten-year span for this research.

Pillar 3 will include an automated Ann Arbor, where a select group of industry and government partners will work together. This phase will include testing in a simulated city (M City) a $6.5 million 32-acre site located in Ann Arbor near the University of Michigan campus and is scheduled to open in July 2015.

The investment that has taken place so far is likely just the tip of the iceberg in terms of what will be needed to complete a national intelligent transportation system. Sweatman argued that if the needed investment is made to complete a national system, it will not only provide an opportunity for the U.S. to lead the world in developing a CV technical knowledge base, it will also lead to the creation of numerous high-tech jobs in Michigan and throughout the country. For more information on this topic, follow some of the links provided in this article or on the University of Michigan Transportation Research Institute website.

Following Dr. Sweatman’s presentation I gave a short summary of the 2014 light vehicle industry. Here are some of the highlights. There were 16.434 million light vehicles sold in the U.S. in 2014 making it the best year the industry had seen since 2006, when 16.504 million light vehicles were sold. Although job growth has been good in the auto industry, the pace of growth has slowed in conjunction with the slowing pace of growth in sales. As a result, the automotive and parts sector added 41,600 jobs in 2014, down slightly from the peak job growth year of 2012 when the industry added 59,600 jobs. Average hourly earnings of automotive manufacturing workers, which were flat for most of the period following the 2008 recession, grew only slightly in 2014, up just 0.5% when adjusting for inflation. According to data from J.D. Power and Associates, vehicle incentives as a percentage of total vehicle prices rose to 9.1% in 2014, while the average transaction price for a new vehicle grew to an estimated 56.7% of median household income. One of the more controversial developments of 2014 was the number of vehicles recalled. According to data from the National Highway Traffic Safety Administration, vehicle manufacturers recalled almost 64.0 million vehicles in 2014, the most ever reported. And, of course, the biggest story was the reduction in gasoline prices through the year, with the national average for a gallon of regular gasoline falling more than $1.10 from December 2013 to December 2014. This resulted in about $600 per year in fuel cost savings for the average driver. Looking ahead, there will be 16.9 million and 17.0 million light vehicles sold in the U.S. in 2015 and 2016, respectively, according to the Blue Chip Indicators consensus forecast. If you’d like to see more information or to view the entire presentation you may click the DABE Auto Update – January 22, 2015 here.

Wells Fargo Chief Economist Gives Economic Outlook at Latest DABE Meeting

By Martin Lavelle

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

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

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

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

What’s after Bankruptcy? Lessons in Governance Reform and Financial Planning from Other Cities

By Martin Lavelle

On November 7–8, 2013, the Federal Reserve Bank of Chicago, Detroit Branch and the Citizens Research Council of Michigan hosted a two-day symposium on municipal bankruptcy, with the aim of uncovering what could be learned from cities that have experienced and are currently experiencing fiscal struggles. Local experts were given the chance to comment on presentations by national experts regarding Detroit’s July bankruptcy filing. This blog summarizes key information from the conference.

Day One

The first day’s discussion centered on the current state of local governments that have already gone through financial difficulties and lessons that could be learned from past crises.

Michael Pagano, College of Urban Planning & Public Administration, University of Illinois–Chicago, argued that Detroit’s case is unique and isn’t necessarily the beginning of a wave of municipal bankruptcies. Cities are still required to balance their budgets annually. Part of the budget pressure Detroit currently faces stems from cuts in state revenue sharing, which began in 2000. Further pressure on Detroit’s finances came from drops in property values which, combined with drops in sales and income tax revenues, put major constraints on Detroit’s budget.

According to CLOSUP’s September survey of municipal governments, fewer jurisdictions are reporting declines in state aid, though almost half still report decreases in state revenue sharing, according to Debra Horner, CLOSUP, University of Michigan. With property tax revenue growth flat, local governments are reducing their spending through shifting more health care costs to employees and increasing intergovernmental cooperation. Between 25% and 50% of Southeast Michigan’s local jurisdictions are less able to meet their fiscal needs, fewer than Saginaw (more than 50%), but more than Western Michigan (fewer than 25%). Fewer than half of Michigan’s local jurisdictions feel they can’t meet future needs within their current spending structure, with fewer reporting they can improve their service delivery and that significant structural reform to public finance is needed.

Robert Inman, Wharton School, University of Pennsylvania, argued that Detroit has to set up the right set of institutions and incentives that will create the appropriate fiscal culture. Inman said fiscal crises result from weak demographics, a weak economy, and weak public policies. Wage and benefit increases without compensating marginal productivity increases is a “recipe for disaster,” said Inman, something Detroit pensioners face under Chapter 9 bankruptcy. Detroit’s decaying infrastructure (physical and human) equates to borrowing money indirectly while contributing to losses in property values. Detroit and other fiscally troubled cities should have the option to privatize when necessary, Inman said, and to create neighborhood and business improvement districts but not tax businesses to cross-subsidize residential services.

Municipalities should devote more time to place-making, according to Anthony Minghine, Michigan Municipal League. When municipalities diminish their service level in order to pay workers’ pensions, it leads to lower property tax revenues, which further erode service delivery. Minghine said the municipal government financial model is broken, except in high-income areas. He added that Michigan’s emergency manager law is a law of destruction, not construction. Once a municipal government starts to experience financial difficulties, it becomes hard to end that cycle of financial dysfunction.

Frank Shafroth, George Mason University, said state governments can and should play an important role in preventing municipal bankruptcies. Prevention should come through preemptive responses to deteriorating financial conditions, not through reactions to already dire financial situations. In the case of Central Falls, Rhode Island, it has been more expensive for the state after the bankruptcy filing because state law did not require Central Falls to accept state assistance. Even though Rhode Island volunteered help by offering the expertise of former city managers for no charge, it wasn’t enough to prevent Central Falls’ bankruptcy. Shafroth expressed concern that Michigan’s current intervention system with local governments will not begin soon enough.

Joyce Parker, The Municipal Group, brought Ecorse, MI, successfully out of her emergency management through place-setting and engaging the community in the place-setting process. Parker was able to get city residents to overcome the anger and distrust that sometimes accompanies the appointment of an emergency manager and contribute to the process of setting Ecorse on a sustainable financial course. While serving as Ecorse’s emergency manager, Parker did have to decrease staffing levels, but was able to accomplish some cost-cutting by sharing resources with other local governments.

Day Two

The second day’s discussion turned to the impact a municipal financial crisis can have on investors and how state governments might intervene in local governmental finances.

Lisa Washburn, Municipal Market Advisors, reported that Detroit’s financial troubles did not surprise investors because the city had been plagued by out-migration, high poverty, significant tax burdens, structural budget deficits, and political corruption, thereby prompting state assistance. However, Michigan’s unwillingness to provide direct monetary assistance surprised the investor community, because the state had a long history of credit oversight and of prioritizing debt repayment. Investors questioned how the state could execute such a poor communication strategy and get involved too late in Detroit, seemingly encouraging Detroit to go bankrupt and default. After Detroit’s bankruptcy filing, some Michigan municipalities’ debt issuances were forced to accept higher yields and even higher risk spreads, yet Washburn argued that Detroit’s bankruptcy does not pose systemic risk to the municipal bond market. She noted it may be harder for Detroit to reenter the municipal bond market because of its debtor-in-possession financing and the time it may take the city to emerge from bankruptcy.

From a neighborhood investor’s perspective, Bill Pulte, Pulte Homes, who has done extensive work in removing blight from Detroit’s Brightmoor neighborhood, said Detroit must be cleaned up before any turnaround plan can work. Pulte reported that no one can make a profit currently in Detroit’s real estate market, in part because of Detroit’s 100,000 vacant structures and its 100,000 vacant parcels. In the past, federal funds for demolition went to many contractors, working in different parts of Detroit. Now, Detroit will receive $52 million from the state and $150 million to accelerate blight demolition in an effort that will be more coordinated.

When it comes to state intervention in municipal finances, Stephen Fehr, Pew Center for the States, indicated that 19 states can intervene in distressed localities, but only a handful of these states are really active. States should oversee local governments in order to ensure public safety, avoid negative stigma, and block the distress from spreading to neighboring towns, Fehr said. He noted that Detroit is similar to Camden, NJ, in that both cities have been the focus of various state and federal efforts, as well as service sharing. New Jersey’s state government, under Governor Chris Christie, approves local budgets and debt payments.

North Carolina arguably has the most effective intervention program, which resulted from bankruptcy filings by multiple local governments in the early 1940s. An outside board reviews data sent in periodically by local governments. A state commission then reports on the status of local governments. The board recommends that local governments maintain an 8% fund balance. If the fund balance falls short of that target, warning letters go out to those governments.

Eric Lupher, Citizens Research Council of Michigan, pointed out that since the 1960s, Michigan has had legislation that allows for state intervention into local government finances, but not state monitoring. Public Act 436, passed into law by Michigan’s State Legislature late in 2012, allows the state to take some initiative when intervening into local government financial dealings. Lupher asked whether the scoring of local governments’ fiscal conditions should be taken over by an outside firm, like Munetrix. He said state governments should want to prevent local government finances from worsening because of the economic impacts financial struggles have on cities and the state. One way to protect against financial emergencies could be for the state to teach local governments best budgetary practices. In the case of Detroit, Lupher argued that the state should uphold its constitutional pledge and protect pensions through the creation of a Michigan Benefit Guaranty Corporation. [1]

Arguably, the biggest takeaway from the conference was that states should be more involved with local government finances so financial emergencies can be avoided. Intervening too late in a municipal government’s financial emergency may be more costly for state government post-crisis. Also, state governments should want to be informed about the condition of municipal governments’ finances, particularly in the larger population areas that help drive economic growth. It is very difficult for Michigan to achieve strong state-wide economic growth if its largest city, Detroit, is experiencing significant financial distress.

[1] A Michigan Benefit Guaranty Corporation would be similar to the Pension Benefit Guaranty Corporation (PBGC), which protects more than 40 million American workers in more than 26,000 private-sector defined benefit pension plans. The PBGC is headed by a director who is appointed by the President and confirmed by the Senate (pbgc.gov).

Impact of Lower Natural Gas Prices on the Freight Transportation Sector

Enhanced exploration and recovery of natural gas and other fuels from shale rock have significantly boosted expected availability of energy in the United States. Projections of natural gas supply in this country have gone up so quickly in the past decade that it is hard to get a good handle on where energy markets are going to settle in the decade ahead—that is, at what price and in what industries it will be used as the fuel of choice. One thing is clear—natural gas is now readily available. Nothing shows this better than the falling price of natural gas relative to oil. While the price of oil is up 64.5 percent from 2005, the price of natural gas has actual fallen by 56.7 percent.

Oil and NG Index

Falling prices of natural gas will surely result in increased investment in the many industries and activities that can use natural gas. Natural gas can be used not only as a less expensive alternative for energy and electric power generation, but also as a material input for such products as petro chemicals, plastics and fertilizers. To consider the implications of this new energy revolution, the Federal Reserve Bank of Chicago recently held an event entitled, New Access to Energy: Midwest and Global Industry Impacts. The conference featured panels on diverse topics, including the availability of supply, regional and global market impacts, re-shoring of manufacturing, and developments in the freight transportation sector.

The transportation industry has quickly adapted to falling natural gas prices, especially freight transportation by truck. The trucking sector has had to overcome some significant challenges over the past couple of decades, including rising diesel prices, added emissions standards, and enhanced driver safety regulations, just to name a few.

In an effort to understand more about how falling natural gas prices might impact the trucking industry, the conference’s transportation session covered four specific areas:
1. Overview of the medium and heavy truck market.
2. Implementation of natural gas vehicles into a delivery fleet.
3. The development of natural gas heavy duty trucks.
4. The availability of natural gas and associated infrastructure development.

The U.S. class 8 trucks industry outlook was presented by Ken Vieth, senior partner and general manager for Americas Commercial Transportation (ACT) Research Company, LLC. Vieth’s presentation overviewed the heavy duty truck market and its potential for conversion to natural gas. In the U.S., trucks are classified by size or gross vehicle weight rating (GVWR). Most commercial trucks are rated from GVWR 3 (10,001–14,000 pounds) to GVWR 8. Heavy duty or class 8 trucks are trucks with a GVWR above 33,000 pounds. These are the vehicles most often used for carrying freight over long distances. The mix of trucks by GVWR has changed significantly over the last 65 years, with class 8 truck share growing from virtually zero in 1946 to over 30 percent in 2012. According to data from Ward’s Automotive, in calendar year 2012 class 8 trucks accounted for 34.2 percent of all class 3 through class 8 trucks sold in the United States.

Truck Share by GVW

In 2012, there were 201,300 class 8 trucks produced in the United States. Of those, only about 3.0 percent were designed to use natural gas. However, ACT Research expects the share of natural gas powered class 8 trucks to grow to 50 percent in the next 10 to 20 years. Two of the main reasons cited for this dramatic change in demand for natural gas driven trucks (NG trucks) are regulatory considerations related to more stringent emissions standards and the competitive cost advantage natural gas provides compared with gasoline or diesel fuel. Vieth pointed out that, at today’s prices, on a cost per gallon equivalency basis, natural gas is 33 percent less expensive than gasoline and 39 percent cheaper than diesel. A natural gas truck is more expensive to buy than a comparable gasoline or diesel vehicle but, over a five-year period, the cost savings with an NG truck could be as high as $100,000, more than offsetting the higher initial investment. As for emissions and other regulatory issues, natural gas burns cleaner, resulting in far less greenhouse gas and particulate matter being released into the atmosphere.

To gain a better understanding of how NG trucks are currently being used, a case study of the implementation of natural gas vehicles into a delivery fleet was provided by Jeff Shefchik, president of Paper Transport, Inc. in Green Bay, Wisconsin. Paper Transport is one of the early adopters of natural gas powered trucks for the freight industry. In February 2010, Paper Transport purchased two Freightliner M-2 tractors powered by the Cummins ISL-G natural gas engine. Today they have 35 such vehicles in operation out of a fleet of 390 tractors, and their fleet has logged over 3.5 million miles. Shefchik pointed out that Paper Transport began converting to natural gas for the environmental benefits, as well as the economics of natural gas versus diesel. The decision to convert so many of their trucks wasn’t without some concerns—specifically, finding the right applications, convincing the drivers, maintaining the engines, and the fuel delivery infrastructure. But, according to Shefchik, these issues were easily overcome. He said that the return on investment and payback are application dependent, but for a regional over-the-road model, the payback was just four years for a truck that would most likely stay in service for ten years or more. Shefchik’s payback model was consistent with that presented by Vieth. Shefchik also mentioned that natural gas prices tended to be a lot more stable over time than gasoline and diesel fuel prices, which is helpful for business planning purposes.

We heard about the development of natural gas trucks and what lies ahead from Robert Carrick, sales manager for natural gas vehicles at Daimler Trucks N.A. LLC. Carrick has worked in the trucking industry for 28 years and has held a number of management positions. While working for Freightliner Trucks, which is the largest division of Daimler Trucks N.A., he initiated the first natural gas project for the ports of Los Angeles and Long Beach and delivered over 500 natural gas trucks all across North America. Since that time, Freightliner has delivered an additional 1,500 natural gas trucks. Daimler has developed NG trucks for a variety of applications, including port tractors, food delivery, regional haul tractors, refuse trucks, sewer trucks, utility trucks, and municipal vehicles. Carrick pointed out that natural gas engines produce less pollution and are significantly quieter than comparable diesel engines, making them preferable for many applications in cities or confined areas. Also, municipal and utility fleets that return to the same location every evening are good applications for natural gas because vehicles can be refueled onsite overnight. Another good application for natural gas is long-haul freight distribution, because NG trucks can be equipped with fuel tanks that allow them to go up 600 miles between fill-ups. To prove this point, Freightliner completed a cross country tour from Los Angeles to Washington D.C. in seven days. During the trip, the vehicle refueled just four times, stopping in Phoenix, Oklahoma City, Little Rock, and Nashville. Carrick said Daimler recognizes that natural gas prices could increase again and infrastructure improvements need to continue, but he predicted that by 2020, NG trucks could equal 10 percent of Daimler Truck N.A.’s total production.

The final presentation addressed the availability of natural gas and the development of the fuel distribution infrastructure for the trucking industry and was given by David Jaskolski, a senior account manager for Pivotal LNG, a wholly owned subsidiary of AGL Resources. Jaskolski has over 30 years of experience in developing and implementing strategic plans for key accounts in commercial on-highway, construction, marine, petroleum, and rail markets, and is recognized as an expert in the use of natural gas as an alternative fuel for heavy duty trucks.

Jaskolski pointed out that the U.S. already has an extensive natural gas pipeline network that runs throughout the country. Using a plumbing analogy, he said the pipes are already in the house—we just need to decide what types of faucets we need and where we want to put them. There are two options for using natural gas, each requiring a different faucet—compressed natural gas (CNG) and liquid natural gas (LNG). CNG is a better option for buses, refuse trucks, and utility or municipal fleets, for which fuel consumption is low (less than 65 gallons a day), space for numerous tanks is available on the vehicle, vehicle weight is not important, wheelbase is not an issue, time to fuel is not an issue (can fuel overnight), and vehicles may sit idle for long periods. The exact opposite of this holds true for long-haul vehicles. Because of this, they are better suited to using LNG. LNG is the same natural gas that is used in homes across America and, thus, it is readily available. The major difference is that the gas is cooled in an industrial process to –260 degrees, at which point it turns into a liquid. Once cooled to a liquid, 1 cubic foot of LNG is equal to 600 cubic feet of natural gas. Care must be taken when fueling, because the fuel will turn back to a gaseous state if it is not kept cold. This is why LNG is not good for applications in which vehicles are allowed to sit idle for extended periods as the gas will just dissipate. However, the quick dissipation of liquid natural gas is a plus in terms of safety and the environment. In the event of a spill, unlike diesel fuel and gasoline that can pool on the ground or flow into lakes and streams, LNG will just evaporate into atmosphere. In addition, LNG is not explosive or flammable like gasoline or diesel fuel. For LNG to be flammable, it must return to vapor first, and natural gas vapor will only ignite in a ratio of 5 percent to 15 percent natural gas to air and only if there is an ignition source present. For natural gas vapor to get to the level of concentration needed to ignite, it must be in a confined area. Unlike gasoline, natural gas vapor is not explosive in the open air.

In summary, there appear to be many applications in the trucking industry for which natural gas makes good economic sense. Early adopters have had good success in incorporating natural gas vehicles profitably into their fleets. Truck developers are working on creating more options for the future. And for CNG and LNG, most of the distribution network is already in place.

For more on the conference and to access copies of the presentations cited here and others from the conference, please visit the New Access to Energy: Midwest and Global Industry Impacts page on the Federal Reserve Bank of Chicago’s website.

Developing Small Businesses and Leveraging Resources in Detroit Conference Summary

Written by Emily Engel

Detroit’s economic difficulties stem in large part from wholesale relocation of auto manufacturing jobs beginning in the 1970s. The city now has a rapidly declining population, high unemployment, very low property values, high crime rates, and underperforming schools. A variety of organizations interested in the city’s economic future believe that entrepreneurship is the way forward, and are working on multiple fronts to support and promote small businesses.
The Chicago Fed, the Michigan Bankers Association, and the New Economy Initiative for Southeast Michigan co-sponsored a symposium in Detroit on October 16–17 that brought together business experts and owners, policymakers, private capital funders, and bankers to address the issues of small business credit and financing.

Conference sessions began with a presentation of research findings on the MSA’s financial infrastructure and patterns of small business lending by Maude Toussaint-Comeau. Subsequent panels explored, broadly, the “entrepreneurial ecosystem” in Detroit; methods to connect small business owners with technical and advisory resources; on-the-ground experience of banks still active in the market and related compliance issues; and opportunities for small business lending from banks and other sources.

For years, service providers have been investing substantial resources in legal, management, and marketing services to small businesses in the Detroit area. Banks and other lenders have been active in SBA lending, Low Income Housing Tax credits and other programs that mitigate credit risks to small businesses. More recently, foundations, city planners and other civic organizations have been at the forefront of building a new ‘entrepreneurial paradigm’ in Detroit that develops the infrastructure to better connect small business owners with the resources available to them and addresses some of the capital gaps that have created liquidity constraints for small businesses.

For a more detailed summary of the symposium please read the Chicago Fed Letter co-authored by Robin Newberger and Maude Toussaint-Comeau Developing Small Businesses and Leveraging Resources in Detroit.

To view materials from the conference in Detroit please view the Developing Small Businesses and Leveraging Resources in Detroit events page on the Chicago Fed website go here.

Federal Reserve Bank of Chicago’s 26th annual Economic Outlook Symposium

Written by Martin Lavelle

The Federal Reserve Bank of Chicago hosted its 26th annual Economic Outlook Symposium on Friday, November 30, 2012. The symposium addressed the 2012 performance as well as the 2013 outlook for the U.S and Seventh District economies and their key sectors. William Strauss, Senior Economist and Economic Advisor, reported that real GDP forecasts submitted last year by attendees, economists, and other analysts were in line with actual figures. Light vehicle sales and residential investment were stronger than predicted, the unemployment rate fell more than anticipated, and consumer spending met expectations. Total inflation, business fixed investment, and industrial production was weaker than expected.

The group’s 2013 forecast calls for real GDP to grow at a faster rate than in 2012, a rate slightly above trend. Most of the major sectors are expected to see growth slightly accelerate in 2013. The pace of growth is projected to increase in consumer spending, business fixed investment, and industrial production. The housing and employment markets are expected to improve steadily, but still remain well off their respective long-run trend levels. Inflation expectations look to be consistent with the Federal Reserve’s goal of price stability.

Carl Tannenbaum, Chief Economist, Northern Trust, calls for the U.S. economy to continue growing slowly and steadily. The unemployment rate is expected to fall slowly as the labor market sorts through issues such as high levels of discouraged workers, increasing numbers of part-time workers, and workers’ increasing acceptance of lower wages. The housing market is projected to see increased activity, though headwinds remain; these include stubbornly tight lending standards, pending regulations, and high levels of student loan debt, making it harder for potential new home buyers to enter the market. Orderly resolutions of U.S. and European financial issues are expected, though both continue to represent significant downside risks to the growth forecast.

Mary D’Ascoli, Economic Analyst, Toyota, believes U.S. and global light vehicle sales levels will increase in 2013. The forecast of higher sales levels can be attributed to an ever aging fleet of vehicles and relatively high used vehicle prices. There is presently a mismatch between new and used vehicle inventory; there aren’t large numbers of slightly used vehicles, adding to the attraction of new vehicles. As a result, vehicle manufacturing capacity utilization rates are expected to remain around 80% throughout next year. Hurricane Sandy is deemed to have lowered sales levels between 300,000 and 400,000 units, which should be made up for by the first quarter of 2013.

Robert DiCianni, Marketing Manager, ArcelorMittal USA, indicated slow growth in the steel industry continued in 2012 with slower growth expected the rest of this year and in 2013. Even though residential construction’s recovery is underway, it is restricted by lingering high unemployment levels, tight credit conditions, and distressed property inventory. Nonresidential construction activity is expected to remain relatively unchanged. Overall construction activity is expected to improve enough to increase demand for construction machinery. Continued improvements in light vehicle, truck, and appliance sales will boost sales of electric motors. An expanding energy sector will require more steel; however, steel demand for rail cars, rail tank cars, and the rest of the infrastructure segment is expected to level out. Despite the presence of continued downside domestic and global risks, such as European financial stress, there is cautious optimism within the steel market for next year.

Dr. Loren Scott, President of Loren C. Scott & Associates, Inc., delivered the keynote presentation, which looked at the potential of natural gas. The supply of domestic shale natural gas could lead to great opportunities for a number of industries, including chemical production. Ethane is a major input in ammonia fertilizer used in agriculture, and ethylene is used in household goods, ranging from toys to clothing, and clean burning boiler fuel. The cost to make ethylene is in the U.S. is half that in Europe, where oil is used to produce ethylene. Another growing natural gas demand source is power producers. Natural gas is looked at as a lower-cost, lower-emission alternative to coal. With large shale deposits such as the Bakken, Eagle Ford, Marcellus, and Utica available for mining, severe downward pressures could be applied on utility bills and overall energy prices. An additional demand source could be exports of shale natural gas and shale oil. Over the past four years, the increase in shale oil exports equals 80% of Iran’s total oil exports before the imposing of sanctions on Iran. If domestic shale deposits are explored thoroughly, complementary infrastructure such as pipelines and rail cars will need to be added to accommodate increasing supply. There is great concern surrounding the hydraulic fracturing or “fracking” that allows natural gas to be extracted from shale. However, Scott noted that in 60 years of fracking, no scientific cases of drinking water contamination were reported.

Donald Johnson, Chief Economist, Caterpillar Inc., said developing countries will grow at faster rates than developed economies next year. Developed countries, including the U.S., continue to experience record low interest rates thanks mostly to central banks’ continued efforts to enhance bank liquidity. The U.S. construction sector should improve next year. Europe has fallen into recession and little improvement is expected next year. Economic growth in developing economies should improve more than half a percentage point as countries like China and Brazil adopt more accommodative monetary policies in order to further ease credit conditions. Commodity production is expected to increase, likely increasing prices slightly.

Presentations from the Economic Outlook Symposium can be found here.  Next year’s Economic Outlook Symposium will take place on Friday, December 6th.