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.

An Analysis of State and Local Government Spending

Written by Martin Lavelle 

Starting in February 2012, the Federal Reserve Bank of Chicago, Detroit Branch, in partnership with the Michigan Council on Economic Education (MCEE) began hosting a series of educational workshops entitled, “Night at the Fed.” The purpose of these workshops is to give economics, history, and social studies teachers, as well as other financial or economic educators, the opportunity to enhance their knowledge of economics and personal finance. In addition, primary and secondary public school teachers may earn continuing education credits by attending these workshops. These workshops are held on a quarterly basis during the school year and will continue in early 2013.

The most recent “Night at the Fed” took place on Thursday, November 15, 2012, and focused on the distinction between monetary and fiscal policy. David Zin, chief economist of the Michigan Senate Fiscal Agency, presented information on the limitations and powers of fiscal policy. Zin discussed not only federal fiscal policy, but also state and local fiscal policy, in great detail. State and local fiscal policy has been somewhat ignored, with greater attention being placed on the approaching “fiscal cliff” facing the federal government. However, whatever proposals result from the ongoing “fiscal cliff” negotiations, state and local budgets will most likely be affected.

The largest sources of revenue for the state of Michigan and its local governments, as seen in Chart 1 below, are non-tax sources, such as school fees, state-provided services, licenses, permits not related to transportation, and lottery transfers to the School Aid Fund. The next largest revenue sources are intergovernmental revenues, corporate taxes, and income taxes, which when put together with non-taxable sources, comprise over 88% of the state of Michigan’s revenue and 96% of its local governments’ revenue.

Chart 1: State Revenue Sources: All States, Michigan

At the state government level, the two major state general purpose and restricted revenue funds are the General Fund/General Purpose Fund (GF/GP) and the School Aid Fund (SAF). The GF/GP covers all state appropriation, expenditure, and receipt transactions, except those for which special constitutional or statutory requirements demand separate fund accounting, such as the SAF.[1]  Chart 2 shows 63% of the GF/GP’s revenue comes from income tax collections. GF/GP revenues fell by almost half during the 2000s, mostly a recessionary decade for Michigan. Since the end of the national recession in mid-2009, nominal GF/GP revenues have slightly rebounded, though at rates about equal to inflation.

Chart 2:  Michigan General Fund Revenue Sources

Chart 3:  Michigan School Aid Fund Revenue Sources

As seen in Chart 3, the largest input into the SAF is state sales tax revenue, which makes up almost 47% of SAF revenue. SAF nominal revenues have remained flat since the beginning of the most recent national recession in December 2007; SAF real revenues have fallen slightly during the same period. Overall revenues (GF/GP + SAF) are expected to increase at 2% to 4% annual rates over a three-year period that includes the most recent fiscal year. After a slight decrease in net revenues during the most recent fiscal year, 1% to 3% increases in net revenues are expected from fiscal year 2012 to 2014.

Despite some increase in net revenues since the end of the recession, tax breaks have grown even faster. This gap may widen further because of the state’s failure to replace lost revenues due to changes in the state business and personal property tax codes, respectively.

The gap between tax expenditures and revenues based on current state policies takes on greater importance when analyzing state spending trends. At the state level, spending is dominated by intergovernmental grants, Medicaid, and other social services, areas of intensifying cost pressures. Those categories, plus insurance trusts, which include unemployment compensation funds, workers’ compensation, and employee retirement systems, constitute the majority of state government spending. When examining where all gross Michigan tax revenues are spent, more than 75% are spent on social services and education as seen in Chart 4.

Chart 4:  Where State of Michigan Tax Dollars Are Spent

Looking at spending that the state can control, which comes from the GF/GP, health services and education make up almost half of all appropriations, but another 20% is spent on corrections. When considering current fiscal year projections, gross spending has been relatively flat since 2008, while GF/GP spending has increased 5%. Most of the spending increases are occurring in the budget areas of community health and corrections. In the past decade, spending on community health in Michigan, which includes Medicaid, has increased 53% as Medicaid caseloads have increased by almost 47%. Spending on corrections has increased 21% in the past decade, yet the prison population has decreased by almost 15%. In contrast, higher education spending has fallen 29% over the last decade, in spite of an increase in enrollment of 8%.

Total  $8,944,202,300

Since the end of the Great Recession, Michigan has instituted budgetary reforms that have eliminated structural budget deficits present during the mid- to late 2000s. Also contributing to the elimination of these structural budget deficits has been above-trend economic growth, led by a resurgent domestic auto industry. However, more pressure will likely be placed on state and local budgets due to some of near-term challenges. These challenges include the potential establishment of health insurance exchanges and expansion of Medicaid through the Affordable Care Act, increasing state and local public pension fund liabilities, the slow housing market recovery, the taxable value cap on property values, and potential congressional action to avert the “fiscal cliff.” These challenges can be alleviated to some degree if Michigan’s economy keeps growing at a faster rate than the nation’s and more Michigan residents  opt to stay in the state rather than moving elsewhere, thereby supporting the state’s tax base.

[1] Michigan Senate Fiscal Agency,

Ballard Discusses Michigan’s Economy

At the Detroit Association of Business Economists’ (DABE) November 1, 2012, meeting, Charles L. Ballard, professor of economics at Michigan State University, delivered a presentation entitled “Michigan’s Economy on the Eve of the Election.” In his opening remarks, Ballard pointed out how “fundamental structural changes in the U.S. economy have created big problems for the Michigan economy for a very long time – not just in the last decade.” The structural change he was referring to is the shift away from manufacturing as a dominant contributor to Michigan’s economy toward more technical and service-oriented industries. The following graph shows just how much manufacturing’s share of the economy has declined for the United States and Michigan since 1963.

In 1963, almost half of Michigan’s economy (measured as gross state product, or GSP) was in manufacturing, most of which was related to the automotive industry. By 2009, at the bottom of the recession, manufacturing’s percentage of Michigan’s GSP had fallen to 12.5%. During that same period, manufacturing’s share of U.S. gross domestic product (GDP) fell from 27.2% to 11.1%.
Looking deeper into the data, it can be seen that while total manufacturing was declining, motor vehicles and equipment remained a significant share of Michigan’s manufacturing structure. Even after suffering some significant declines in the late 1980s and early 1990s, the motor vehicles and equipment share of Michigan’s total manufacturing output reached a high of 50.9% in 2001 (see chart ). Every time it became apparent that Michigan’s economy was going through a significant structural change and something needed to be done to diversify its economy, the automotive industry would stage a cyclical comeback, which would act to mask Michigan’s over-dependence on a declining sector of the U.S. economy. To some extent, Michigan became a victim of its own early success with the auto industry.

Professor Ballard went on to point out that despite its struggles, Michigan remained a relatively affluent place to live. The following chart shows Michigan’s inflation adjusted per capita income, compared with that of the United States as a whole. What this seems to show is that through the early 2000s, Michigan’s per capita income tracked the nation’s very closely.

However, a closer look at the data tells a slightly different story. The following chart uses the same data to show Michigan’s per capita income as a percentage of the nation’s. Here we see that Michigan incomes started losing ground as far back as the early 1950s. However, the auto industry continued to be a very attractive industry to many workers. It was a well-established fact for anyone growing up in Michigan that they could make a good living working for one of the automotive manufacturers with not much more than a high school education. According to Bureau of Labor Statistics (BLS) data, just prior to the recession in 2009, the average hourly earnings for Michigan production workers in the motor vehicle parts manufacturing industry were $25.56, which is equivalent to an annual salary of $53,165. According to U.S. census data, in 2009 the average income for all persons regardless of level of education attainment was $42,469. But because of global competition and automation of some of the assembly jobs, many of the higher paying low-skilled automotive jobs began to disappear. This seemed to accelerate the decline in Michigan’s per capita income, compared with the rest of the nation. By 2011, Michigan’s per capita income was down to 87.3% of the national average.

Taking the broader perspective across all U.S. states, Ballard pointed out that there seems to be a strong positive relationship between income and educational attainment. The following scatter plot shows per capita income by state and the percentage of population with at least a bachelor’s degree.

The data in this chart show that higher levels of education seem to lead to higher expected incomes. So even though Michigan was once near the top compared with the rest of the nation in per capita income, by 2009 it had fallen to 31st in per capita income and 36th in educational attainment.
Ballard argued that given the current level of global competitiveness, education has become more important than ever for Michigan’s future. But this realization could not have come at a more difficult time for the state. In 2000, U.S. light vehicle sales peaked at 17.3 million units. By 2009, the effect of the recession reduced that number to just 10.4 million units, the worst light vehicle sales this country had seen since 1982. Because of its dependence on the auto industry, Michigan suffered a devastating impact from this decline. Many auto-related businesses were forced to make major cutbacks, forcing many workers to leave the state in search of employment. This led to drastic cuts in state spending, including spending on education. The chart below shows how inflation-adjusted spending per pupil in grades K through 12 has fallen in Michigan since its peak in 2001.

In addition to these cuts, since 2003 appropriations for state-funded colleges have been reduced by $637 million, not even accounting for inflation. In the 2012–13 fiscal year state budget, Michigan was forced to cut state appropriations to higher education by 15%. On a somewhat positive note, Ballard noted that, recently, auto sales appear to be on the rebound and Michigan’s economy is doing better. However, he warned that continued diversification of Michigan’s economy is imperative if the state is to avoid repeating some of its past mistakes. This will require more emphasis on education and a more diversified economy throughout the state.