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ESSAYS ON ISSUES THE FEDERAL RESERVE BANK OF CHICAGO OCTOBER 1995 NUMBER 98 Chicago Fed Letter Midwest manufacturing exports: Who buys? What sells? com pared to a 116% increase for the U.S. Nearly two-thirds of all Midwest m anufacturing exports are concentrated in three industries— machinery, both electrical and non Exports have been responsible for a electrical, and transportation equip large share of the growth in gross ment. The individual states of the domestic product (GDP) over the last Midwest extend this mix somewhat. decade. Between 1987 and 1995, Illinois and Indiana both have large exports as a share of total GDP rose chemical exports; Iowa has large from about 8% to more than 13%. processed-food exports; and measur Moreover, exports play an im portant ing instruments are Wisconsin’s role in sustaining not only manufac export industry. The turing jobs, but also jobs that support third-largest top export destinations Midwest manufacturing, such as services, trans m anufacturing goods areforCanada, portation, and shipping. According Japan, and Mexico (see figure 1). to government reports, in 1992, 10.5 million U.S. jobs (approximately one- M anufacturing exports’ share of total tenth of all nonfarm jobs) were sup m anufacturing output (gross state ported by exports—7 million by mer product, or GSP) in the Midwest rose chandise exports and 3.4 million by from 22% in 1987 to 29% in 1992. services exports. The com parable figures for the U.S. were and 38%. Thus the re From a policy perspective, particular gion’s25% m anufacturing is not as export ly at the state level, it is im portant intensive as the nation’s. Among to know the role exports play in a midwestern states, only M ichigan’s state’s or region’s economy. It is m anufacturing is more export-inten especially useful to know which types sive than the nation’s, with a 39% of goods are in high dem and world wide and which regions of the world share of output in 1992. are dem anding them. With this in W hen one calculates this share at the form ation, state and federal export industry level, the Midwest lags the prom otion efforts have a better U.S. in most industries. However, the chance of succeeding. individual states tend to be dom inat ed by two or three industries, and This Chicago Fed Letter looks at the these industries tend to be m ore ex midwestern states of Illinois, Indiana, port-intensive at the state level than Iowa, Michigan, and Wisconsin and they are nationally. For example, examines the types of goods these Illinois’s top export industries are states export as well as their major m achinery and transportation equip destinations. Although services ex ment. These industries are more ports are an im portant and growing export-intensive in Illinois than na part of the U.S. economy, data on tionwide. Following is a state-by-state services exports at the state or re analysis of Midwest exports over the gional level are unavailable. There 1987-94 period. fore, this article will discuss only m anufacturing exports. Illinois Export intensity in the Midwest Over the 1987-94 period, Midwest m anufacturing exports grew 96% Over half of Illinois’s m anufacturing exports is concentrated in three in dustries: electrical machinery, non 1. Top export destinations, 1994 Value Percent ($ billions) Canada 33.6 48.3 Ja p a n 4.5 6.5 M e xico 4.1 5.9 U n ite d K in g d o m 3.1 G e rm a n y T otal M id w e s t exports 4.4 2.6 3.8 69.5 100.0 electrical machinery, and chemicals. This is not surprising, since Illinois is hom e to num erous large capital goods producers, consum er appli ance companies, electronics and telecom m unications manufacturers, and pharm aceutical companies. Canada is the largest export destina tion for Illinois goods, as it is for total U.S. goods and the goods of each of the other Midwest states. Canada received nearly a third of the state’s exports in 1994. While Canada garnered the largest share of Illinois’s exports, the state’s exports to China and Mexico grew m ore rapidly over the 1987-94 peri od. Half of Illinois’s exports to Chi na in 1994 was electrical m achinery, primarily com puters and telecom m unications equipm ent, accounting for 40% of all U.S. electrical ma chinery exports to China. About 70% of C hina’s com puter im ports are from the U.S.1 Telecom m unica tions equipm ent, which includes cable TV, paging, cellular, and net work com puter equipm ent, is a high-priority sector for developm ent in China, which is good news for Illinois’s exports. A nother Illinois growth export indus try to China was chemicals, with most of the increase occurring in 1993-94. Illinois’s chemical exports to China accounted for 13% of all U.S. chem i cal exports to China in 1994. Quick surges such as this are sometimes only temporary, reflecting a tem po rary need or favorable exchange rate. This surge may be m ore durable, however, as the U.S. has worked ex tensively over the last few years to persuade China to open its doors to more U.S. goods. Almost all Illinois industries saw exports to Mexico grow significantly over the 1987-94 period, with non electrical m achinery, electrical ma chinery, and processed foods experi encing the largest dollar increases. Mexico has accom plished significant econom ic developm ent over the last decade, partly the result of a m ore open trade policy. A growing econ omy typically needs certain types of goods to support growth—goods to build an infrastructure (such as roads or com m unications), industri al equipm ent, and eventually, con sum er goods. Illinois, like most midwestern states, has already bene fited from increased trade with Mex ico in ju st those goods. However, the devaluation of the peso in late 1994 and M exico’s sharp econom ic dow nturn in 1995 have upset this trend considerably. The U.S.’s ex ports to Mexico will likely take a beating this year. Indiana Indiana’s m anufacturing exports increased 121% over the 1987-94 period. The state is hom e to many large auto parts suppliers, pharm a ceutical m anufacturers, and industri al machinery manufacturers; its larg est export industries in 1994 were transportation equipm ent, nonelec trical machinery, and chemicals. In the same year, Indiana’s top export destinations were Canada, Japan, and the United Kingdom. M anufactur ing exports to Canada accounted for nearly half of the state’s total exports. O f the top destinations for Indiana’s exports, Belgium and Germany real ized the largest percentage gains over the 1987-94 period. The state’s m anufacturing exports to Belgium increased 321%, with transportation equipm ent accounting for nearly two-thirds of that growth. Indiana’s transportation equipm ent exports to Belgium grew from $2 million in 1987 to $95 million in 1994; the lat ter figure represented 10% of all U.S. transportation equipm ent exports to Belgium that year. Indiana’s leading export to Germ a ny in 1994 was chemicals, account ing for nearly a third of the state’s exports to Germany in that year. In the previous year, the U.S. ranked fourth am ong Germ any’s leading chemical suppliers, with almost 10% of its im port market. Industrial chemicals as well as drugs and pharm aceuticals are considered good prospects for increased ex ports to Germany. Iow a Iowa’s m anufacturing exports to Australia increased from $32 million in 1987 to $106 million in 1994. About 60% of the state’s exports to Australia are nonelectrical m achin ery, probably farm equipm ent, since agriculture plays an im portant role in Australia’s economy. Despite several years of drought, Australia continues to be a growth m arket for U.S. farm equipm ent exports, which now make up about 50% of Australia’s total imports in this category. M ichigan In 1994, M ichigan’s m anufacturing exports accounted for 40% of the Midwest’s m anufacturing exports, yet they contributed only 30% of the region’s export increase over the 1987-94 period. This is not surprising, since Michigan’s manufacturing ex ports grew only 57% over the entire period. Why the lackluster perfor m ance com pared to the other Mid west states? As figure 2 shows, Michi gan’s economy is no longer so heavily dependent on the auto industry. Nev ertheless, transportation equipm ent is still the largest export industry of the state; it accounted for 55% of all m anufacturing exports and 30% of m anufacturing em ploym ent in 1994. Yet transportation equipm ent ex ports grew only 27% over the 1987-94 period, largely because of slow ex port growth to the state’s largest Over the 1987-94 period, Iowa’s m anufacturing exports increased 91%. Since Iowa is hom e to several large farm equipm ent and industrial equipm ent m anufacturers, it stands to reason that nonelectrical m achin ery m ade up one-third of the state’s m anufacturing exports in 1994. Pro cessed foods and electrical m achin ery were the second- and third-largest export industries, respectively. Canada accounted for over one-third of Iowa’s total m anufacturing exports in 1994. However, between 1987 and 2. Industry share of total GSP/GDP 1994, South Korea and Australia experienced Michigan U.S. faster rates of growth as 1977 1992 1977 1992 markets for the state’s (-------------------- percent------------------ ) exports. Iowa’s m anu T o ta l GSP/GDP 100.0 100.0 100.0 100.0 facturing exports to 27.2 17.7 23.9 M a n u fa c tu rin g 40.1 South Korea increased 19.0 10.1 1.9 0.9 M o to r v e h ic le s m ore than 400%, with T ra n s p o rta tio n 9.2 8.8 7.1 6.8 processed foods ac counting for over half 5.5 6.6 7.1 6.6 W h o le s a le tra d e of the state’s exports in 9.7 9.3 Retail tra d e 9.1 9.3 1994. As a large and 12.1 16.5 14.5 18.5 FIRE3 growing m arket for 19.7 17.7 13.1 S e rvice s 10.9 U.S. goods, South Ko Note: Columns w ill not total 100.0% because some rea was the U.S.’s sixthcategories are not listed. largest export m arket fin a n c ia l services, insurance, and real estate. in that year, supplying Source: U.S. Department of Commerce, Gross State Product, about 23% of the coun 1977-92, CD-ROM, 1995. try’s total imports. markets, Canada and Mexico. Ex cluding transportation exports, Mich igan’s rem aining m anufacturing industries increased their exports 120% over the period. While M ichigan’s total m anufactur ing exports to Canada increased only 49% and those to Mexico in creased only 41% over the period, several of the state’s industries expe rienced significant export growth to those countries, including both of the m achinery industries. Exclud ing transportation equipm ent, Mich igan’s total m anufacturing exports to Mexico tripled over the period. Trade with M ichigan’s other large partners in 1994 was more positive. In particular, Austria (a relatively new trade partner for Michigan) and France (a longstanding partner) experienced the largest percentage increases as M ichigan’s major trade partners over the period. The state’s exports to Austria consisted almost exclusively of transportation equip ment. Most of the U.S.’s transporta tion equipm ent trade with Austria is in auto parts. Trade in autos is mini mal. M ichigan’s transportation equipm ent exports to Austria ac counted for 80% of all U.S. transpor tation equipm ent exports to that country in 1994. M ichigan’s largest export industry to France in 1994 was chemicals, ac counting for nearly half of the state’s increased trade with that country over the 1987-94 period. M ichigan’s chem ical exports to France com prised 11% of all U.S. chemical exports to France in 1994. Chemicals are one of the U.S.’s best prospects for trade with France, particularly industrial chemicals and pharm aceuticals, two subindustries in which M ichigan has several large m anufacturers. Wisconsin Over the 1987-94 period, Wisconsin’s m anufacturing exports increased 132%, the second-highest growth rate of the Midwest states. Nonelectrical machinery, transportation equipment, and measuring instrum ents were the are our traditional partners such as state’s largest export industries in Canada, Japan, and Europe, or 1994. Measuring instrum ents ex ports have been a growth m arket for em erging markets such as South Wisconsin, increasing at least sixfold Korea and China. over the period. Wisconsin is hom e The Midwest has a large and diverse to several large and medium-sized anufacturing base, and many of its measuring and test instrum ents m an m products are of the types that grow ufacturers as well as medical instru ing economies need in order to de ments manufacturers. Much of the velop: farm equipm ent, construction increased trade in this industry can equipm ent, and telecom m unications be attributed to increased sales to equipm ent, as well as a broad range France and Japan. of industrial equipm ent. Demand for consum er goods such as house Wisconsin’s largest export destina hold appliances or prepared foods tions in 1994 were Canada, Japan, also increases as countries develop. and the U nited Kingdom. Saudi This bodes well for the Midwest, Arabia was the state’s largest export since it means that m anufacturing growth market, rising from $36 mil lion in 1987 to $346 million in 1994, exports are likely to continue playing an im portant role in the region’s almost entirely as a result of in creased exports in the transportation economies. equipm ent industry. W isconsin’s —Linda M. Aguilar exports from that industry to Saudi Regional Economist Arabia accounted for 13% of all U.S. transportation equipm ent exports to the country in 1994. Saudi Arabia is JU.S. Department of Commerce, Interna the fifth-largest world m arket for tional Trade Administration, China: Data auto parts, primarily because its used- on Best Prospects, CD-ROM, 1995. All subsequent references to export pros vehicle m arket is sizable. In total, the U.S. supplies about 40% of Saudi pects for various countries are from this series of sources, with the same citation Arabia’s auto parts market. but a different country name (Germany, Mexico was another growth market France, Saudi Arabia, and Mexico). for W isconsin’s goods, increasing from $69 million in 1987 to $397 million in 1994. Com pared with exports to Saudi Arabia, the growth in Wisconsin’s exports to Mexico was m ore evenly spread across all indus Michael H. Moskow, President; William C. Hunter, Senior Vice President and Director of tries, with nonelectrical equipm ent Research; David R. Allardice, Senior Vice President, seeing the largest dollar value in regional programs; Douglas Evanoff, Assistant crease. O ther growth industries to Vice President, financial studies; Charles Evans Mexico were electrical machinery, and Kenneth Kuttner, Assistant Vice Presidents, processed foods, and chemicals. The macroeconomic policy research; Daniel Sullivan, Vice President, microeconomic policy U.S. Commerce D epartm ent reports Assistant research; Anne Weaver, Manager, administration; that the best prospects for trade with Janice Weiss, Editor. Mexico in nonelectrical equipm ent Chicago Fed Letter is published monthly by the are in pollution control equipm ent, Research Department of the Federal Reserve air conditioning and refrigeration, Bank of Chicago. The views expressed are the and m achine tools—industries in authors’ and are not necessarily those of the Federal Reserve Bank of Chicago or the which Wisconsin has several large Federal Reserve System. Articles may be m anufacturers. reprinted if the source is credited and the Summary Recent Midwest export data show that the region has responded to the w orld’s increased dem and for U.S. goods, w hether those m arkets Research Department is provided with copies of the reprints. Chicago Fed Letter is available without charge from the Public Information Center, Federal Reserve Bank of Chicago, P.O. Box 834, Chicago, Illinois, 60690-0834, (312) 322-5111. ISSN 0895-0164 Purchasing m anagers’ surveys indicate that Midwest m anufacturing activity flattened out in recent m onths, after decelerating significantly in the second quarter. The com posite production com ponent of surveys in Chicago, Detroit, and Milwaukee rose in August, but rem ained at a level consistent with only m odest growth in output in the region. Extended hot, hum id w eather cut into production hours in August, but stronger retail sales and housing activity should help prom pt rising m anufacturing output in the m onths ahead. Sources: The Midwest Manufacturing Index (MMI) is a composite index of 15 industries, based on monthly hours worked and kilowatt hours. IP rep resents the Federal Reserve Board industrial pro duction index for the U.S. manufacturing sector. Autos and light trucks are measured in annualized units, using seasonal adjustments developed by the Board. The purchasing managers’ survey data for the Midwest are weighted averages of the sea sonally adjusted production components from the Chicago, Detroit, and Milwaukee Purchasing Man agers’ Association surveys, with assistance from Bishop Associates, Comerica, and the University of Wisconsin-Milwaukee. IU9~Z>Z£ (2I£) f £80-06909 slouHII f£8 O'd J31U33 uop^uuojuj opqnj ODVOIH3 TO HNV9 3AH3S3H 3VH3Q33 iTTpy i pqj abTpup )