The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
ESSAYS ON ISSUES TH E FEDERAL RESERVE BANK OF CHICAGO APRIL 1999 NUM BER 140 Chicago Fed Letter What’s ahead for the Midwest economy? A gainst the backdrop o f the current econom ic expansion entering its ninth year, the F ed eral Reserve Bank o f C hicago invited econom ists from business, academ ia, an d governm ent to attend an E con om ist W orkshop on February 5, 1999, focusin g on the out look fo r the Midwest econom y in 1999 an d beyon d.1This Chicago Fed Letter sum m arizes the w orkshop p resen ta tions on the econ om ic outlook fo r the Midwest region an d its states in 1999. T he Midwest econom y in the year ahead T he Midwest econom y finished 1998 at a slightly slower growth pace than it had shown earlier in the year. Midwest em ploym ent h ad been rising by nearly 2% in the first half, then in creased at a 1.5% in the second half. For the year, Midwest em ploym ent grew by 1.7%, 0.1 p ercen tage points slower than in 1997, an d lagged the n atio n ’s em ploy m ent growth fo r the third consecutive year. T he n atio n ’s em ploym ent base expanded 2.6% in 1998, although, like the Midwest, it experienced a slower pace o f growth in the secon d half. The m arked slowdown in the re gio n ’s em ploym ent growth three years ago coin cid ed with its unem ploym ent rate falling to 4.6% in early 1996. By January 1998, Midwest unem ploym ent had broken the 4% barrier; it rem ained below 4% for the entire year, finishing at 3.7%. T he re gio n ’s share o f national m an u facturing jo b s rose to ju st u n d er 19%, up 1.4 p ercen tage points fro m the begin n in g o f the curren t expansion. While alm ost 15% o f all jo b s n ation wide were in m anufacturing, the share o f total em ploym ent in m anufacturing in the Midwest was ju st over 20%. Several m an ufacturin g industries in the Midwest faced great challenges d uring 1998. T he Asian crisis put pressure on electronic equ ipm en t m anufacturers, as co m pu ter chip prices fell sharply. Foreign steel p ro ducers sharply increased their exports, dou blin g the U.S. m arket share held by im ported steel from 20% to 40%. This steel “d u m p in g ” caused severe cutbacks an d layoffs am o n g dom estic steel produ cers an d pu sh ed several sm all firm s into bankruptcy. In ad d i tion, low com m odity prices lowered farm incom es an d hurt dem an d for agricultural machinery. T he stron g con sum er sp en d in g that has su p p orted the national econom y has also been quite stron g in the M id west. H igh con sum er co n fiden ce— supported by low interest rates, a strong stock m arket, an d good hom e value appreciation— has generated a spec tacular housing m arket and a fairly steady sales pace for light vehicles. A ccording to an econom ist from a m ajor C hicago bank, econ om ic con di tions in the Midwest will rem ain rela tively robust. O ne ch allen ge the region faces is an increasingly tight labor market. However, this is helping to offset the difficulties associated with the dow nturn in the region al steel industry. H ousing m arket activity is expected to continue at record highs; the regional housing m arket skyrocketed in the last quarter o f 1998. R efinancing ac tivity was stron g for m ost of1 9 9 8 , and reached new highs in O ctober and D ecem ber. This econom ist expects to see con sum er loan activity increase. T h ere are tradeoffs between refi nance activity an d credit usage, so as refinance activity begin s to soften, the econom ist expects to see a pickup in credit card usage. T he blizzard that hit the Midwest over New Year caused som e disruptions in produ ction activity in January, particu larly in the vehicle industry, but the industry is expected to recou p this lost produ ction very quickly. While the vehicle industry is p rodu cin g at astoundingly high levels, significant growth above this output level is not expected. Midwest em ploym ent growth is fo re cast at 1.3% in 1999 an d 1.1% in 2000. T his is likely to be below the national level, as has been the case for the past several years, due to a shortage o f labor in the region. T he Midwest has not been experien cin g a lot o f m igration o f workers from oth er parts o f the country. T he unem ploym ent rate for the Midwest states will likely fall fro m 3.7% in D ecem ber 1998 to 3.5% by the end o f 1999. T he outlook fo r Illinois An econom ist fro m the Illinois state governm ent n oted that lab or m arket con dition s vary quite a bit across the state. In south ern Illinois, at least six firm s in the steel industry laid o ff a significant n um ber o f workers in the third and fourth quarters o f 1998. With a continuing build-up o f dem an d for lab or in oth er areas o f the state, the laid-off workers m ust decide whether it is worth moving or com m utin g great distances to obtain em ploym ent. It is not yet clear how this dynam ic will play out. For the past five years, Illin ois’s un em ploym ent rate has been below the n ation ’s— a situation that last occurred in the early 1970s. T he econom ist pointed out that a com m ercially gen er ated forecast shows state unem ploy m ent in creasing to 4.7% during 1999. Em ploym ent growth in the state is expected to increase by 1.3% in 1999, un derp erfo rm in g national em ploy m ent growth. T he key em ploym ent sector that ben efited fro m Illinois jo b growth in 1998 was financial services. This econom ist doesn ’t expect that sec tor to show the sam e level o f strength in 1999. T he tran sportation sector also did well in 1998 (trucking an d ware housing), in large part due to the strong con sum er sector an d the large n um ber o f new hom es bein g built. T he m anufacturing sector had declin ing employment for the last five months o f 1998 an d is expected to continue to struggle in 1999. an d J. I. Case. While these com panies have red uced em ploym ent, they are p rod u cin g m ore, due to the use o f robotics an d just-in-time inventory systems. A lthough this industry is the m ost volatile in the state, driven by ch an ges in agriculture, it currently has the ability to w eather a sustained downturn. T he large inventories that farm im plem ent dealers all over the state had in 1983 are lon g gone. Cus tom ers buy their equ ipm en t from cat alogs, an d only used equ ipm en t sits in the fields. T he industry’s inventory to sales ratio has fallen from over 4.5:1 in 1983 to 1:1 currently. T he outlook fo r Iowa T he chem ical sector has diversified, expan din g its production from mostly agricultural chem icals to pharm aceuti cals and agricultural byproducts, such as lycene and corn an d soybean deriva tives for nonagricultural purposes. A governm ent econom ist from Iowa m entioned that the state’s recent elec tion o f a D em ocratic governor, follow ing two R epublican governors who each served abo u t 15 years, was only one o f the many ch an ges underway in the state. O ne o f the biggest issues that the state has to address is the finan cial m arkets’ im pact on foreign pur ch ases o f Iow a’s products. Iow a’s econom y is two-pronged, with very large shares o f em ploym ent an d in com e gen erated by agriculture and m anufacturing. T here is also a hybrid o f m anufacturing—farm m achinery an d equ ip m en t—that sells to agricul ture. As a result, in the 1980s Iowa experien ced a capital goo d s reces sion follow ed by an export-driven re cession that was double-bottom ed and lasted for six years. Farm land, which is a large equity h oldin g o f farm ers, lost 66% o f its value; an d Iowa lost a third o f its car d ealersh ips an d banks an d h alf o f its farm im plem ent d ealer ships. A lthough Iowa has recovered, farm lan d values are still not as high as at the peak in 1980. T o what extent are falling com m odity prices (especially h og prices) p o r ten din g a repeat o f the 1980s in Iowa? This econom ist n oted that the struc ture o f Iow a’s m ainstay industries has u n d ergo n e significant ch an ges since the early 1980s. For exam ple, between 1983 an d 1997, the em ploym ent o f the group that sells to agriculture dropped by 33%, representing em ploym ent cut backs by John Deere, Massey Ferguson, T he sector that buys fro m agriculture has shown the m ost growth in Iowa co m p ared with the rest o f the nation. This is a sector that Iowa w ould like to develop even m ore. While Iowa is bein g un dersold in the grain m arkets by countries that it used to sell to, such as C hina an d Argentina, it can take advantage o f opportun ities in valuea d d ed products, e.g., by exportin g corn syrup instead o f corn an d tofu instead o f soybeans. N onetheless, this econom ist expects a large n um ber of peop le to leave agriculture, coupled with a loss o f incom e in the agricul ture sector over a sustained period. Although farm incom es have declined, they rem ain at levels they have aver aged over the past 15 years. Farm ers m ade a large am oun t o f capital goo d s purch ases in 1997 an d early 1998 an d the agricultural equ ipm en t m arket is expected to rem ain weak during 1999 an d 2000. However, this slowdown co u ld n ’t happen at a better time given the em ploym ent situation. U nem ploy m ent rates in Iowa averaged 2.6% in 1998, the third year in a row o f u n d er 3% unem ploym ent. As Iowa continues to lose popu lation in rural areas, m ore public capital ex penditures may be shifted to the cities. However, unlike M innesota which has stop p ed trying to h old back the tide o f population outflow from rural areas, Iowa has attem pted to retain p op u la tion in rural areas. Iowa has one o f the oldest state popu lation s in the nation and it probably won’t be too long before deaths exceed births. H ousin g construction is expected to slow som ew hat in 1999, largely due to a lab or shortage. In 1998, building perm its growth reach ed an all-time high o f 39% , su p p orted by low m ort gage rates. With the lowest unem ploym ent rates in the region, Iow a’s em ploym ent growth is forecast to be ju st 0.5% in 1999 an d 0.25% in 2000. N om inal incom e, which grew at 3.8% during 1998, is expected to increase to 6.25% for both 1999 an d 2000. T he outlook fo r Indiana A university econ om ist presen ted the outlook for the Indian a economy. While the Indiana econom y continued to operate at relatively high output levels with the secon d lowest u n em ploym ent rate in the region, em ploy m ent is only expected to grow by 1.0% for 1999. Personal incom e in Indian a is an ticipated to grow at a very slow 1.5% this year. T he m an ufacturin g sector is very im portan t to the Indian a econom y. T he state has the highest con cen tration o f m an ufacturin g workers in the region, accoun ting fo r over 23% o f the state’s total work force. M anufacturing in gen eral finished 1998 on a weaker note than it began an d the dom estic steel sector could be categorized as being in a recession. T he problem s facing the steel industry affect Indian a m ore than any oth er state in the region, since In dian a produ ces roughly 25% o f all the steel p rod u ced in the U.S. T he state has been struggling to m ain tain its relative econom ic position over the past 20 years. C o m pared with the nation, Indian a has continuously lost share o f output an d popu lation over this period, with the only exception bein g the early 1990s, when it picked up relative to the nation (largely b e cause C alifornia was doin g so poorly at that tim e). This econom ist felt that, to a large ex tent, the housing m arket b o o m can be attributed to a ph en o m en on referred to as clim ax housing. People are build ing or buying the house that represents the peak house that they are going to own. Som e are even buying into larger houses than necessary an d viewing it as an investm ent. Given the low m ort gage rates, it is believed that m ore con sum ers are viewing purchasing a house as a way o f diversifying their investment portfolios. T he outlook fo r Michigan An econom ist from the M ichigan state governm ent analyzed the state o f the M ichigan economy. T he vehicle indus try continues to be very im portan t for Michigan. Vehicle ownership per household continued to grow in 1998. Ligh t truck sales are approach in g 50% o f total light vehicle (cars an d light trucks) m arket sales. C onsum ers love trucks. With low gasoline prices, im age im provem ent for trucks, an d high re sidual values, the p urch asin g trend toward trucks will likely continue in 1999. T he pricing environm ent for vehicles rem ains very competitive. New vehicle sales continue to be quite im pressive, especially this late in an expansion. D ecem ber 1998 new vehi cle sales were the stron gest m onthly sales in over 12 years. New vehicle sales have been above trend since 1994. With the an ticipated slower gross dom estic prod u ct growth in 1999, vehicles sales are also expected to m oderate in 1999 to average 15.0 m illion units, and then hold steady at that sales level in 2000. This slower pace o f econ om ic growth for M ichigan will be reflected by a slowing in person al incom e growth from 3.9% in 1999 to 3.4% in 2000. M ich igan ’s unem ploym ent rate is ex pected to rem ain relatively low, aver agin g 3.7% during 1999 an d rising to 4.1% in 2000. Employment in Michigan is forecast to increase by 1.8% in 1999 an d then rise by a slower 1.2% in 2000. M anufacturing em ploym ent growth is expected to increase by 0.2% in 1999 an d then fall by 1.2% in 2000. Private n on m anu factu rin g jo b growth in M ichigan is expected to increase by 2.6% in 1999 an d slow to 2.1% in 2000. T h e h ou sin g m arket has gen erally b een very robust in M ichigan. Al th ough there are som e weak pockets, even the city o f Detroit, which had been very slow for a lon g time, has shown som e significant gains in hous ing prices in the last few years. M anufacturing em ploym ent has been losing its share o f total em ploym ent in the state over the years. In 1969 m an ufacturin g jo b s represen ted a third o f all workers, in 1977 it had fallen to 28% , an d in 1997 it reach ed 19%. Most o f the new em ploym ent opportunities are in small firms. O ut put is still considered pretty sensitive to national econom ic growth, but be cause o f all the capital spen din g to im prove productivity, ch an ges in em ploym ent are probably not as sensitive to competitive pressure as in the past. T he outlook fo r W isconsin An econom ist from a m anufacturing firm in W isconsin presen ted the ou t look for the Wisconsin economy. The W isconsin econom y con tin u ed to operate at full output levels in 1998. T he tight lab or m arkets have been a restraining factor on ou tpu t growth. At this econom ist’s company, the bluecollar work force has been very stable, but there has been m ore noticeable turnover am o n g the white-collar workers. O bserving that the parking lots at sh o ppin g m alls con tin ue to be full, this econom ist would have ex pected that this late in the expansion consum ers would have purchased everything they wanted. T he outlook fo r the W isconsin econ omy is for con tin u ed growth at slower rates than the rest o f the nation, with lab or m arkets rem aining quite tight. This econom ist does expect a slight dow nturn in the econom y within the next two years. T he curren t ex pan sion has gon e on so long, this econom ist feels that a dow nturn is due to occur. Conclusion T he outlook fo r the Midwest econom y in 1999 is for slower growth than the rest o f the nation, as the region strug gles with tight lab or m arkets. This has probably been the m ost restraining fac tor fo r growth in the Midwest. Full em ploym ent has been a bittersweet issue for the region. It has brought significant challenges for individual states, reflected by the econom ists’ presentations at the w orkshop, to ensure con tin u ed eco nom ic growth with such low unem ploy m ent rates. As the rest o f the country continues to move toward the Midwest’s unem ploym ent rates, this is a them e that m ost certainly will be ech oed across the nation. —W illiam Strauss Senioreconomistand economicadvisor 1 The workshop was organized by William Strauss, with valuable assistance from William A. T esta and Keith Motycka. The Midwest is defined as the states of the Seventh Federal Reserve District— Illinois, Iowa, Indiana, M ichigan, and W iscon sin . Michael H. Moskow, President; William C. Hunter, Senior Vice President and Director ofResearch; Douglas Evanoff, Vice President, financial studies; Charles Evans, Vice President, macroeconomic policy research; Daniel Sullivan, VioePresident, microeconomic policy research; William Testa, Vice President, regional programs and economics editor; Helen O ’D. Koshy, Editor. Chicago Fed Letter is published monthly by the Research Department o f the Federal Reserve Bank o f Chicago. The views expressed are the authors’ and are not necessarily those o f the Federal Reserve Bank of Chicago or the Federal Reserve System. Articles may be reprinted if the source is credited and the Research Department is provided with copies o f the reprints. Chicago Fed Letter is available without charge from the Public Information Center, Federal Reserve Bank o f Chicago, P.O. Box 834, Chicago, Illinois 60690-0834, tel. 312-322-5111 or fax 312-322-5515. Chicago Fed Letter and other Bank publications are available on the World Wide Web at h ttp :// www.frbchi.org. ISSN 0895-0164 Tracking Midwest m anufacturing activity Purchasing managers’ surveys (production index) M anufacturing o utput indexes (1992=100) 72 40 Jan. CFMMI IP Month ago 129.8 136.6 1 ---------------------------------------- 1 ---------------------------------------- 1 ---------------------------------------- 1 ----------------------1996 1997 1998 1999 Year ago 129.6 136.7 ---------------------------------------------------------------- 128.7 133.8 M otor vehicle production (millions, seasonally adj. annual rate) Feb. Month ago Year ago Cars 5.4 5.6 5.4 Light trucks 6.9 6.8 6.3 P urchasing m anagers’ surveys: n et % re p o rtin g pro d u ctio n growth Feb. Month ago MW 54.7 50.4 Year ago 59.9 U.S. 56.9 53.1 55.3 T he Chicago Fed Midwest M anufacturing Index (CFMMI) decreased 0.2% from D ecem ber 1998 to January 1999. In com parison, the Federal Reserve B o ard ’s Industrial Production Index for m anufacturing (IP) increased 0.1% in January 1999 from D ecem ber 1998. Light truck production increased slightly from 6.8 m illion units in January to 6.9 million units in February an d car production de clined from 5.6 m illion units in January to 5.4 million units in February. T he Midwest purch asin g m an ag ers’ com posite in d ex (a w eighted average o f the Chicago, Detroit, an d Milwaukee surveys) fo r produ ction in creased to 54.7% in February from 50.4% in January. T he purch asin g m an ag ers’ index in creased in all three surveys. T he national p urch asin g m an ag ers’ survey for produ ction also in creased from 53.1% in January to 56.9% in February. Sources: The Chicago Fed Midwest Manufactur ing Index (CFMMI) is a composite index of 16 industries, based on monthly hours worked and kilowatt hours. IP represents the Federal Re serve Board’s Industrial Production 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 seasonal ly adjusted production components from the Chicago, Detroit, and Milwaukee Purchasing M anagers’ Association surveys, with assistance from Bishop Associates, Comerica, and the University of Wisconsin-Milwaukee. peisenboj odiajos u jn ie y IIISZZE (ZI£) F88006909 z m o N iiiA m a d SIONmi'OOVOlHO aivd a o v i s o d s n a d a o o d v a t7 + diz HVIAI S SV lO lSd ld cm d o sd d d siouini ‘0§E3TO t£8 xoa O'd J01U0Q uoqeraioju j aq q n j OOVOIHO 4 0 3NV4 HAHHSHH TVHH(134 jo i p o q p 0 q o § B 0 iq Q