May 10, 2012
Auto Sales and the Seventh District
by Paul Traub
Continued improvement in U.S. light vehicle sales has been good news not only for the automotive industry, but also for the Seventh District. The chart below plots the percentage change in U.S. light vehicle sales against the percentage change in real gross state product for the District from 1991 through 2010. It should not come as any surprise that these two factors are very highly correlated (correlation coefficient of 0.82, where 1.00 would imply a perfect correlation) since four of the five states in the District currently have automotive assembly plants. If we add Ohio’s assembly production to that of the Seventh District states—Iowa, Illinois, Indiana, Michigan and Wisconsin—the region accounts for roughly 50 percent of the total U.S. automotive production. Given this relationship, we would expect last year’s increase in light vehicle sales (up 10.2 percent in 2011 over 2010) to have a favorable impact on the District’s overall economic growth for 2011—those numbers are due to be released later this year.
And so far in 2012, sales of light vehicles in the U.S. continue to outperform expectations. The seasonally adjusted annual sales rate for April 2012 was reported to be 14.4 million units; year to date through April, the rate has risen to 14.6 million units. In addition, the share of vehicles sold in April that were produced in North America was estimated to be about 77.3 percent. This is a significant increase from February 2009, when the percentage of North American produced light vehicles sold in the U.S. dropped to just 70.5 percent, reaching its lowest share since November 1986; at the same time overall sales volumes were bottoming at levels not seen since 1974.
So how do we assess the strength of the current auto sector recovery? The following chart shows the current light vehicle sales recovery compared with those that followed auto industry downturns in 1970, 1974, 1981, and 1991. For comparison purposes, an index for each downturn was created by setting the trough for each cycle to 100. This index comparison shows just how much more severe the initial sales decline was in the 2009 auto recession compared with the average of the previous four downturns. However, it is interesting to see that the current recovery has followed the average of those four recoveries fairly closely, except for two notable points in time. At both of those points in time, there were identifiable events that seem to have had significant effects on the auto industry.
The first event was the Car Allowance Rebate System (CARS), also known as “cash for clunkers.” This was a $3 billion program that was intended to provide an incentive for Americans to purchase more fuel-efficient vehicles by trading in their less fuel-efficient ones. The Department of Transportation reported that nearly 700,000 clunkers were taken off the road during this program, resulting in 684,941 new vehicle purchases. It's difficult to say exactly how many of those sales were incremental purchases, but it resulted in a spike in vehicle sales as purchases were pulled ahead from subsequent months. The decline in the sales rate immediately following the end of the program made it appear as if the recovery in vehicle sales might be stalling.
The second event that stands out clearly is the March 2011 earthquake in Japan. While it is difficult to calculate the earthquake’s precise impact on U.S. light vehicle sales, it is clear that the auto industry’s recovery was adversely affected by the supply disruptions that followed this disaster. Over time, however, this might have added to pent-up demand as consumers waited for product availability from their preferred manufacturers.
Even with these two outliers in the data, this auto sector recovery seems to track average past auto sector recoveries fairly closely for the 12 quarters following the bottom of the cycle.
The recent recovery of the U.S. auto industry has been good for the Seventh District for many reasons, but most notably for employment. Between December 2009 and March 2012, the District has seen a 2.9 percent increase in nonfarm payroll employment, compared with an increase of 2.7 percent nationally. Even better, the District has seen a 9.1 percent increase in manufacturing jobs, compared with an increase nationally of just 4.1 percent. In fact, the Seventh District has accounted for 38 percent of the entire nation’s manufacturing jobs added during this timeframe. And it looks like there may be potential for adding even more jobs in the Midwest if auto sales continue to rise.
The May 2012 Blue Chip consensus for U.S. light vehicles for calendar year 2012 now stands at 14.5 million units having been increased five times since bottoming in October of 2011 at 13.3 million units. That equates to a 1.2 million unit increase in the light vehicle sales forecast. And at 14.5 million units, this forecast is still 100,000 units below the industry’s performance year to date, which implies that there may be further upside potential for auto sales in the coming months. Next year looks even better— 2013 sales of light vehicles are now projected to be 14.9 million units.
This recent surge in sales appears to have taken some of the region’s auto producers by surprise. General Motors announced this week that it is increasing its U.S. light vehicle forecast for 2012 by 500,000 units, bringing its revised forecast up to 14.0 to 14.5 million units. Ford Motor Company’s expectations for this year seem to be even more optimistic, anticipating total sales of 14.5 to 15.0 million units. In fact, according to a recent article in the Financial Times, Ford plans to add 400,000 units of production capacity. However, its market share still might fall, because production increases are lagging demand. And Chrysler announced that it will not be observing its traditional two-week summer shutdown in four of its assembly plants, so that it can produce additional vehicles to address the increase in demand. This news from Chrysler is especially good for the District, which hosts three Chrysler assembly plants—two in Michigan, the Jefferson North Assembly Plant and Sterling Heights Assembly, and one in Belvedere, Illinois.
Even though the pace of this improvement seems to have come as somewhat of a surprise, there were indications that sales were getting ready to improve. As reported earlier this year by R. L. Polk, the average age of cars and trucks on U.S. roads hit a new record of 10.8 years on July 1, 2011. That is up from 10.6 years in 2010. Used vehicle prices have continued to increase, providing the consumer with added equity to use as a down payment at trade-in. Employment levels are slowly improving, helping to improve consumer sentiment, as measured by the University of Michigan’s Consumer Sentiment Index. In addition, Comerica Bank announced that vehicle affordability, as measured by vehicle price relative to median income, recently improved to its best reading since the third quarter of 2009. And finally, higher fuel prices might actually be working as an incentive for consumers to replace their less fuel-efficient vehicles with newer more fuel-efficient ones. So, all things considered, there may be more positive surprises in our future.
Posted by Testa at 9:59 AM | Comments (0)May 1, 2012
Recent Energy Price Movements in the Midwest
Households in the region and nationwide have been affected by rising motor fuel prices in recent months; this follows an earlier spike that took place in 2007–08. Such price spikes ordinarily pinch household incomes and spending on non-fuel items. However, at the same time, natural gas prices have been trending downward, thereby providing some relief to household budgets. This is especially true in the Midwest, where most homes are heated with natural gas that is piped in by utility companies. So, to what extent has the favorable trend in natural gas prices been offsetting the unfavorable trend in motor fuel prices?
The chart below displays prices paid by household consumers for both types of fuel[1]. Prices for both natural gas and gasoline have typically moved in tandem. In many instances, this is because the two fuels are substitutes in several important markets and uses. For example, if either petroleum products or natural gas can be used in applications such as heating industrial boilers or homes, the price of one could not easily fall out of line with the other. If it started to do so, consumers would switch to the cheaper product, thereby raising its price.
Sources: Bureau of Labor Statistics /Haver Analytics. Motor fuel price represents regular unleaded fuel as reported in the CPI-U.
However, in the near term, limits on infrastructure for either transporting fuel or using it can allow fuel prices to diverge. Beginning in 2009, petroleum prices began to climb, largely reflecting its scarcity on world markets. And so, motor fuel prices are up sharply “at the pump.” On the other hand, domestic natural gas tends to be more of a locally traded commodity with little ready adaptability for use in highway transportation. In addition, technological developments in on-shore natural gas production have meant that the available supply has been climbing rapidly. On-shore producers of natural gas have used a combination of hydraulic fracturing of gas trapped in shale rock formations, along with horizontal drilling techniques, to greatly expand U.S. natural gas production since 2005. As a result, natural gas prices “at the wellhead” have fallen to near-record lows in recent months. For instance, the spot market price at a well-known trading point called the “Henry Hub”[2] has fallen to close to $2 per thousand cubic feet, far below its average of $5 since 2008.
However, natural gas prices for home uses have not fallen nearly so steeply. That is because the price of home heating fuel reflects much more than the fuel price; it also reflects a sizable infrastructure of pipelines (and underground storage systems) that are necessary to deliver the fuel to far-flung residences. For all of 2011, the estimated price of natural gas delivered to residences averaged $10.80 per thousand cubic feet, which was well over 2.5 times the wellhead price.[3]
Falling prices for natural gas have been very welcome news to Midwest households, who have seen their home utility bills for natural gas edge downwards in recent years. In addition, due to abnormally mild temperatures this past winter, lower consumption of home heating fuel also helped to ease pressures on household budgets. Midwestern households rely on natural gas more than the national average, especially for home heating purposes. As of 2009, an estimated 72 percent of the region’s households received piped gas at their homes versus 57 percent for the rest of the U.S.[4]
However, average annual expenses for home heating do not approach annual expenses for motor fuel—even for midwesterners. At 2010 prices, for example, we estimate motor fuel expenditures to have been 3.2 times average expenses for residential natural gas in the broad Midwest region.[5] For this reason, the declines in residential gas prices since 2010 have not offset the rises in motor fuel. Yet, the boom in domestic production of natural gas, and its moderating effect on natural gas prices at the wellhead, have acted as a stablizing influence on household incomes in the region.
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[1]These data are drawn from the Consumer Price Index for all urban consumers nationally. Motor fuel prices represent prices for unleaded regular gasoline. Home heating fuel price reflects piped gas to residences.(Return to text)
[2]The Henry Hub is the pricing point for natural gas futures contracts traded on the New York Mercantile Exchange. (Return to text)
[3]www.eia.gov/naturalgas/monthly/pdf/table_03.pdf.(Return to text)
[4]Estimates derived from U.S. Dept. of Energy, Energy Information Administration (EIA), Fuel Use Survey, table HC1.9. Of those receiving piped gas, over 90 percent use it as their primary space-heating fuel. Due to continued production expansion of shale gas, the Energy Information Administration forecasts continued stable to falling home heating fuel prices in the years ahead. (Return to text)
[5]Per household, the 2010 figures average $2,019 for annual motor fuel and motor oil expenditures, $634 for residential heating. Residential energy expenditures (principally for home heat) are from EIA, State Price and Expenditure Database. Residential motor fuel prices, households, and consumption are from U.S. Department of Labor, Bureau of Labor Statistics, Consumer Expenditure Survey. The Midwest geography is here defined as the states of OH, MI, IN, WI, IL, MN, IA, MO, NE, ND, SD, and KS.(Return to text)
April 18, 2012
Manufacturing as Destiny, Part II
By Bill Testa
During a recent visit and tour of Racine, Wisconsin, and vicinity, I was reminded of the difficult challenges that face older manufacturing-oriented cities. It would be tough to find a place as steeped in manufacturing as the Racine area. As recently as 1969, over 40 percent of the Racine metropolitan area’s jobs were to found in the sector—double the national level. Since then, the Racine area’s experience has been similar to that of so many manufacturing-oriented places. Due primarily to job losses in the sector, manufacturing now represents only 20 percent of the Racine area work force, and this is still more than double today’s national average!
Forty years ago, with such a heavy orientation in manufacturing, it would have been risky indeed for Racine area leaders to neglect the needs of this sector and focus their full attention toward diversifying the local economy. Even today, Racine’s makers of household cleaning products, farm machinery, and hydraulic mechanisms used in marine craft remain a vibrant part of its economy.
So, over the years, Racine’s leaders have pursued a dual development strategy of maintaining the region’s manufacturing base to the extent possible, while also trying to shift gears to the growing services sectors of the economy, including residential living, tourism and recreation, and business and professional services. In particular, the region has, on the one hand, worked to rebuild its downtown and neighborhoods and develop its lakefront and riverfront with bikeways, beaches, downtown festivals, and marinas for pleasure boats. At the same time, it continued to pursue manufacturing and distribution through cleanup and environmental remediation of vacant industrial land, development of new industrial sites, aggressive work force training and education, and construction of viable overland transportation for moving freight and materials.
Driving around the City of Racine, one can clearly see the challenges to planning and redevelopment as they relate to region’s economic base and physical footprints. This area was built around manufacturing and heavy industry and has a legacy of neighborhoods with small houses where former factory workers resided and frequented neighborhood stores, meeting halls, churches, and taverns. The challenges lie in creating cohesive links between the parks and revitalized downtown across areas of older factory buildings, railway tracks, and busy highways carrying freight among still-working factory operations and warehouses. At the same time, new land to accommodate today’s spacious industrial development, such as warehousing and distribution, must be fashioned or reclaimed from a hodge-podge of small parcels of varied-use land. Mayors, county officials, town planners, and economic development officials have their hands full in Racine as they do in many towns of the Midwest.
The issues and lessons from such redevelopment efforts are currently being assessed by the Community Development and Policy Studies (CDPS) group at the Chicago Fed as part of their Industrial Cities Initiative (ICI). At the recent inaugural conference to discuss the ICI, I presented some statistical results which, I think, corroborate the sharp challenges of industrial cities such as Racine.
In our statistical analysis of 83 metropolitan areas (MSAs) located in the midwestern states from Iowa and Minnesota eastward to Ohio, we examined two main influences on MSA growth. We measure growth both as per capita income and separately by total jobs. Drawing on the large existing body of research, we demonstrate that an MSA’s initial “educational attainment of the adult work force” apparently exerts a strong influence on subsequent growth in jobs and income across MSAs. Educational attainment has been previously found to be influential for several reasons. For one, places with higher educational attainment have been better able to shift into new industries and occupations when their former mainstays (such as manufacturing) have declined. Further, new business start-ups and entrepreneurial activity appear to arise more easily among work force populations having higher education.
We also tested the degree to which MSAs with higher initial concentrations of manufacturing employment were more or less successful in their subsequent economic growth. What we found was that, even after accounting for the influence of educational attainment, a historical manufacturing orientation tended to depress subsequent growth. Moreover, the effects were long-lived. An MSA’s tendency to host manufacturing 20 years prior continued to depress overall economic growth. For example, we correlated MSA manufacturing concentration in 1969 with subsequent growth during 1990 to 2009 and found that the manufacturing legacy was a significant drag on economic growth and development for the much later period.
All things considered, the redevelopment achievements of many of our older manufacturing cities are remarkable.
Posted by Testa at 8:11 AM | Comments (0)