Detroit’s economic activity improved in March, According to New Index from the Chicago Fed
In the spring of 2017, the Federal Reserve Bank of Chicago published a Chicago Fed Letter article that introduced an index that was developed to track the economic activity in the city of Detroit. This new index was called the Detroit Economic Activity Index (DEAI), and it was also briefly discussed in an earlier Michigan Economy blog entry dated April 27, 2017. The DEAI uses 23 Detroit-specific data series to capture economic activity in four major categories: income, labor, real estate, and trade. The index is calibrated so that Detroit’s average historical economic trend growth equals zero and is measured in standard deviation units from this long-term trend. This means that an index value greater than zero implies that Detroit’s economic activity is growing faster than its trend and a value less than zero implies that the city’s economic activity is expanding below its trend. An extremely negative index value, such as those during the 2001 and 2008–09 recessions, would likely imply the city’s economy is contracting.
Detroit Economic Activity Index
According to the latest information from the Federal Reserve Bank of Chicago’s Detroit Economic Activity Index, Detroit’s economic activity grew faster than its historical average in March. The complete history of the index through March 2018 is shown below (chart 1).
Chart 1. Detroit Economic Activity Index (standard deviations from trend)
The March value of 1.02 is the index’s strongest reading since it debuted in April 2017, indicating an improved economic environment for Detroit following a slowing in the pace of economic activity in 2017. When Michigan’s contribution to the Chicago Fed’s Midwest Economy Index (MEI) is compared with the DEAI, it appears that Detroit’s economy was actually performing better than Michigan’s economy as a whole through the end of 2017 (chart 2).
Chart 2. DEAI & Michigan MEI (standard deviation from trend)
While this assessment based on the index readings is accurate, it is important to remember that these indexes are stated in standard deviations from trend and that relative to Michigan as a whole, Detroit was recovering from a much lower baseline, as the city endeavored to emerge from bankruptcy. The fact is that since 1997 the average economic growth rate for Detroit has been very close to zero. This can be seen more clearly when comparing Michigan’s gross state product (GSP) and Detroit’s estimated gross city product (GCP), both indexed to 1997 as the base year (chart 3). Over the past 20 years, Michigan’s economic output has increased just 13.9% and Detroit’s economy has only improved a meager 0.9% (both values have been adjusted for inflation). March marked the first month since August 2017 that all four categories that make up the DEAI made positive contributions to the index: income’s contribution came in at 0.03; real estate’s, at 0.04; trade’s, at 0.03; and most importantly, labor’s, at 0.91. Given that all four categories of the index provided positive contributions to the March DEAI, the question that needs to be addressed is what caused the DEAI to turn negative in December 2017.
Chart 3. Real economic output ($2009, index - 1997 = 100)
Labor’s contribution to the DEAI
A closer examination of the DEAI data points to the significant role that changes in labor played in both the January decline in the index and the February and March recovery that helped to push the index back into positive territory (chart 4).
Chart 4. Detroit Economic Activity Index (standard deviations from trend)
Data from the U.S. Bureau of Labor Statistics point to the fact that the seasonally adjusted number of employed persons living in the city of Detroit since the 2010 U.S. Census peaked in September 2017 at 226,400 and then began to decline through January 2018 before bottoming out at 223,300 employees. This decrease in employed residents contributed significantly to January’s negative DEAI value of –0.7, the index’s lowest level since October 2013. After January 2018, employment rose for two consecutive months, and so in March, employment was back up close to its September 2017 level. While the contributions from the other three categories look to be relatively minor, the overall improvement in the data for these categories has been significant, especially after Detroit exited bankruptcy in December 2014.
Real per capita income
A recovery in employment not only plays an important role in improving economic output; it also significantly supports income growth. Since the DEAI is constructed using a mixed-frequency model, annual observations for real per capita income (PCI), available through the U.S. Census Bureau, can be included in the calculation. While the city’s income data is released at a significant lag, it is still an important indicator of economic performance. The most current data for Detroit’s per capita income are only available through 2016. However, the model is capable of predicting low-frequency variables from the information gained from high-frequency data. In March 2017, the model was used to predict Detroit’s 2016 real per capita income: This forecast was $16,085. The actual number that was released a few months later was $16,784, which made the DEAI model’s forecast appear to be quite reasonable. Based on the most recent DEAI calibration, real per capita income for 2017 is projected to be $17,500, a 4.3% increase from the 2016 level. The Detroit’s projected real PCI compares unfavorably with the nation’s ($44,723) and Michigan’s ($40,165)—which were up 0.7% and 0.6%, respectively. While Detroit’s real PCI is lagging those of the U.S. and Michigan significantly, the rate of increase in recent years has been encouraging (chart 5).
Chart 5. Real per capita income ($2009 - percent change yr./yr.)
Detroit’s real estate market continues to improve
While it is true that prices for single-family homes in Detroit are still well below their housing bubble peak reached in 2003, their average was up an estimated 80% in March 2018 relative to December 2014. This is according to data provide by Realcomp, Michigan’s largest multiple listing service. As for commercial real estate, CoStar data indicates that the vacancy rate for commercial property in Detroit had fallen to 5.9% in the first quarter of 2018 from 9.1% in the fourth quarter of 2014. During the same time period, overall asking rent for non-office commercial properties increased by 47%—from $4.58 per square foot to $6.74 per square foot—and rent on office space increased 6.5%—from $16.03 per square foot to $17.07 per square foot.
Trade activity rebounds
One of Detroit’s most important characteristics is its location relative to Canada. Detroit is one of only a few spots in the continental U.S. where Canada is south of the U.S. border, and the city hosts one of the busiest ports in the United States given its proximity to Canada. Detroit currently has two tunnels and one bridge to Windsor, Canada, that are used to transport goods worth billions of dollars into and out of the nation. According to U.S. Census Bureau data, almost $150 billion in trade crossed through the Port of Detroit in 2017, up from just $98.1 billion in the 2009 (trade activity’s most recent trough at the port, reached during the Great Recession) (chart 6).
Chart 6. Detroit port activity
That said, the current level of trade activity is stretching the limits of Detroit’s current port capacity. This has created a need to construct a second bridge to Canada, which will raise the total number of border crossings between Detroit and Windsor to four. Construction on the Gordie Howe International Bridge is projected to begin this summer, and this bridge is planned to open as early as 2020. This project is expected to create thousands of construction and operational jobs in Detroit and Windsor.
While the DEAI is indicating that economic growth in Detroit has slowed from its 2017 peak, some solace can be taken from the fact that the index is predicting that 2018 will continue the city’s economic expansion that started back in 2011. Based on data through March 2018, Detroit’s economy is expected to grow by 0.7% in 2018, which would mark the eighth consecutive year of above-trend growth for the city. We will continue to track the Detroit economy with the DEAI and other tools, and report on the city’s progress regularly. Starting soon the DEAI will be accessible through the Federal Reserve Bank of Chicago’s website on the Data Releases page and here on the Michigan Economy blog. Readers will be able to see the DEAI together with other national and regional economic indexes produced by the Federal Reserve Bank of Chicago. Because the DEAI is a mixed-frequency model and much of the underlying data is not monthly, the DEAI will be updated quarterly and published together with a quarterly release. For more information on this and other economic indexes provided by the Federal Reserve Bank of Chicago, go to our website or contact Paul Traub at email@example.com.