Detroit Economic Growth Continued to Improve in June After Unprecedented Decline to Start the Second Quarter, According to Chicago Fed Index
The Chicago Fed’s Detroit Economic Activity Index (DEAI) was +6.30 in June 2020, up from +0.42 in the previous month. For the entire second quarter, the DEAI value was –8.67.1 The index values for April, May, and June of this year are displayed in figure 1. Also featured are visual representations of the contributions from the index’s four major categories: income, labor, real estate, and trade. An index value greater than zero points to the city of Detroit’s economic activity growing faster than trend, while an index value less than zero points to the city’s economic activity growing slower than trend. The DEAI’s value in June 2020 reflects improvements in labor and trade data following the sudden and severe impact of the Covid-19 pandemic on the city’s monthly economic activity—which started in March and worsened significantly in April. The DEAI’s June 2020 value set a new record high, surpassing the index’s second-highest level recorded in July 2009 (+0.48), just after the Great Recession. The June 2020 DEAI value captures the rebound in economic activity following the devastating effects of the onset of the Covid-19 virus.
Figure 1. Detroit Economic Activity Index, by category, 2020:Q2 (standard deviations from trend)
Detroit’s economic growth started out positive in 2020, with monthly DEAI values in January (+0.12) and February (+0.01) that were above trend; but by March (–0.10) the index suggested that the city’s economic activity had already begun to decline below its long-run trend. In April, the decline continued and dramatically accelerated: Detroit experienced a severe drop in its economic activity, as additional businesses closed to help minimize the spread of the Covid-19 virus. This was reflected in the DEAI plunging to an unprecedented low of –14.92 in April. In May, economic activity in the city started to recover as businesses reopened their doors, resulting in above-trend growth for the city and a positive value for the index (+0.42). Economic activity continued to improve in April, resulting in a record high DEAI value in June (+6.30). The strongly positive DEAI value for June suggests just how severely economic activity was disrupted in April, but the improvements in economic activity in June only partially reversed the declines in earlier months.
To clarify what transpired in the second quarter of 2020, I present in table 1 the numerical value of the contribution from each of the index’s four major categories to the DEAI for the month and quarter.
Table 1. Contributions to the Detroit Economic Activity Index, 2020:Q2
|Category||June 2020||May 2020||April 2020||2020:Q2|
The contribution to the DEAI from the income category—consisting almost entirely of annual data—does not tend to change significantly on a monthly basis. We will learn considerably more about the impact the pandemic had on this category when the data are updated next year. The DEAI model has the income category making a very small contribution, which rounds to zero, in each of the three months and for the second quarter of 2020 as a whole.
The real estate category made a positive contribution to the DEAI (+0.01) for the second quarter of 2020 overall. This was based mainly on the strength of rising sales prices for single-family homes (+17.8%) and condominiums (+1.1%) over the quarter.
After making negative contributions to the DEAI in April (–0.71) and May (–0.02), the trade category made a solid positive contribution in June (+0.61). However, that increase was not enough to take this category’s contribution to the DEAI out of negative territory for the second quarter of 2020 as a whole (–0.27). This negative quarterly contribution to the index is due to the significant declines in imports (–35% on an inflation- and seasonally adjusted basis) and exports (–42%) in the second quarter of 2020 from the first quarter.
Finally, the labor category’s extremely negative contribution to the DEAI for the second quarter of 2020 (–8.42) reflects a decline of 28.7% in the number of employed individuals in April, which helped to push the city’s unemployment rate to 45.3% for the month. Many workers returned to their jobs in May and June as businesses reopened, but employment was still 28.4% and 18.8% below its year-ago levels, respectively. For the second quarter, the number of employed individuals was down 25.4% on a year-over-year basis and the unemployment rate averaged 39.9%. These readings indicate there is still a lot of improvement needed in the labor market before Detroit’s overall economic activity can return to pre-pandemic levels. In order to achieve a full recovery in economic activity before the end of next year, the city will need to continue to experience above-trend economic growth well into 2021.2
The September 2020 DEAI release (covering the third quarter of 2020) will be posted on December 3, 2020. The most recent DEAI results and future release dates can be found on the DEAI page of the Federal Reserve Bank of Chicago website. A copy of the June DEAI release can be found here.
1 The quarterly and annual averages we report for the DEAI are not “simple” averages, but instead “triangle” averages of the monthly values. For growth rate measures like the DEAI, the triangle average best approximates a quarterly or annual growth rate from monthly growth rates. It gets its name from the tent-line nature of weights applied to current and past values in the averaging process. A simple average weights current and past values equally, while a triangle average has weights that peak in the recent past and are equally spaced going backward and forward in time from the peak (e.g., Q2-20 growth = (1/3)*Jun-20 + (2/3)*May-20 + (1)*Apr-20 + (2/3)*Mar-20 + (1/3)*Feb-20 growth rates). The negative quarterly DEAI value implies that Detroit’s economic activity did not expand enough in May and June to offset the unprecedented decline in April (–14.92).
2 The labor-related values referenced in this paragraph have all been seasonally adjusted, and they have also been adjusted for breaks in their time series resulting from the decennial censuses.