Manufactures ; Economic conditions - Middle West

Michael Munley

William A. Strauss

English

Research Papers in Economics

SPECIAL ISSUE THE FEDERAL RESERVE BANK MAY 2001
OF CHICAGO NUMBER 165a
Chicago Fed Letter
Slower economic outlook
for the Midwest
With the U.S. economy apparently
struggling to continue the longest
economic expansion of our nation’s
history, the Federal Reserve Bank of
Chicago invited economists from
business, academia, and government
to attend an Economist Roundtable
discussion on February 9, 2001, fo-
cusing on the outlook for the Mid-
west economy in 2001 and beyond.
This Chicago Fed Letter summarizes the
workshop presentations on the eco-
nomic outlook for the region and
the states in 2001.
Midwest economy more cyclical
Early last year, the national economy
grew at a white-hot pace, setting a
record for the longest economic ex-
pansion in our nation’s history. Real
gross domestic product (GDP) growth
in the first quarter of 2000 was 4.8%,
faster than most economists consider
a sustainable pace of expansion. Light
vehicle sales were 18.2 million units
at a seasonally adjusted annual rate
(saar), setting a quarterly record, and
housing starts were over 1.7 million
units (saar). The strong economic
pace continued into the second quar-
ter with real GDP growth rising to
5.6%. However, the economy’s growth
weakened substantially as the year
came to a close. Real GDP growth was
2.2% and 1.1%, respectively, in the
third and fourth quarters. In large
part, the economic slowdown was
due to a weakening manufacturing
sector, which struggled with slowing
production to match weakening de-
mand. Inventories began to build
and production cuts accelerated as
the year came to a close. While most
sectors of the economy continue
either to have slower growth or to
have experienced only modest de-
clines, the manufacturing sector’s
declines are the type usually associat-
ed with a recession. However, it is not
clear that the weakness in the manu-
facturing sector will spread to the
economy as a whole.
While manufacturing has become a
smaller part of the Midwest economy,
it is still the key distinguishing sector
when comparing the Midwest econo-
my with other regions.1 Manufactur-
ing jobs in the U.S. last year were just
0.2% higher than they were at the be-
ginning of this expansion, but Mid-
west manufacturing jobs increased
by 7.9% over the same period. This
had the effect of allowing the Mid-
west’s share of the nation’s manufac-
turing jobs to rise from 17.6% in 1991
to 18.9% last year. Since overall job
growth in the Midwest has been in-
creasing at a faster rate, manufactur-
ing jobs in the Midwest represent a
smaller share of total employment
in the region. Manufacturing jobs
in the Midwest represented 21.3%
of all jobs in the region in 1991, but
only 19.4% of all jobs in 2000. While
manufacturing job growth has been
relatively modest over the current
expansion, output has grown by quite
a bit. Manufacturing output was 58.9%
higher in the nation last year compared
with 1991, while the Midwest’s out-
put gain was a more striking 82.6%.
Part of the reason for the better per-
formance of the manufacturing sector
in the Midwest is that the region tends
to have more cyclical industries than
the nation. With less than one in five
manufacturing jobs, the region pro-
duces just under half of all passenger
cars, 30% of all light trucks, and nearly
40% of all the steel in the country.
These sectors tend to be very procycli-
cal and the Midwest has been enjoying
the fruits of a ten-year-old expansion.
When the manufacturing sector ex-
periences a decline, the Midwest econ-
omy tends to fall at a greater rate,
typically twice that of the national
economy. The manufacturing sector
appears to have peaked in September
of last year and has been declining
since then. True to the region’s cycli-
cal performance, more of the weakness
has been reflected in the Midwest than
in the nation as a whole. Between Sep-
tember 2000 and January 2001, man-
ufacturing employment fell by 0.8%
in the nation, compared with a 1.3%
decline in the Midwest. Manufactur-
ing output has also taken more of a
hit here in the Midwest. Between Sep-
tember 2000 and January 2001, man-
ufacturing output declined by 2.0%
in the U.S., while Midwest manufac-
turing output contracted by 3.7%, with
much greater reductions taking place
in the regional auto and steel sectors.
The slowdown in other sectors has also
been more pronounced in the Mid-
west than in the nation. Construction
activity has been one area of the na-
tional economy that has provided
strength in recent months, but while
permits for new privately owned build-
ings in the U.S. were up 9.6% from a
year earlier in January, they were up
only 2.3% in the Midwest. Nonmanu-
facturing employment growth in the
region has been weaker than in the
rest of the country. Sharper increases
in jobless claims and unemployment
rates (see figure 1) in the Midwest have
contributed to more dramatic declines
in consumer confidence in the region,
and indications are that retail sales in
the Midwest have also been weaker
than in the rest of the country.
Midwest economy in the year ahead
It is the slowing manufacturing sector
that will dictate the path of economic
growth for the Midwest in the comingyear. While it appears that producers
have been quite aggressive at reducing
production to control inventories, at
the time of the writing of this article
an apparent bottom has yet to be
reached. Furthermore, the weakness
in the Midwest manufacturing sector
does appear to have spilled over into
other sectors of the regional economy,
contributing to weaker performance
in the housing market, retail sales, and
employment growth. Weak job growth
and weak retail sales threaten to put
state tax revenues below what many
state governments had expected.
The Economist Roundtable group
forecast that employment in the Mid-
west will not show any growth this year
and will remain at the levels of last
year. While each state is expected to
experience slower growth than last
year, the two states that are more close-
ly linked with the cyclical vehicle man-
ufacturing industry are anticipated to
experience job losses in 2001 compared
with 2000. Both Michigan, with 6.4%
of its jobs in transportation manufac-
turing, and Indiana, with 4.3% in that
sector, are forecast to lose 0.3% and
1.0% of their total jobs this year, re-
spectively (see figure 2). Employment
in Illinois and Iowa is expected to grow
by a modest 0.5% and 0.6%, respec-
tively. Wisconsin is forecast to experi-
ence the largest employment growth
for the region, rising by 1.0% in 2001.
Illinois
Illinois ended 2000 with a rising
unemployment rate and declining
employment growth, leading the three
representatives from Illinois to declare
that the state economy is in a slow-
down. While one participant acknowl-
edged feeling “skittish” about the
economy and another predicted that
2001 will be a “tight” year, none of
the participants would say that Illinois
is entering a recession.
One sign of weakness is the surge in
layoffs late in 2000 and the beginning
of 2001. Mass layoffs were up 50%,
according to one government labor
economist, which contributed to an
equal, if not larger, increase in initial
unemployment claims. Initial unem-
ployment claims by manufacturing
workers were up 30%, while claims
by services workers (which includes
temporary workers who might work
for manufacturers) jumped 80%. The
economist analyzed those claimants’
reemployment during 2000. Of the
claimants who had worked in the man-
ufacturing sector, 80%–85% had
found a job within six months. Of
those who had found a job, 75% were
back working in the manufacturing
sector at about 90% of their former
wages. Remarkably, 30% of those who
had found employment again were
older than 45, an age group that usual-
ly finds reemployment difficult. Of the
claimants who had worked in the ser-
vices sector, 75%–80% were back to
work in half a year, and 50% of those
people were working in the services
sector with a 25% pay cut. In a sign
of high demand for construction work-
ers, 15% of those claimants from the
services sector found new jobs in the
construction sector.
Unemployment claims
will probably continue
to rise through 2001
as employment growth
slows. The labor econo-
mist sees employment
increasing 0.5% during
2001. Growth in all sec-
tors will be slower, but
services and construc-
tion jobs should contin-
ue to expand while
manufacturing jobs are
expected to decrease by
about 1%. Concurring
with the labor economist, an econo-
mist from the state’s fiscal commis-
sion expects the unemployment rate
to rise from 4.5% at the end of 2000
to just over 5% by the end of 2001.
Indiana
An economist from a community re-
search institute in northeast Indiana
presented the most pessimistic out-
look at the roundtable. While the
overall economy of Indiana is only
undergoing a slowdown, the econo-
mist believes that the Fort Wayne area
is in the early stages of a recession.
The biggest signs of a recession for
the area are increasing layoffs and
plant closings. The Fort Wayne Office
of Workforce Development reported
that, at the end of December 2000,
the numbers of new and continued
unemployment claims were up 256%
from a year ago. The economist not-
ed that, recently, numerous small
businesses have run out of money
and just “put a padlock on the door,”
often without giving employees any
prior notice. The biggest drag on the
area has been a weak motor vehicle
industry, including slowing sales of
light, commercial, and recreation
vehicles (RVs). RVs are traditionally
a discretionary purchase, susceptible
to swings in economic activity; during
2000 sales fell 26% nationwide as con-
sumer wealth was eroded by a declin-
ing stock market. One small town in
the area, where much of the economy
is fueled by two RV manufacturers and
one RV parts supplier, saw its unem-
ployment rate climb nearly 1 percent-
age point during 2000. This was in
part due to layoffs occurring at those
plants, which led to the outright
closure of one plant in early 2001.
The economist emphasized that north-
east Indiana is in a worse position than
the rest of the state, but that the state’s
economy as a whole is also slowing.
Employment in the Fort Wayne area
is expected to decline 1% to 2% over
2001, but employment for the whole
state would likely drop by only 0.5%
to 1.5%. The state government ex-
pects revenues in 2001 to be roughly
equal to those in 2000.
percent
Source: Bureau of Labor Statistics.
1. Unemployment rates
1999 2000 2001
3.4
3.7
4.0
4.3
4.6
U.S.
MidwestMichael H. Moskow, President; William C. Hunter,
Senior Vice President and Director of Research;  Douglas
Evanoff, Vice President, financial studies; Charles
Evans, Vice President, macroeconomic policy research;
Daniel Sullivan, Vice President, microeconomic policy
research;  William Testa, Vice President, regional
programs and Economics Editor; Helen O’D. Koshy,
Editor; Kathryn Moran, Associate Editor.
Chicago Fed Letter is published monthly by the
Research Department of the Federal Reserve
Bank of Chicago.  The views expressed are the
authors’ and are not necessarily those of the
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Reserve System. Articles may be reprinted if the
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ISSN 0895-0164
Iowa
Like Indiana, Iowa is showing signs
of rising unemployment, slower em-
ployment growth, and weak state gov-
ernment revenue growth. However,
according to the representative from
Iowa, an economist with the state gov-
ernment, the state is not in a recession.
The slowdown in Iowa might be simi-
lar to those in other District states,
but it has been lagging the other
states. The economist reported that
the number of layoff notices and
plant closings in Iowa only began to
pick up around the end of 2000,
whereas other District states reported
similar conditions during the sum-
mer. Some of the layoffs have been
spreading from communities where
the labor markets could easily absorb
the displaced workers to communi-
ties where job conditions are not as
rosy. Among other signs of a slow-
down, the number and dollar value
of housing permits fell during 2000
and retail sales in January 2001 were
down as well. These conditions con-
tributed to weak revenue growth for
the state government. The govern-
ment forecast for the current fiscal
year had been for 3.5% growth in re-
ceipts, but through the first half of
the fiscal year they were only up
0.2%. The economist noted that in
light of this “troublesome” growth
figure, some legislators were looking
at in-line budget cuts for the current
and next fiscal years.
Iowa’s labor markets have been among
the tightest in the District, if not the
nation, and an overall economic
slowdown will likely do little to
change that. The economist fore-
casts that the unemployment rate
should rise from 2.5% at the end of
2000 and level off at 3.0% by mid-
year. However, the number of new
jobs created will moderate. About
9,100 new jobs should be added
during 2001, an increase of 0.6%
over 2000. The economist expects a
similar growth rate for employment
during 2002.
Michigan
Representatives from Michigan uni-
versally forecast a slowdown in light
vehicle sales, expecting sales during
2001 to range from 15.5 million
units to 15.9 million, a decline of
7.6% to 10%. This would leave the
state vulnerable to economic weak-
ness during 2001 but, according to
an economist from a regional re-
search group and a state government
economist, continued expansion in
the service economy should cushion
the blow to the overall state economy.
While one analyst acknowledged be-
ing “concerned” about the economy,
neither economist forecast a reces-
sion for Michigan.
Heading into 2001, manufacturing
conditions in Michigan looked
bleak. The slowdown in vehicle
sales, which began in the second
half of 2000, led automakers to cut
back production and lay off workers
to control inventories. One repre-
sentative noted that parts suppliers
to the auto industry have weathered
the slowdown financially better than
many analysts expected because they
have more flexibility in their employ-
ment through use of temporary and
non-union labor. The paper industry,
with a presence in west Michigan, is in
a “tremendous slowdown,” due in part
to overcapacity nationwide. As a result
of weak conditions, one economist
noted that the purchasing managers
index for West Michigan was plunging
to “horrible” levels. One bright spot is
that the office furniture industry con-
tinues to grow, but this sector tends to
lag slowdowns in the rest of the econ-
omy; and its rate of expansion will
probably halve from 9% in 2000 to
about 5% in 2001.
Manufacturing employment will prob-
ably be the weak spot for Michigan’s
labor market going into 2001. The state
government economist forecast a 4.5%
decline in manufacturing jobs, mostly
in motor vehicles and other durable
goods industries; but the other econo-
mist said that the decline probably will
not be that large because many tempo-
rary manufacturing workers are count-
ed under business services. However,
services employment is forecast to grow
a healthy 1.7%, as in 2000, so total wage
and salary employment is forecast to
fall 0.3% in 2001. The unemployment
2. Employment growth in Seventh District states
Employment growth rate Unemployment rate
1999 2000 2001 1999 2000 2001
year-over-year % change end of year, percent
Illinois 1.0 1.2 0.5 4.2 4.5 5.1
Indiana 1.8 1.4 –1.0 3.4 2.8 n.a.
Iowa 1.8 0.7 0.6 2.5 2.5 3.0
Michigan 1.6 2.2 –0.3 3.6 3.8 4.6
Wisconsin 2.4 1.9 0.1 3.2 3.3 n.a.
Seventh District 1.6 1.6 0.0 3.6 3.7 n.a.
Note: n.a. indicates not available.
Sources: Actual data from the Bureau of Labor Statistics; forecasts (in bold) from Midwest
Economist Roundtable participants.P
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rate will likely rise from 3.7% at the
end of 2000 to 4.8% at the end of
2001. If this labor market forecast
holds, personal income growth
should be weak.
Wisconsin
A university economist from Wisconsin
noted that the economy was in a
“choppy” and “scary” transition to a
slower rate of growth, but not in a re-
cession, because the economic news
is not universally negative; conditions
are generally mixed across industries.
Among the negative news cited by
the economist, it appears that the
manufacturing sector “is in trouble”
and layoffs at factories are likely to
continue. Wisconsin law requires ad-
vance notice for layoffs larger than
50 workers or so, and activity in that
office has been significant. Declines
in capital expenditures have been
bigger than expected. On a positive
note, retail hiring remains robust, and
labor markets are still tight. Given
these mixed conditions, employment
should range from being unchanged
to expanding a slight 0.3%.
Conclusion
Because the Midwest economy tradi-
tionally depends more heavily on
cyclical industry sectors then the rest
of the country, it also tends to lead
the rest of the country in the business
cycle. As such, the fact that no partic-
ipants in the Chicago Fed’s recent
Economist Roundtable said they ex-
pect their state to enter a recession
1The Midwest is defined here as the states
of the Seventh Federal Reserve District—
Illinois, Indiana, Iowa, Michigan and
Wisconsin.
in the coming year bodes well for the
national economic outlook. However,
much of the outlook depends on how
resistant the rest of the economy is to
the sharp decline in manufacturing
activity and how well the labor mar-
kets absorb the newly laid-off workers
from manufacturing plants.
—William A. Strauss
Senior economist and
economic advisor
—Michael Munley
Associate economist

Slower economic outlook for the Midwest

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Slower economic outlook for the Midwest

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