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January 4, 2012

Midwest Outlook Workshop

By Thom Walstrum and Norman Wang

On December 1, 2011, a group of experts convened to discuss developments in the Midwest economy in 2011 and to look forward to 2012 and beyond. The forum drew upon a variety of perspectives, hosting researchers from across the Midwest and from government, academic, and private institutions. As the conversation progressed, themes began to emerge.

Data from 2011 give a picture of an economy that is recovering, but lacking the vigor needed to return quickly to full employment. The outlook for the Midwest economy for 2012 is more of the same: slow improvement.

Looking beyond the current business cycle, the Midwest will be challenged by the economic fundamentals of a manufacturing-based economy. So far, economic development policy remains disappointing in addressing the challenges of diversification and competitiveness.

Sophia Koropeckyj from Moody’s Analytics noted that growth in the first half of 2011 was accelerating, but that it had slowed in the second half. The tepid pace of recovery means that the rate of job growth remains below the rate of population growth. It may take until 2017 to return to full employment. Koropeckyj highlighted manufacturing employment because it is concentrated in the Midwest relative to the rest of the U.S. She saw growth in manufacturing jobs in 2011, but noted that total manufacturing employment is still far below its pre-recession peak. Exports from the Midwest overseas continue to grow, but with possible challenges from a weak European economy in 2012. However, growth in Asia and South America could provide a backstop.

Ernie Goss from Creighton University provided a perspective on the rural economy that focused on the Plains states. They are doing better than many other parts of the country, driven by a good year for farms and farm-related businesses. Revenues were high in 2011, creating a push for consolidation that is driving up farmland prices (possibly to “bubble” levels). Federal Reserve economist David Oppedahl noted that farmland prices in other Midwestern states to the east are a bit stronger than in the Plains states. Price growth for the most productive land has outpaced prices for less productive land because of reduced recreational demand. While the farming industry did well in 2011, sectors that do not participate directly in the international marketplace (for example, construction) are subject to the same malaise afflicting other parts of the country.

Beth Weigensberg from the University of Chicago’s Chapin Hall discussed the CWICstats Dashboard Report, a quarterly assessment of the economies of Chicago and Illinois. She saw unemployment rise for Chicago and Illinois in the first half of 2011 even as labor force participation fell. Total employment is still 5% below its December 2007 level. Like other Midwest employment sectors, manufacturing employment is slowly rising from a trough in late 2009; it is still 15% below its December 2007 level.

George Erickcek from the Upjohn Institute provided an outlook on Michigan’s economy. Michigan lost 410,000 jobs from December 2007 to the trough in June 2009. It has recovered 85,200 jobs since then. Erickcek estimates that 37,100 (39%) of the new jobs were created by the auto industry. He noted that there has been no structural change for Michigan’s economy over the course of the recent recession and recovery. The auto industry is as important as ever. Even as many call for diversification, the Great Recession does not seem to have pushed Michigan’s economy in that direction.

In the near term, Michigan’s continued reliance on the auto sector will continue to lift the state and other auto-intensive communities in the Midwest. However, the longer term prospects are not so sanguine. As manufacturing growth begins to level off, longer term trends suggest little new employment will be generated by the sector. Some observers are a little more optimistic about the longer term. Federal Reserve economist Bill Strauss argued that rising overseas costs may result in the return of some manufacturing jobs to the U.S.

However, Geoff Hewings from the University of Illinois presented a less optimistic outlook on the region’s longer term future, predicting that the Midwest would continue to underperform the rest of the U.S. in several areas. According to Hewings, the Midwest’s GDP is forecasted to grow by 1.7% annually, compared with the 2.4% annual growth rate forecasted for the U.S. from 2007 to 2040. Over the same period, employment is forecasted to grow annually by 0.5% for the Midwest and 0.7% for the U.S., and personal income is forecasted to grow annually by 1.7% for the Midwest and 2.8% for the U.S.

Additionally, Hewings highlighted several trends that have shaped the Midwest in recent years. States are becoming increasingly interconnected as they fragment and hollow out; typical establishments have lengthened their supply chains by sourcing from more plants for increasingly specialized components (fragmenting) and are now less dependent on sources of inputs and markets within the state (hollowing out). Hewings noted the outsized volume of intra-Midwest trade as evidence; Midwest export trade to other Midwest states in 2007 amounted to $450 billion. Such strong intra-region trade linkages generate benefits for the Midwest economy during good times, but they amplify job losses during downturns. During the latest recession, 1.78 million jobs were lost in just five Midwest states, representing 20% of the total jobs lost in the U.S.

The close intra-region trade linkages in the Midwest sparked discussion about the need for more thoughtful and concerted policy actions within the region. Midwest states continue to play “beggar-thy-neighbor,” by offering selective tax abatements to lure businesses. Given the cohesion of the regional economy, such policies may be counter-productive. In particular, investment in overland transportation infrastructure to compliment the region’s goods-oriented economy would be worthwhile. Such investments should be carefully planned and coordinated both within and across Midwest states.

Selected presentations from the forum can be found on the following website link.

Posted by Testa at January 4, 2012 12:38 PM

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