SPECIAL ISSUE THE FEDERAL RESERVE BANK MAY 2001 OF CHICAGO NUMBER 165a

Chicago Fed Letter

Slower economic outlook have experienced only modest de- When the manufacturing sector ex- clines, the manufacturing sector’s periences a decline, the Midwest econ- for the Midwest declines are the type usually associat- omy tends to fall at a greater rate, With the U.S. economy apparently ed with a recession. However, it is not typically twice that of the national struggling to continue the longest clear that the weakness in the manu- economy. The manufacturing sector economic expansion of our nation’s facturing sector will spread to the appears to have peaked in September history, the Federal Reserve Bank of economy as a whole. of last year and has been declining since then. True to the region’s cycli- Chicago invited economists from While manufacturing has become a cal performance, more of the weakness business, academia, and government smaller part of the Midwest economy, to attend an Economist Roundtable has been reflected in the Midwest than it is still the key distinguishing sector in the nation as a whole. Between Sep- discussion on February 9, 2001, fo- when comparing the Midwest econo- tember 2000 and January 2001, man- cusing on the outlook for the Mid- my with other regions.1 Manufactur- west economy in 2001 and beyond. ufacturing employment fell by 0.8% ing jobs in the U.S. last year were just in the nation, compared with a 1.3% This Chicago Fed Letter summarizes the 0.2% higher than they were at the be- decline in the Midwest. Manufactur- workshop presentations on the eco- ginning of this expansion, but Mid- nomic outlook for the region and ing output has also taken more of a west manufacturing jobs increased hit here in the Midwest. Between Sep- the states in 2001. by 7.9% over the same period. This tember 2000 and January 2001, man- had the effect of allowing the Mid- ufacturing output declined by 2.0% Midwest economy more cyclical west’s share of the nation’s manufac- in the U.S., while Midwest manufac- turing jobs to rise from 17.6% in 1991 Early last year, the national economy turing output contracted by 3.7%, with to 18.9% last year. Since overall job grew at a white-hot pace, setting a much greater reductions taking place growth in the Midwest has been in- in the regional auto and steel sectors. record for the longest economic ex- creasing at a faster rate, manufactur- pansion in our nation’s history. Real ing jobs in the Midwest represent a The slowdown in other sectors has also gross domestic product (GDP) growth smaller share of total employment been more pronounced in the Mid- in the first quarter of 2000 was 4.8%, in the region. Manufacturing jobs west than in the nation. Construction faster than most economists consider in the Midwest represented 21.3% activity has been one area of the na- a sustainable pace of expansion. Light of all jobs in the region in 1991, but tional economy that has provided vehicle sales were 18.2 million units only 19.4% of all jobs in 2000. While strength in recent months, but while at a seasonally adjusted annual rate manufacturing job growth has been permits for new privately owned build- (saar), setting a quarterly record, and relatively modest over the current ings in the U.S. were up 9.6% from a housing starts were over 1.7 million expansion, output has grown by quite year earlier in January, they were up units (saar). The strong economic a bit. Manufacturing output was 58.9% only 2.3% in the Midwest. Nonmanu- pace continued into the second quar- higher in the nation last year compared facturing employment growth in the ter with real GDP growth rising to with 1991, while the Midwest’s out- region has been weaker than in the 5.6%. However, the economy’s growth put gain was a more striking 82.6%. rest of the country. Sharper increases weakened substantially as the year in jobless claims and unemployment came to a close. Real GDP growth was Part of the reason for the better per- rates (see figure 1) in the Midwest have 2.2% and 1.1%, respectively, in the formance of the manufacturing sector contributed to more dramatic declines third and fourth quarters. In large in the Midwest is that the region tends in consumer confidence in the region, part, the economic slowdown was to have more cyclical industries than and indications are that retail sales in due to a weakening manufacturing the nation. With less than one in five the Midwest have also been weaker sector, which struggled with slowing manufacturing jobs, the region pro- than in the rest of the country. production to match weakening de- duces just under half of all passenger mand. Inventories began to build cars, 30% of all light trucks, and nearly and production cuts accelerated as 40% of all the steel in the country. Midwest economy in the year ahead the year came to a close. While most These sectors tend to be very procycli- It is the slowing manufacturing sector sectors of the economy continue cal and the Midwest has been enjoying that will dictate the path of economic either to have slower growth or to the fruits of a ten-year-old expansion. growth for the Midwest in the coming year. While it appears that producers employment growth, leading the three with the labor economist, an econo- have been quite aggressive at reducing representatives from Illinois to declare mist from the state’s fiscal commis- production to control inventories, at that the state economy is in a slow- sion expects the unemployment rate the time of the writing of this article down. While one participant acknowl- to rise from 4.5% at the end of 2000 an apparent bottom has yet to be edged feeling “skittish” about the to just over 5% by the end of 2001. reached. Furthermore, the weakness economy and another predicted that in the Midwest manufacturing sector 2001 will be a “tight” year, none of does appear to have spilled over into the participants would say that Illinois other sectors of the regional economy, is entering a recession. An economist from a community re- contributing to weaker performance search institute in northeast Indiana in the housing market, retail sales, and One sign of weakness is the surge in presented the most pessimistic out- employment growth. Weak job growth layoffs late in 2000 and the beginning look at the roundtable. While the of 2001. Mass layoffs were up 50%, and weak retail sales threaten to put overall economy of Indiana is only state tax revenues below what many according to one government labor undergoing a slowdown, the econo- economist, which contributed to an state governments had expected. mist believes that the area equal, if not larger, increase in initial is in the early stages of a recession. The Economist Roundtable group unemployment claims. Initial unem- forecast that employment in the Mid- ployment claims by manufacturing The biggest signs of a recession for west will not show any growth this year workers were up 30%, while claims the area are increasing layoffs and and will remain at the levels of last by services workers (which includes plant closings. The Fort Wayne Office year. While each state is expected to temporary workers who might work of Workforce Development reported experience slower growth than last for manufacturers) jumped 80%. The that, at the end of December 2000, year, the two states that are more close- economist analyzed those claimants’ the numbers of new and continued ly linked with the cyclical vehicle man- reemployment during 2000. Of the unemployment claims were up 256% ufacturing industry are anticipated to claimants who had worked in the man- from a year ago. The economist not- experience job losses in 2001 compared ufacturing sector, 80%–85% had ed that, recently, numerous small with 2000. Both , with 6.4% found a job within six months. Of businesses have run out of money of its jobs in transportation manufac- those who had found a job, 75% were and just “put a padlock on the door,” turing, and Indiana, with 4.3% in that back working in the manufacturing often without giving employees any sector, are forecast to lose 0.3% and sector at about 90% of their former prior notice. The biggest drag on the 1.0% of their total jobs this year, re- wages. Remarkably, 30% of those who area has been a weak motor vehicle spectively (see figure 2). Employment had found employment again were industry, including slowing sales of in Illinois and is expected to grow older than 45, an age group that usual- light, commercial, and recreation by a modest 0.5% and 0.6%, respec- ly finds reemployment difficult. Of the vehicles (RVs). RVs are traditionally tively. is forecast to experi- claimants who had worked in the ser- a discretionary purchase, susceptible ence the largest employment growth vices sector, 75%–80% were back to to swings in economic activity; during for the region, rising by 1.0% in 2001. work in half a year, and 50% of those 2000 sales fell 26% nationwide as con- people were working in the services sumer wealth was eroded by a declin- ing stock market. One small town in Illinois sector with a 25% pay cut. In a sign of high demand for construction work- the area, where much of the economy Illinois ended 2000 with a rising ers, 15% of those claimants from the is fueled by two RV manufacturers and unemployment rate and declining services sector found new jobs in the one RV parts supplier, saw its unem- construction sector. ployment rate climb nearly 1 percent- age point during 2000. This was in 1. Unemployment rates Unemployment claims part due to layoffs occurring at those will probably continue percent plants, which led to the outright 4.6 to rise through 2001 closure of one plant in early 2001. as employment growth slows. The labor econo- The economist emphasized that north- 4.3 mist sees employment east Indiana is in a worse position than U.S. increasing 0.5% during the rest of the state, but that the state’s 4.0 2001. Growth in all sec- economy as a whole is also slowing. tors will be slower, but Employment in the Fort Wayne area services and construc- is expected to decline 1% to 2% over 3.7 2001, but employment for the whole Midwest tion jobs should contin- ue to expand while state would likely drop by only 0.5% 3.4 manufacturing jobs are to 1.5%. The state government ex- 1999 2000 2001 expected to decrease by pects revenues in 2001 to be roughly Source: Bureau of Labor Statistics. about 1%. Concurring equal to those in 2000. to the auto industry have weathered 2. Employment growth in Seventh District states the slowdown financially better than Employment growth rate Unemployment rate many analysts expected because they 1999 2000 2001 1999 2000 2001 have more flexibility in their employ- ment through use of temporary and year-over-year % change end of year, percent non-union labor. The paper industry, Illinois 1.0 1.2 0.5 4.2 4.5 5.1 with a presence in west Michigan, is in Indiana 1.8 1.4 –1.0 3.4 2.8 n.a. a “tremendous slowdown,” due in part Iowa 1.8 0.7 0.6 2.5 2.5 3.0 to overcapacity nationwide. As a result Michigan 1.6 2.2 –0.3 3.6 3.8 4.6 of weak conditions, one economist Wisconsin 2.4 1.9 0.1 3.2 3.3 n.a. noted that the purchasing managers Seventh District 1.6 1.6 0.0 3.6 3.7 n.a. index for West Michigan was plunging Note: n.a. indicates not available. to “horrible” levels. One bright spot is Sources: Actual data from the Bureau of Labor Statistics; forecasts (in bold) from Midwest that the office furniture industry con- Economist Roundtable participants. tinues to grow, but this sector tends to lag slowdowns in the rest of the econ- omy; and its rate of expansion will Iowa nation, and an overall economic probably halve from 9% in 2000 to Like Indiana, Iowa is showing signs slowdown will likely do little to about 5% in 2001. change that. The economist fore- of rising unemployment, slower em- Manufacturing employment will prob- casts that the unemployment rate ployment growth, and weak state gov- ably be the weak spot for Michigan’s ernment revenue growth. However, should rise from 2.5% at the end of 2000 and level off at 3.0% by mid- labor market going into 2001. The state according to the representative from government economist forecast a 4.5% year. However, the number of new Iowa, an economist with the state gov- decline in manufacturing jobs, mostly ernment, the state is not in a recession. jobs created will moderate. About 9,100 new jobs should be added in motor vehicles and other durable goods industries; but the other econo- The slowdown in Iowa might be simi- during 2001, an increase of 0.6% mist said that the decline probably will lar to those in other District states, over 2000. The economist expects a but it has been lagging the other similar growth rate for employment not be that large because many tempo- rary manufacturing workers are count- states. The economist reported that during 2002. the number of layoff notices and ed under business services. However, plant closings in Iowa only began to services employment is forecast to grow Michigan pick up around the end of 2000, a healthy 1.7%, as in 2000, so total wage whereas other District states reported Representatives from Michigan uni- and salary employment is forecast to similar conditions during the sum- versally forecast a slowdown in light fall 0.3% in 2001. The unemployment mer. Some of the layoffs have been vehicle sales, expecting sales during spreading from communities where 2001 to range from 15.5 million the labor markets could easily absorb units to 15.9 million, a decline of Michael H. Moskow, President; William C. Hunter, the displaced workers to communi- 7.6% to 10%. This would leave the Senior Vice President and Director of Research; Douglas ties where job conditions are not as state vulnerable to economic weak- Evanoff, Vice President, financial studies; Charles rosy. Among other signs of a slow- ness during 2001 but, according to Evans, Vice President, macroeconomic policy research; down, the number and dollar value an economist from a regional re- Daniel Sullivan, Vice President, microeconomic policy research; William Testa, Vice President, regional of housing permits fell during 2000 search group and a state government programs and Economics Editor; Helen O’D. Koshy, and retail sales in January 2001 were economist, continued expansion in Editor; Kathryn Moran, Associate Editor. down as well. These conditions con- the service economy should cushion Chicago Fed Letter is published monthly by the tributed to weak revenue growth for the blow to the overall state economy. Research Department of the Federal Reserve the state government. The govern- While one analyst acknowledged be- Bank of Chicago. The views expressed are the ment forecast for the current fiscal ing “concerned” about the economy, authors’ and are not necessarily those of the Federal Reserve Bank of Chicago or the Federal year had been for 3.5% growth in re- neither economist forecast a reces- Reserve System. Articles may be reprinted if the ceipts, but through the first half of sion for Michigan. source is credited and the Research Department is the fiscal year they were only up provided with copies of the reprints. Heading into 2001, manufacturing 0.2%. The economist noted that in conditions in Michigan looked Chicago Fed Letter is available without charge from light of this “troublesome” growth the Public Information Center, Federal Reserve bleak. The slowdown in vehicle figure, some legislators were looking Bank of Chicago, P.O. Box 834, Chicago, Illinois sales, which began in the second at in-line budget cuts for the current 60690-0834, tel. 312-322-5111 or fax 312-322-5515. half of 2000, led automakers to cut Chicago Fed Letter and other Bank publications are and next fiscal years. back production and lay off workers available on the World Wide Web at http:// Iowa’s labor markets have been among to control inventories. One repre- www.chicagofed.org. the tightest in the District, if not the sentative noted that parts suppliers ISSN 0895-0164 Chicago Fed Letter PRESORTED FIRST CLASS MAIL FEDERAL RESERVE BANK OF CHICAGO US POSTAGE PAID Public Information Center CHICAGO, IL P.O. Box 834 PERMIT 1942 Chicago, Illinois 60690-0834 (312) 322-5111

Return service requested

vance notice for layoffs larger than larger layoffs for notice vance

pect their state to enter a recession a enter to state their pect

continue. Wisconsin law requires ad- requires law Wisconsin continue.

Economist Roundtable said they ex- they said Roundtable Economist Wisconsin.

and layoffs at factories are likely to likely are factories at layoffs and

Illinois, Indiana, Iowa, Michigan and Michigan Iowa, Indiana, Illinois, ipants in the Chicago Fed’s recent Fed’s Chicago the in ipants

manufacturing sector “is in trouble” in “is sector manufacturing

of the Seventh Federal Reserve District Reserve Federal Seventh the of —

cycle. As such, the fact that no partic- no that fact the such, As cycle.

the economist, it appears that the that appears it economist, the

The Midwest is defined here as the states the as here defined is Midwest The

the rest of the country in the business the in country the of rest the 1

Among the negative news cited by cited news negative the Among

of the country, it also tends to lead to tends also it country, the of

cyclical industry sectors then the rest the then sectors industry cyclical are generally mixed across industries. across mixed generally are

Associate economist Associate tionally depends more heavily on heavily more depends tionally is not universally negative; conditions negative; universally not is

—Michael Munley —Michael Because the Midwest economy tradi- economy Midwest the Because cession, because the economic news economic the because cession,

slower rate of growth, but not in a re- a in not but growth, of rate slower

economic advisor economic

Conclusion

“choppy” and “scary” transition to a to transition “scary” and “choppy”

Senior economist and economist Senior

noted that the economy was in a in was economy the that noted

—William A. Strauss A. —William

to expanding a slight 0.3%. slight a expanding to A university economist from Wisconsin from economist university A

should range from being unchanged being from range should from manufacturing plants. manufacturing from

Wisconsin

these mixed conditions, employment conditions, mixed these kets absorb the newly laid-off workers laid-off newly the absorb kets

labor markets are still tight. Given tight. still are markets labor activity and how well the labor mar- labor the well how and activity

note, retail hiring remains robust, and robust, remains hiring retail note, the sharp decline in manufacturing in decline sharp the weak. be should

bigger than expected. On a positive a On expected. than bigger resistant the rest of the economy is to is economy the of rest the resistant growth income personal holds,

in capital expenditures have been have expenditures capital in much of the outlook depends on how on depends outlook the of much forecast market labor this If 2001.

office has been significant. Declines significant. been has office national economic outlook. However, outlook. economic national of end the at 4.8% to 2000 of end

50 workers or so, and activity in that in activity and so, or workers 50 in the coming year bodes well for the for well bodes year coming the in the at 3.7% from rise likely will rate