Outside the Box: Factory jobs are again shrinking in industrial Midwestern states

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Manufacturing firms added about 1.4 million jobs in the U.S. from the low point of Great Recession. Now growth is slowing — and in some key Midwestern states, the number of factory jobs is actually declining.

Why this is happening, and what it means for the U.S. economy is both important and likely different from past recessions. This is significant because a deep economic downturn affecting just one region may have broad political effects, but there are few policy tools available to address a geographically isolated downturn. Our economic policy tool kit is made for a national, not regional, recession.

A good rule of thumb is that about half the economic losses of a recession are in consumer durable goods, construction, and new business plant and equipment. These manufactured goods are typically products consumers and businesses can defer purchasing, so succumb first to expectations about an economic slowdown.

The most sensitive manufacturing sectors are those that produce items whose purchase can be delayed until better economic times. Textbook examples of these sectors are cars and trucks, fleet vehicles, recreational vehicles, washer, dryers and other appliances, as well as business equipment. The production of many of these items, especially cars, trucks and RVs, are clustered in the industrialized Midwest states of Wisconsin, Michigan, Ohio, Indiana and Illinois.

Manufacturing employment across the Midwest is now in decline. The two most manufacturing-intensive states in the nation, Wisconsin and Indiana, both have fewer factory jobs than at this point in 2018. Both Michigan and Ohio are six months into decline, and have fewer jobs than at the end of 2018. Only Illinois experienced factory job growth in 2019, and is up 400 jobs over the start of the year.

These states are ground zero in a trade war that has reduced the demand for steel and autos and led to a crushing, nearly 17% collapse in recreation vehicle sales this year.

Overall employment across the region is more stable. Only Indiana saw total employment down from the same month last year. Wisconsin and Ohio are close behind, with modest job losses since the start of the year. Both Michigan and Illinois are growing slowly over the year.

Though it may not be a formal recession, these states are almost certain to feel employment and income losses equivalent to a modest recession, say like in 1990-1991 or 2001.

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Nationally, industrial production remains beneath the low-2018 levels. Historically, declining factory demand of this magnitude would be widely seen as a direct evidence of recession. Still, most economists, myself included, forecast modest economic growth through 2019 and into 2020. While this may be due to broad fiscal stimulus and a now-reactive Federal Reserve, there is likely more at work.

We are now observing a de-linking of the highly volatile construction and manufacturing production from the overall economy. Indeed the period from the early 1980s through today is referred to as the Great Moderation of the business cycle. With the notable exception of the Great Recession, the swings in the business cycle have been more modest, and less frequent than in the early postwar years. From 1950 to 1985, we experienced seven recessions; from 1985 to today, only three.

This Great Moderation likely has many causes, including better policy responses. But it is also likely that the shrinking importance of highly volatile factory and construction jobs play a role. In our last large factory-led recession, in 1981, we had 18.7 million factory works and 4.3 million construction jobs. Together, they comprised a full 25% of the nation’s workers.

Today, we have 7.5 million construction jobs and 12.8 million factory workers, who comprise only 13.4% of the nation’s workforce. Total employment in the U.S. rose from 91.5 million to over 151.5 million today. The U.S. remains a formidable job-creating engine, but factory employment remains on its decades-long decline as a share of total jobs.

The shrinking link between the manufacturing sector and national economic health is an important trend for both rates of growth and volatility. Manufacturing firms can adopt much more automation and process-related growth than can other sectors. While this has stalled for a few years, productivity growth among U.S. factories is more robust than in the economy as a whole.

But the shrinking importance of manufacturing means slower but less volatile growth. Demand for factory goods are more volatile than in service-sector jobs. You can defer the purchase of an RV or new car in a recession, but not an appendectomy or third grade. The regional variation in employment growth largely bolsters that view. The slowing economy in the U.S. is isolated to states and even regions that are heavy with industrial production.

The U.S. might well dodge a formal recession this and next year, even as factory production and employment languish. If this slowdown remains geographically isolated, the U.S. can muddle through 2020 adding jobs at a modest rate.

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This of course, won’t matter if you live in Kenosha, Wis., Toledo, Ohio, or Flint, Mich. No one there is waiting on a formal definition of recession to know that employment is down, employed workers have shorter hours, and an economic slump has descended on the region once again.

Michael J. Hicks is the George and Frances Ball distinguished professor of economics and the director of the Center for Business and Economic Research at Ball State University in Muncie, Ind. Follow him on Twitter @HicksCBER.

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