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APRIL 2000

Chicago Fed Letter
The Midwest in the
new millennium
With the economy entering the longest expansion of our nation’s history,
the Federal Reserve Bank of Chicago
invited economists from business, academia, and government to attend an
Economist Roundtable on February
11, 2000, focusing on the outlook for
the Midwest economy in 2000 and beyond. This Chicago Fed Letter summarizes
the workshop presentations on the
economic outlook for the region and
its states in 2000.
The Midwest economy in
the year ahead
The Midwest economy finished 1999
at a slightly slower growth pace than it
had shown earlier in the year. Midwest
employment had been rising by nearly
1.5% in the first half, then increased
at a slower 1.1% rate in the second half.
For the year, Midwest employment
grew by 1.3%, 0.7 percentage points
slower than in 1998, and lagged the
nation’s employment growth (2.2%)
for the fourth consecutive year. The
marked slowdown in the region’s employment growth four years ago coincided with its unemployment rate falling
to 4.6% in early 1996. By January 1998,
Midwest unemployment had broken
the 4% barrier; and it has remained
below 4% for the past two years. In
December 1999 the unemployment
rate in the Midwest was 3.4%.
While jobs in manufacturing continue
to disappear, the region’s share of
national manufacturing jobs has continued to rise, increasing by 0.3 percentage points during 1999. Some
manufacturing industries continued
to struggle, while others began to recover from challenges they have faced
over the past several years. The Asian
crisis had put pressure on electronic

equipment manufacturers, as computer chip prices fell sharply, and on
steel producers, as foreign imports
began to flood the U.S. market. During
1999 both of these industries began
to recover. Low commodity prices continued to hamper agricultural machinery manufacturers.
Consumer spending, which has supported the national economy, has also
been quite strong in the Midwest. High
consumer confidence—supported by
relatively low interest rates, a strong
stock market, and good home value
appreciation—has generated a spectacular housing market and a record
sales pace for light vehicles. One
challenge to continued growth the
region faces is an increasingly tight
labor market.
Housing market activity is expected to
slow in the coming year as the rising
mortgage rates during 1999 finally
have an impact. These higher rates
have also caused refinancing activity
to virtually come to a standstill. With
growth in real disposable personal
income moderating, stock price gains
abating, and interest rates not expected
to ease, the stage is set for a breather in
the pace of consumer spending during 2000. The auto industry is expected to do quite well in 2000, although
light vehicle sales are forecast to be
below the record 16.8 million level of
last year. Midwest employment growth
for 1999 was forecast at 1.3%, and that
is exactly what it averaged. The forecast for 2000 is for Seventh District
employment growth to continue to
moderate, increasing by only 0.9%
(see figure 1). This is likely to be
below the national level again, due to
a shortage of labor in the region.
The outlook for Illinois
Four economists from Illinois discussed state tax revenues and labor

1. Midwest non-farm employment

1999 a

2000 b

year over year % change


























Preliminary data from Bureau of Labor Statistics (BLS).
Forecast from Midwest Economist Roundtable participants.
Sources: BLS and Midwest Economist
Roundtable participants.

markets, while another discussed the
strength of the Chicago real estate
market. The economists noted that
the state was sound fiscally, with sales
and individual income tax revenue
growing and corporate tax revenue
falling from a year ago. Labor markets
were tight, though there were some
indications entering 2000 that they
might loosen.
A state government economist and a
university economist examined the
state budget. Nominal sales tax revenue
has been growing strongly and above
state projections, up 7% year-over-year
in the first six months of fiscal year
2000. A university economist pointed
out that was “as good as it has been for
a while.” Additionally, the government
economist noted that generally there
has been no great impact from Internet
commerce on sales tax revenues. Individual income tax revenue has been
growing, but that growth has slowed.
Nominal revenue was up 4% year-overyear in the first six months of fiscal year
2000, compared with 12% growth a year
and a half earlier. The university economist said that although much of the
slowdown was related to exceptional

capital gains in the earlier period, it
was still a cause for concern. Corporate tax revenue was down sharply
from a year earlier, but both economists agreed that the decline reflected a change in the corporate tax rate
on multi-state corporations from a
weighted formula involving property
values, wages, and sales to
a flat rate based on sales.
A labor economist from the state government reviewed the state labor markets. The unemployment rate stood
at 4.5% in the fourth quarter of 1999,
and in January 2000, the unemployment rate dipped to 4.1%, with many
people moving into full time jobs.
The economist viewed January
as an aberration and expected the
rate to return to higher levels before
long. Jobs in manufacturing continued to decline in 1999 and job growth
in construction was solid, but the
economist did not see that growth in
construction employment continuing
for very much longer. Overall employment growth for 2000 was forecast to
be 1.1%, but the economist noted
that figure could be on the high side.
He said that many employers were
beginning to report weaker demand
and may have to adjust their labor
forces accordingly.
A real estate economist from a large
university in the District referred to
the Chicago real estate market as the
best in the country. Chicago, with
office vacancy rates in the 2% to 3%
range and a rising core city population, was the one city with evidence
of a back-to-the-city trend in 1999.
This represents a tremendous turnaround from six years ago when owners were renting space in the Loop
at cost. The retail market was strong,
particularly the North Michigan
Avenue area, where a 25% increase
in rents translated into only a small
increase in vacancies. The market
for condominiums has been strong
as well. The economist expressed
some concern about the way some
private firms were underwriting large
mortgages across the country, noting
that their methods could lead to
problems if there is a downturn in
house prices.

The outlook for Michigan
Four representatives from Michigan
discussed the outlook for the state,
including economists from a state
agency, a retail trade association, a
research group, and an industrial
supplier with operations in the state.
Like the other states in the region,
Michigan had very tight labor markets
during 1999, causing concerns for
some employers. The strong economy
contributed to a good year for businesses, notably retailers.
All of the representatives from Michigan agreed that the tight labor markets
would constrict employment and overall growth for Michigan in 2000 and
2001. Employment grew by 1.1% in
1999 and was forecast to grow by 0.9%
in 2000 and 2001. Labor force growth
for the state was forecast to be 0.9% in
2000 and 1.0% in 2001, implying relatively flat unemployment rates for the
next two years. Employment growth in
1999 was stronger in some areas. For
example, a strong year for auto-related
industries pushed employment in west
Michigan up 2.4%. But, the area’s future dependence on the auto industry
is less certain, as many of the companies
that announced expansions or development plans in the area in 1999 are
not in the auto sector.
Tight labor markets affected the
Michigan economy in several ways.
The retail trade association representative presented anecdotal evidence
that retailers raised wages up to the
$7 to $10 per hour range in order to
compete for workers, which squeezed
some profit margins. Some employers
added other benefits to attract workers,
including money for college textbooks,
rides to and from work for opening
and closing shift workers, and flexible
work hours. One economist mentioned
that some of his industry contacts
started to report quality control problems as a result of increased use of
temporary workers. This issue could
be especially serious for manufacturers
working in a just-in-time environment.
Representatives reported that some
companies had to turn away potential
business because they did not have
the workers to get the job done. However, the representative from the

industrial supplier noted that his
company decided to increase employee hours rather than turn away work,
and as a result earnings were up 20%
to 30% in 1999.
The retail sector of Michigan’s economy had a strong year in 1999. Retailers reported strong holiday season
sales and very strong January sales,
which were probably boosted by the
announcement of record bonuses for
autoworkers. The retail sector continued to expand, with many of the “big
box” stores (such as Home Depot or
Menard’s) moving into smaller markets and many of the national pharmacy chains expanding their presence.
Retailers are concerned about the
timing of a possible downturn in the
economy, as well as the availability
of labor.
The outlook for Indiana
A university economist from the state
of Indiana discussed the outlook for
Indiana. In 1999, Indiana employers
continued to report labor shortages,
and the tight labor markets should
slow employment growth in the coming year. However, Indiana is one of
the few areas in the country where
manufacturing employment expanded. Two of the concerns that the economist raised were petroleum cost
increases and the differentials in productivity gains between large and
small companies.
The economist said that for the past
five years, employers have reported
labor shortages. The unemployment
rate in Indiana fell to 2.4% in 1999,
with some counties reporting rates
below 2.0%. The data showed that the
unemployment rate decline was a result of a declining labor force, but the
economist raised questions about the
data, saying that some of Indiana’s
benefits from migration were not reflected. The apparent effects of the
labor shortage were limited, however,
with few, if any, reports of upward
wage pressure. No businesses reported turning away work, because strong
productivity gains had offset labor
shortages. Manufacturing employment expanded in Indiana, due

largely to growth in automotive industry
jobs. Notably, Toyota expanded and
announced additional expansions of
facilities in Indiana. Overall employment growth in Indiana was forecast
to fall to 0.5% in 2000.
The economist reported several other
issues important to Indiana’s economic
outlook. Petroleum costs were rising,
which would increase the cost of moving goods and affect the financial
performance of Indiana’s trucking
companies; the boom in e-commerce
would only exacerbate those problems.
Finally, productivity gains seemed to
be taking place in only large companies. If the smaller firms fail to match
these productivity gains, they could
face problems competing.
The outlook for Wisconsin
Discussion about Wisconsin focused
mostly on labor markets issues. Representatives reported that employment
growth in Wisconsin was equal to or
slightly slower than the rest of the
nation. Labor shortages largely caused
the slower growth; however, representatives from Milwaukee did report
some pockets of excess labor supply.
A university economist noted that after
1998 the trend of Wisconsin’s employment growth fell below that of the rest
of the nation. One reason for the slowdown was a shortage of workers, but
another economist pointed to a change
in Wisconsin’s migration patterns. In
the early 1990s, population growth in
Wisconsin was strong because the
state’s below-average unemployment
rates attracted workers, but that dynamic evaporated in the last half of the
decade as the unemployment rate
differential shrank.
The unemployment rate in Wisconsin
was around 2% for much of 1999, resulting in hiring difficulties for most
industries. Hiring problems were made
more severe by the fact that Wisconsin
had one of the highest labor force participation rates in the nation. Growth in
service sector jobs in Wisconsin was
slower than the growth on the national level, and shortages were more pronounced for low-wage service jobs.
However, the economist wondered if

the data exaggerated the shortages
for low-wage jobs. In particular, were
workers who were joining the lowwage work force as part of Wisconsin’s
widely successful welfare-to-work program counted as social service workers because they were contracted out
through social agencies? Manufacturing employment in Wisconsin
contracted less than it did on the
national level. The economist noted
that the recovery abroad has helped
manufacturing activity in the state
and that the contraction in manufacturing employment should stop in
the coming year.
Two representatives from the city of
Milwaukee pointed out that the city’s
economy was not performing as well
as the rest of the state. Surveys of
people in the city revealed that large
numbers of people from inner-city
Milwaukee were looking for jobs but
could not find them, leading one
representative to conclude that in
some areas of the city the unemployment rate could be as high as 20%.
However, many of the problems associated with helping those workers to
find jobs require long-term solutions.
Representatives cited transportation
as one of the largest problems in
getting those people to jobs in the
suburbs, and initiatives to improve
transportation out to the suburbs
have failed thus far. City officials are
working to improve the city’s schools
in order to improve the skill sets of
those who live in the city. City officials
have also tried to lure businesses to
the downtown area. While their efforts
have yet to bear fruit, they continue
to talk about prospective developments for the area. One positive note
about the city’s economy is that property values increased strongly over
the past two years.
The outlook for Iowa
A government economist from Iowa
noted that the most important factor
in Iowa last year was the tight labor
market. While the lack of available
labor affected employment growth,
it was not necessarily leading to wage
pressure. Elsewhere in the Iowa
economy in 1999, the housing market

set another new record and farmland
values stabilized somewhat.
For the whole state, the unemployment
rate was 2.6% in 1999 and the monthly,
seasonally unadjusted jobless rate
dropped as low as 1.6%. Additionally,
90% of the working age population
(persons between 18 and 65 years old)
was employed in 1999. Tight labor markets led employment growth to slow, and
the economist forecast that employment
would increase 1.0% in 2000, compared with 2.5% in 1999. However, he
noted that the forecast might be high
because he did not think that there
would be enough workers to fill jobs.
These tight labor markets created a
“crisis of hiring” for employers in Iowa.
The economist spoke of fast food restaurants offering employees $7.50 per
hour with health and 401k benefits.
One firm was offering signing bonuses
as large as $25,000 to attract high-skilled
workers to fill some information technology positions. Employers were also
offering more promotions to retain
The tight labor markets led to higher
wages for low-wage workers, but did
not lead to higher wages on the high
end of the pay scale. In 1999, average
weekly earnings for wholesale workers
and service sector workers—traditionally low-wage jobs—increased 4.5% and

Michael 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.
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
Federal Reserve Bank of Chicago or the Federal
Reserve System. Articles may be reprinted if the
source is credited and the Research Department
is provided with copies of the reprints.
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6.5%, respectively. Overall average weekly earnings, however, only increased
1.5%, which the economist said gave
“virtually no indication of inflation.”
However, growth of wage-based personal income was stronger than weekly earnings growth, a sign that workers
were moving upward to higher paying
positions, while wages for each position
were relatively flat. The economist
forecast that wage-based income would
grow 7.5% in 2000 and 7.7% in 2001.
Indications from other economic activity in Iowa were mixed in 1999. Net
farm income was about $2.9 billion in
1999, down from $3.4 billion in 1998.
Emergency federal assistance added

about $610 million to income in 1999.
Farmland values were down only about
1% from 1998, as the emergency federal money caused renegotiations on
rent payments to stop and land values
to stabilize somewhat. The housing
market set a record for the second
year in a row; housing permit values
were up 0.1% from 1998. The economist suspected that the housing market would start to show the effects of
higher mortgage rates early in 2000.
The same old story

an issue that the region has been
struggling with for a number of years.
It appears that a tight labor market
will continue to be the key issue during the coming year. How an economy
expands while facing full employment
is one of those good problems that
the Midwest will hopefully be able to
adjust to.
—William A. Strauss
Senior economist and economic advisor
—Michael Munley
Associate economist

The Midwest’s major challenge during 1999 was the tight labor market,

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