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APRIL 1999

Chicago Fed Letter
What’s ahead for the
Midwest economy?
A gainst the backdrop o f the current
econom ic expansion entering its
ninth year, the F ed eral Reserve Bank
o f C hicago invited econom ists from
business, academ ia, an d governm ent
to attend an E con om ist W orkshop on
February 5, 1999, focusin g on the out­
look fo r the Midwest econom y in 1999
an d beyon d.1This Chicago Fed Letter
sum m arizes the w orkshop p resen ta­
tions on the econ om ic outlook fo r the
Midwest region an d its states in 1999.
T he Midwest econom y
in the year ahead
T he Midwest econom y finished 1998
at a slightly slower growth pace than it
had shown earlier in the year. Midwest
em ploym ent h ad been rising by nearly
2% in the first half, then in creased at
a 1.5% in the second half. For the year,
Midwest em ploym ent grew by 1.7%,
0.1 p ercen tage points slower than in
1997, an d lagged the n atio n ’s em ploy­
m ent growth fo r the third consecutive
year. T he n atio n ’s em ploym ent base
expanded 2.6% in 1998, although, like
the Midwest, it experienced a slower
pace o f growth in the secon d half. The
m arked slowdown in the re gio n ’s
em ploym ent growth three years ago
coin cid ed with its unem ploym ent rate
falling to 4.6% in early 1996. By January
1998, Midwest unem ploym ent had
broken the 4% barrier; it rem ained
below 4% for the entire year, finishing
at 3.7%.
T he re gio n ’s share o f national m an u­
facturing jo b s rose to ju st u n d er 19%,
up 1.4 p ercen tage points fro m the
begin n in g o f the curren t expansion.
While alm ost 15% o f all jo b s n ation ­
wide were in m anufacturing, the share
o f total em ploym ent in m anufacturing
in the Midwest was ju st over 20%.

Several m an ufacturin g industries in
the Midwest faced great challenges
d uring 1998. T he Asian crisis put
pressure on electronic equ ipm en t
m anufacturers, as co m pu ter chip
prices fell sharply. Foreign steel p ro ­
ducers sharply increased their exports,
dou blin g the U.S. m arket share held
by im ported steel from 20% to 40%.
This steel “d u m p in g ” caused severe
cutbacks an d layoffs am o n g dom estic
steel produ cers an d pu sh ed several
sm all firm s into bankruptcy. In ad d i­
tion, low com m odity prices lowered
farm incom es an d hurt dem an d for
agricultural machinery.
T he stron g con sum er sp en d in g that
has su p p orted the national econom y
has also been quite stron g in the M id­
west. H igh con sum er co n fiden ce—
supported by low interest rates, a strong
stock m arket, an d good hom e value
appreciation— has generated a spec­
tacular housing m arket and a fairly
steady sales pace for light vehicles.
A ccording to an econom ist from a
m ajor C hicago bank, econ om ic con di­
tions in the Midwest will rem ain rela­
tively robust. O ne ch allen ge the
region faces is an increasingly tight
labor market. However, this is helping
to offset the difficulties associated
with the dow nturn in the region al
steel industry.
H ousing m arket activity is expected to
continue at record highs; the regional
housing m arket skyrocketed in the
last quarter o f 1998. R efinancing ac­
tivity was stron g for m ost of1 9 9 8 , and
reached new highs in O ctober and
D ecem ber. This econom ist expects to
see con sum er loan activity increase.
T h ere are tradeoffs between refi­
nance activity an d credit usage, so as
refinance activity begin s to soften, the
econom ist expects to see a pickup in
credit card usage.

T he blizzard that hit the Midwest over
New Year caused som e disruptions in
produ ction activity in January, particu­
larly in the vehicle industry, but the
industry is expected to recou p this
lost produ ction very quickly. While
the vehicle industry is p rodu cin g at
astoundingly high levels, significant
growth above this output level is not
Midwest em ploym ent growth is fo re­
cast at 1.3% in 1999 an d 1.1% in 2000.
T his is likely to be below the national
level, as has been the case for the past
several years, due to a shortage o f labor
in the region. T he Midwest has not
been experien cin g a lot o f m igration
o f workers from oth er parts o f the
country. T he unem ploym ent rate for
the Midwest states will likely fall fro m
3.7% in D ecem ber 1998 to 3.5% by
the end o f 1999.
T he outlook fo r Illinois
An econom ist fro m the Illinois state
governm ent n oted that lab or m arket
con dition s vary quite a bit across the
state. In south ern Illinois, at least six
firm s in the steel industry laid o ff a
significant n um ber o f workers in the
third and fourth quarters o f 1998. With
a continuing build-up o f dem an d for
lab or in oth er areas o f the state, the
laid-off workers m ust decide whether
it is worth moving or com m utin g great
distances to obtain em ploym ent. It is
not yet clear how this dynam ic will
play out.
For the past five years, Illin ois’s un em ­
ploym ent rate has been below the
n ation ’s— a situation that last occurred
in the early 1970s. T he econom ist
pointed out that a com m ercially gen er­
ated forecast shows state unem ploy­
m ent in creasing to 4.7% during 1999.
Em ploym ent growth in the state is
expected to increase by 1.3% in 1999,

un derp erfo rm in g national em ploy­
m ent growth. T he key em ploym ent
sector that ben efited fro m Illinois jo b
growth in 1998 was financial services.
This econom ist doesn ’t expect that sec­
tor to show the sam e level o f strength in
1999. T he tran sportation sector also
did well in 1998 (trucking an d ware­
housing), in large part due to the
strong con sum er sector an d the large
n um ber o f new hom es bein g built.
T he m anufacturing sector had declin­
ing employment for the last five months
o f 1998 an d is expected to continue
to struggle in 1999.

an d J. I. Case. While these com panies
have red uced em ploym ent, they are
p rod u cin g m ore, due to the use
o f robotics an d just-in-time inventory
systems. A lthough this industry is the
m ost volatile in the state, driven by
ch an ges in agriculture, it currently
has the ability to w eather a sustained
downturn. T he large inventories that
farm im plem ent dealers all over the
state had in 1983 are lon g gone. Cus­
tom ers buy their equ ipm en t from cat­
alogs, an d only used equ ipm en t sits
in the fields. T he industry’s inventory
to sales ratio has fallen from over 4.5:1
in 1983 to 1:1 currently.

T he outlook fo r Iowa

T he chem ical sector has diversified,
expan din g its production from mostly
agricultural chem icals to pharm aceuti­
cals and agricultural byproducts, such
as lycene and corn an d soybean deriva­
tives for nonagricultural purposes.

A governm ent econom ist from Iowa
m entioned that the state’s recent elec­
tion o f a D em ocratic governor, follow­
ing two R epublican governors who
each served abo u t 15 years, was only
one o f the many ch an ges underway in
the state. O ne o f the biggest issues
that the state has to address is the finan­
cial m arkets’ im pact on foreign pur­
ch ases o f Iow a’s products. Iow a’s
econom y is two-pronged, with very
large shares o f em ploym ent an d in­
com e gen erated by agriculture and
m anufacturing. T here is also a hybrid
o f m anufacturing—farm m achinery
an d equ ip m en t—that sells to agricul­
ture. As a result, in the 1980s Iowa
experien ced a capital goo d s reces­
sion follow ed by an export-driven re­
cession that was double-bottom ed and
lasted for six years. Farm land, which
is a large equity h oldin g o f farm ers,
lost 66% o f its value; an d Iowa lost a
third o f its car d ealersh ips an d banks
an d h alf o f its farm im plem ent d ealer­
ships. A lthough Iowa has recovered,
farm lan d values are still not as high
as at the peak in 1980.
T o what extent are falling com m odity
prices (especially h og prices) p o r­
ten din g a repeat o f the 1980s in Iowa?
This econom ist n oted that the struc­
ture o f Iow a’s m ainstay industries has
u n d ergo n e significant ch an ges since
the early 1980s. For exam ple, between
1983 an d 1997, the em ploym ent o f the
group that sells to agriculture dropped
by 33%, representing em ploym ent cut­
backs by John Deere, Massey Ferguson,

T he sector that buys fro m agriculture
has shown the m ost growth in Iowa
co m p ared with the rest o f the nation.
This is a sector that Iowa w ould like
to develop even m ore. While Iowa is
bein g un dersold in the grain m arkets
by countries that it used to sell to, such
as C hina an d Argentina, it can take
advantage o f opportun ities in valuea d d ed products, e.g., by exportin g
corn syrup instead o f corn an d tofu
instead o f soybeans. N onetheless, this
econom ist expects a large n um ber of
peop le to leave agriculture, coupled
with a loss o f incom e in the agricul­
ture sector over a sustained period.
Although farm incom es have declined,
they rem ain at levels they have aver­
aged over the past 15 years. Farm ers
m ade a large am oun t o f capital goo d s
purch ases in 1997 an d early 1998 an d
the agricultural equ ipm en t m arket is
expected to rem ain weak during 1999
an d 2000. However, this slowdown
co u ld n ’t happen at a better time given
the em ploym ent situation. U nem ploy­
m ent rates in Iowa averaged 2.6% in
1998, the third year in a row o f u n d er
3% unem ploym ent.
As Iowa continues to lose popu lation
in rural areas, m ore public capital ex­
penditures may be shifted to the cities.
However, unlike M innesota which has
stop p ed trying to h old back the tide

o f population outflow from rural areas,
Iowa has attem pted to retain p op u la­
tion in rural areas. Iowa has one o f the
oldest state popu lation s in the nation
and it probably won’t be too long before
deaths exceed births.
H ousin g construction is expected to
slow som ew hat in 1999, largely due to
a lab or shortage. In 1998, building
perm its growth reach ed an all-time
high o f 39% , su p p orted by low m ort­
gage rates.
With the lowest unem ploym ent rates
in the region, Iow a’s em ploym ent
growth is forecast to be ju st 0.5% in
1999 an d 0.25% in 2000. N om inal
incom e, which grew at 3.8% during
1998, is expected to increase to 6.25%
for both 1999 an d 2000.
T he outlook fo r Indiana
A university econ om ist presen ted the
outlook for the Indian a economy.
While the Indiana econom y continued
to operate at relatively high output
levels with the secon d lowest u n em ­
ploym ent rate in the region, em ploy­
m ent is only expected to grow by 1.0%
for 1999. Personal incom e in Indian a
is an ticipated to grow at a very slow
1.5% this year.
T he m an ufacturin g sector is very im ­
portan t to the Indian a econom y. T he
state has the highest con cen tration o f
m an ufacturin g workers in the region,
accoun ting fo r over 23% o f the state’s
total work force. M anufacturing in gen ­
eral finished 1998 on a weaker note
than it began an d the dom estic steel
sector could be categorized as being
in a recession. T he problem s facing
the steel industry affect Indian a m ore
than any oth er state in the region,
since In dian a produ ces roughly 25%
o f all the steel p rod u ced in the U.S.
T he state has been struggling to m ain­
tain its relative econom ic position over
the past 20 years. C o m pared with the
nation, Indian a has continuously lost
share o f output an d popu lation over
this period, with the only exception
bein g the early 1990s, when it picked
up relative to the nation (largely b e ­
cause C alifornia was doin g so poorly
at that tim e).

This econom ist felt that, to a large ex­
tent, the housing m arket b o o m can be
attributed to a ph en o m en on referred
to as clim ax housing. People are build­
ing or buying the house that represents
the peak house that they are going to
own. Som e are even buying into larger
houses than necessary an d viewing it
as an investm ent. Given the low m ort­
gage rates, it is believed that m ore con­
sum ers are viewing purchasing a house
as a way o f diversifying their investment
T he outlook fo r Michigan
An econom ist from the M ichigan state
governm ent analyzed the state o f the
M ichigan economy. T he vehicle indus­
try continues to be very im portan t
for Michigan. Vehicle ownership per
household continued to grow in 1998.
Ligh t truck sales are approach in g 50%
o f total light vehicle (cars an d light
trucks) m arket sales. C onsum ers love
trucks. With low gasoline prices, im age
im provem ent for trucks, an d high re­
sidual values, the p urch asin g trend
toward trucks will likely continue in
1999. T he pricing environm ent for
vehicles rem ains very competitive. New
vehicle sales continue to be quite
im pressive, especially this late in an
expansion. D ecem ber 1998 new vehi­
cle sales were the stron gest m onthly
sales in over 12 years. New vehicle sales
have been above trend since 1994. With
the an ticipated slower gross dom estic
prod u ct growth in 1999, vehicles sales
are also expected to m oderate in 1999
to average 15.0 m illion units, and then
hold steady at that sales level in 2000.
This slower pace o f econ om ic growth
for M ichigan will be reflected by a
slowing in person al incom e growth
from 3.9% in 1999 to 3.4% in 2000.
M ich igan ’s unem ploym ent rate is ex­
pected to rem ain relatively low, aver­
agin g 3.7% during 1999 an d rising to
4.1% in 2000. Employment in Michigan
is forecast to increase by 1.8% in 1999
an d then rise by a slower 1.2% in 2000.
M anufacturing em ploym ent growth is
expected to increase by 0.2% in 1999
an d then fall by 1.2% in 2000. Private
n on m anu factu rin g jo b growth in

M ichigan is expected to increase
by 2.6% in 1999 an d slow to 2.1%
in 2000.
T h e h ou sin g m arket has gen erally
b een very robust in M ichigan. Al­
th ough there are som e weak pockets,
even the city o f Detroit, which had
been very slow for a lon g time, has
shown som e significant gains in hous­
ing prices in the last few years.
M anufacturing em ploym ent has been
losing its share o f total em ploym ent
in the state over the years. In 1969
m an ufacturin g jo b s represen ted a
third o f all workers, in 1977 it had
fallen to 28% , an d in 1997 it reach ed
19%. Most o f the new em ploym ent
opportunities are in small firms. O ut­
put is still considered pretty sensitive
to national econom ic growth, but be­
cause o f all the capital spen din g to
im prove productivity, ch an ges in em ­
ploym ent are probably not as sensitive
to competitive pressure as in the past.
T he outlook fo r W isconsin
An econom ist from a m anufacturing
firm in W isconsin presen ted the ou t­
look for the Wisconsin economy. The
W isconsin econom y con tin u ed to
operate at full output levels in 1998.
T he tight lab or m arkets have been a
restraining factor on ou tpu t growth.
At this econom ist’s company, the bluecollar work force has been very stable,
but there has been m ore noticeable
turnover am o n g the white-collar
workers. O bserving that the parking
lots at sh o ppin g m alls con tin ue to be
full, this econom ist would have ex­
pected that this late in the expansion
consum ers would have purchased
everything they wanted.
T he outlook fo r the W isconsin econ ­
omy is for con tin u ed growth at slower
rates than the rest o f the nation, with
lab or m arkets rem aining quite tight.
This econom ist does expect a slight
dow nturn in the econom y within
the next two years. T he curren t ex­
pan sion has gon e on so long, this
econom ist feels that a dow nturn is
due to occur.

T he outlook fo r the Midwest econom y
in 1999 is for slower growth than the
rest o f the nation, as the region strug­
gles with tight lab or m arkets. This has
probably been the m ost restraining fac­
tor fo r growth in the Midwest. Full em ­
ploym ent has been a bittersweet issue
for the region. It has brought significant
challenges for individual states, reflected
by the econom ists’ presentations at the
w orkshop, to ensure con tin u ed eco­
nom ic growth with such low unem ploy­
m ent rates. As the rest o f the country
continues to move toward the Midwest’s
unem ploym ent rates, this is a them e
that m ost certainly will be ech oed across
the nation.
—W illiam Strauss
The workshop was organized by William
Strauss, with valuable assistance from
William A. T esta and Keith Motycka.
The Midwest is defined as the states of
the Seventh Federal Reserve District—
Illinois, Iowa, Indiana, M ichigan, and
W iscon sin .

Michael H. Moskow, President; William C. Hunter,
Senior Vice President and Director ofResearch; Douglas
Evanoff, Vice President, financial studies; Charles
Evans, Vice President, macroeconomic policy research;
Daniel Sullivan, VioePresident, microeconomic policy
research; William Testa, Vice President, regional
programs and economics editor; Helen O ’D. Koshy,
Chicago Fed Letter is published monthly by the
Research Department o f the Federal Reserve
Bank o f Chicago. The views expressed are the
authors’ and are not necessarily those o f 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 o f the reprints.
Chicago Fed Letter is available without charge from
the Public Information Center, Federal Reserve
Bank o f Chicago, P.O. Box 834, Chicago, Illinois
60690-0834, tel. 312-322-5111 or fax 312-322-5515.
Chicago Fed Letter and other Bank publications are
available on the World Wide Web at h ttp ://
ISSN 0895-0164

Tracking Midwest m anufacturing activity
Purchasing managers’ surveys (production index)

M anufacturing o utput indexes




Month ago

---------------------------------------- 1
---------------------------------------- 1
---------------------------------------- 1

Year ago




M otor vehicle production
(millions, seasonally adj. annual rate)

Month ago

Year ago





Light trucks




P urchasing m anagers’ surveys:
n et % re p o rtin g pro d u ctio n growth

Month ago




Year ago





T he Chicago Fed Midwest M anufacturing Index (CFMMI) decreased 0.2% from
D ecem ber 1998 to January 1999. In com parison, the Federal Reserve B o ard ’s
Industrial Production Index for m anufacturing (IP) increased 0.1% in January
1999 from D ecem ber 1998. Light truck production increased slightly from 6.8
m illion units in January to 6.9 million units in February an d car production de­
clined from 5.6 m illion units in January to 5.4 million units in February.
T he Midwest purch asin g m an ag ers’ com posite in d ex (a w eighted average o f
the Chicago, Detroit, an d Milwaukee surveys) fo r produ ction in creased to
54.7% in February from 50.4% in January. T he purch asin g m an ag ers’ index
in creased in all three surveys. T he national p urch asin g m an ag ers’ survey for
produ ction also in creased from 53.1% in January to 56.9% in February.

Sources: The Chicago Fed Midwest Manufactur­
ing Index (CFMMI) is a composite index of 16
industries, based on monthly hours worked and
kilowatt hours. IP represents the Federal Re­
serve Board’s Industrial Production Index for
the U.S. manufacturing sector. Autos and light
trucks are measured in annualized units, using
seasonal adjustments developed by the Board.
The purchasing managers’ survey data for the
Midwest are weighted averages of the seasonal­
ly adjusted production components from the
Chicago, Detroit, and Milwaukee Purchasing
M anagers’ Association surveys, with assistance
from Bishop Associates, Comerica, and the
University of Wisconsin-Milwaukee.



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Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102