Indiana Manufacturing After the Recession

June 16, 2010

For release Tuesday noon June 15 and thereafter (726 words)

Recessions are characterized by their length and severity. The average number of months from high to low in recent business cycles was 10 months. With respect to the current recession, however, the economy seems to have taken 18 months to start its recovery. U.S. output declined by about four percent from its high in 2007, and overall employment declined by six percent. In Indiana, employment declined by eight percent.

In general, recessions have been getting shorter and milder with recovery periods getting longer. This recession has been uncharacteristically long and deep. Will its expansionary recovery period defy generalizations and be mercifully short?
 
Some doubt that a recovery has even taken hold. Dr. Art Laffer warned recently in the Wall Street Journal that the economic is likely to turn south again. That would make this recession “W” shaped. Dr. Laffer argues that the purported recovery may be due to taxpayers accelerating the receipt of income and bonuses. If that is true, national income will again decline as Bush-administration tax cuts on dividends, capital gains and inheritance are phased out. 

Long or short, deep or mild, economies inevitably climb out of recession. Forced to relocate, couples agree to sell homes at a loss. Others accept lower salaries and less desirable positions. Those, having earned their last paycheck, come to term with reduced retirement balances. Orders for machine tools remain low but begin to increase. Markets begin to clear. Recession havoc wrecked on social well-being begins to stabilize.

Ultimately, long-term economic potential and the “new normal” rate of unemployment become more important than the recession. Will the economy return to a sustainable growth rate exceeding two percent? Will the unemployment rate ever again hover around five percent? New health, financial, tax and environmental regulations will certainly have long-term effects on one or the other or both of these indicators. (It is too early to determine, for example, the net effect on employment as medical coverage is extended to employee children up to age 26.)

Closer to home, we see that manufacturing, still a significant sector of the Indiana economy, tends to be pro-cyclical. This means that as U.S. output increases (declines), Indiana’s output will increase (decline) by a greater amount.  Because Indiana’s employment for decades has been more concentrated in manufacturing than in any other state, the reduction of wage levels in this sector may be temporary. As recently as 2003, the average weekly pay in Indiana’s manufacturing sector was still 36 percent above that in its non-manufacturing industries. This was in spite of an overall reduction in manufacturing in the state and nation.

The issue of how to retain Indiana’s manufacturing advantage is addressed in “What Indiana Makes, Makes Indiana,” a report prepared by Thomas P. Miller and Associates under contract to the Central Indiana Corporate Partnership. The report, written in 2005 prior to the recession, is relevant because it analyzes how jobs on the factory floor must be recreated into manufacturing support positions. The story about Indiana’s manufacturing, then, coming out of the recession, will deal with the continual decline in the number of workers needed to produce an additional unit of output but also with the increased need for technicians and mid-level manufacturing positions.

Public policy does not “grow” the economy or “create” jobs. Although public-private partnerships are appropriate in some instances, these partnerships exhibit great potential for moral hazard and poor decision-making. To survive in a crisis, private firms often need to pull out of these agreements shifting costs to the public at large. At its best, public policy limits itself to removing the barriers to investment in capital, research and development and while providing education, training and infrastructure.

The Miller report is cautious about anyone’s ability to select industrial winners. It does, however, identify potential manufacturing opportunities competing with existing technologies. These are likely to be in the areas of advanced energy technology, advanced environment technology services, advanced materials, coating technologies, product software and in nanotechnology (controlling matter on an atomic and molecular scale). Virtually all of these represent extensions or spin-offs from the existing body of knowledge and practice in Indiana’s mainstream manufacturing.

So manufacturing in Indiana is down but not out. From processing ducks in Milford to rolling steel in Gary, there remains a large group of people in the state who enjoy being associated in some way with a good product.

Maryann O. Keating, Ph.D., a South Bend resident and adjunct scholar of the Indiana Policy Review Foundation, is co-author of Microeconomics for Public Managers, Wiley/Blackwell, 2009.



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