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Midwest’s Economy To Remain Lethargic 

The transition from a manufacturing based to service-based economy has yet to take hold.

Interview by Rachel Duran

Editor’s Note: To learn the most up-to-date data as to the state of the economy, visit The Conference Board at www.conference-board.org.

In the Midwest United States, a transition that began long before the recession has thus far failed to pay off in a big way in regard to growth in employment, population and income. The region continues to diversify from its legacy in manufacturing, not just in the assembly of automobiles but in other manufacturing activities as well.

Compounding the economic stagnation is a core service sector that trails other parts of the country. The weak spots are too many to mention says Ken Goldstein an economist with The Conference Board. Naturally, there are exceptions. Discover what is in store for the economies of the Midwest and the United States as we head into the summer months.

Global Corporate Xpansion: The Conference Board has issued a report that says wage growth between 2008 and 2010 was the weakest since the 1960s. What can we expect in the coming years?

Ken Goldstein: We are now approaching the third anniversary of the end of the Great Recession. This three-year period has been one where the economy has been recovering but is also underperforming.

One of the things that corporations in general did during the recession and during the financial crisis was to reduce their overall costs, most important of which was labor. The period of reducing labor costs by large-scale layoffs has ended.

Where we have been since then is a period of slowly rebuilding overall workforce numbers. Businesses have been cautious both in terms of adding to employment counts and in terms of increasing wages.

Even now, it is not crystal clear if the business and demand will be there to pay the higher costs that come from hiring more people and increasing wages.

In fact, employment growth and wage growth will not return to anything that we used to think of as “normal growth” in at least the next half decade.

GCX: What role does the Midwest play in all of this?

Goldstein: Just to put a line underneath that, the overall national income growth, year over year, was 3.7 percent. The Bureau of Economic Analysis found income growth in the Great Lakes region was only 3 percent. And in the Plains States, spanning Missouri to the Dakotas, income growth was 3.5 percent.

The Midwest was the weakest part of the economy before we hit the recession. It is not surprising that years after the recession, and with an overall economy not performing greatly, we are back to a period of time where the slowest growth will be in the Great Lakes region and the upper Plains States.

GCX: What is behind this slow growth? Is it tied to the ailing manufacturing sector?

Goldstein: Clearly these states have been trying. Ohio, Michigan, Illinois and to a lesser extent, Indiana, have struggled to make the transition from a manufacturing base, not just in automobiles but also in small appliances. That is the process that began long before the recession, and one that is still going on. It has yet to pay off in a big way in employment growth, population growth, and even in terms of income growth.

Suppose the U.S. economy started to grow at a 3 percent or 3.5 percent rate of growth. It would increase growth in employment, in population and in wages in the Midwest; but it would still be the weakest part of the U.S. economy. More than likely we will see 2 percent to 2.5 percent GDP growth, which means continued sluggish growth in the Midwest’s manufacturing and core services sector. Core services lag behind the rest of the country as much as a full half percent, which is a big differential.

That is not to say that things are weak across the board. There are some parts of the Midwest that are indeed doing well. For instance, in the western part of North Dakota, you might think you are in Wyoming — people out there are asking “what recession?” The gas field finds have greatly opened up job opportunities in western North Dakota. For a small state, an increase in energy workers makes it look like a big deal.

The weak spots in the Midwest? Too many to mention, which includes Illinois, Missouri, Michigan and Ohio. They are all improving but at a slower pace than almost anywhere else in the country.

Minnesota is doing the best of all the states in this big region. What that suggests is that Minnesota is further along in this transition to services, perhaps not as tied to manufacturing as say Wisconsin, Illinois and Ohio.

The weak spots in the Midwest? Too many to mention, which includes Illinois, Missouri, Michigan and Ohio. They are all improving but at a slower pace than almost anywhere else in the country.

GCX: Moving to the nation’s economic outlook, what do the latest indicators illustrate?

Goldstein: In the next three months to six months, the economy will continue a slow recovery. Housing should pick up a little bit.

We will remain well below a 3 percent rate of GDP growth, not generating on average more than 200,000 jobs a month. And that improvement in jobs does not mean an improvement in wages for many folks.

In fact, in a report from the U.S. Commerce Department, the average income for the average American family, adjusting for inflation, is not much higher than it was 30 years ago.

In regard to consumer confidence, it is better than it was two years ago, but it is still well below where one would expect to see it three years after the end of a recession.

GCX: What can we expect at the state and local levels for the remainder of the year in regard to austerity measures?

Goldstein: With a huge caveat, it looks as if this three and four year cycle of austerity at the state and local public sectors is beginning to wind down.

On the other side of the ledger, the overall improvements in the economy have improved revenues so that these budgets are more in balance now — meaning they do not have to cut as much as they have been cutting.

However, they will still see declines in property tax revenues going forward. The reason? Home prices in many parts of the Great Lakes and upper Plains States are down 20 percent to 40 percent. Only now are tax assessments catching up with those lower home values, therefore, it will likely lead to a reduction in property tax revenues.

The bigger issue is how much the federal government is going to cut and how much of that will affect state and local budgets. Therefore, how much will it exacerbate what is happening at the state and local levels? We will not see any action before the election. And it depends on who wins, not just at the presidential level, but also at the congressional level, and what types of agreements they will arrive at in terms of the federal budget.

Austerity at the federal level is coming and likely to have an impact at the state and local levels. What we don’t know is how soon it will bite; and how much of a bite it will represent at the state and local levels.

Ken Goldstein is an economist with The Conference Board, and can be reached by e-mailing ken.goldstein@conference-board.org. The Conference Board is a global, independent business membership and research association working in the public interest. The board’s unique mission is to provide the world’s leading organizations with the practical knowledge they need to improve their performance and better serve society. The Conference Board is a non-advocacy, not-for-profit entity holding 501(c)(3) tax-exempt status in the United States. Among its services, the organization publishes information and analysis, makes economics-based forecasts and assesses trends. To learn more, visit www.conference-board.org.

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