Academic journal article Chicago Fed Letter

Is Midwest Manufacturing at a Crossroads?

Academic journal article Chicago Fed Letter

Is Midwest Manufacturing at a Crossroads?

Article excerpt

Is the recent weak performance of manufacturing transitory or does it reflect a sustained structural change? A recent Chicago Fed conference assessed the challenges facing U.S. manufacturing and how the sector is adapting to an increasingly competitive global marketplace.

Is Midwest manufacturing at a "crossroads," or merely experiencing a "bump in the road?" On September 30, 2003, over 100 leaders from the public and private sectors attended the first in a series of conferences, part of the Federal Reserve Bank of Chicago's Midwest Manufacturing Project, on the current landscape of manufacturing in the Midwest. The conference addressed whether the recent weakness in manufacturing is attributable to transitory factors, such as an investment overhang from the late 1990s, worldwide economic weakness, and a high-valued dollar, or is the result of a structural change, whereby domestic production activities will accelerate their migration overseas.

In his welcoming remarks, Chicago Fed President Michael H. Moskow explained that by one measure, personal income generated by manufacturing, the Midwest is 44% more dependent on manufacturing than the rest of the nation. Thus, the recent weak performance of manufacturing is a matter of some concern for the region. National manufacturing employment ended each of the past five years lower than the previous year, and has declined for 39 consecutive months.

It is important, said Moskow, to answer this question: Is this recent performance transitory, or does it reflect a more pronounced and sustained structural change? The 2001 recession and its aftermath have obfuscated the answers, and so have multiple structural changes in business organization and process technologies. Among the many structural changes, technological advances in inventory control have seemingly dampened the historical production volatility in the auto industry and other durable goods sectors. In addition, outsourcing and supply chain management of both production and service activities have become more prevalent and geographically widespread.

Another dimension to this question is that shrinking employment may reflect accelerating productivity. The manufacturing sector began a robust, though not unprecedented, productivity acceleration (and labor saving) in the 1990s. Over the long term, such growth means higher living standards for American households. Finally, many believe that, owing to changing terms of trade throughout thr world, the Midwest can no longer compete in the production end of manufacturing.

So, what is the future of manufacturing in the Midwest? Given the experience of the past 15-20 years, Moskow cited some grounds for optimism. During this time, the Midwest pulled off a remarkable comeback in manufacturing health, following the dismal years of the early 1980s.

While analysts will not be able to disentangle today's transitory changes from the structural for some time, Moskow warned against giving up on any industry or manufacturing activity without first considering efforts to eliminate inefficiencies in the region's physical and institutional infrastructure. There are many factors that are critical to keeping manufacturing competitive. One is the extent and composition of our public capital stock and infrastructure. How well can our roadways, rail, air, energy delivery, and communications systems coordinate and deliver goods to their sources of final demand? A second is education and training. How skilled, adaptable, and creative are midwestern workers versus those elsewhere? A third factor is the creation, transfer, and embodiment of new technologies in manufacturing.

Next, Bill Testa, Chicago Fed vice president and director of regional programs, explained that seen across a time span of three decades, the recent fall-off in the region's manufacturing jobs does not appear to be out of the ordinary. Since 1969, manufacturing jobs as a share of total jobs in the region have fallen from 24% to 17%. …

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