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October 18, 2002

Economy Hitting Indiana Where It Hurts

There's really only one surefire way to get the Indiana economy going again, at least in the short run. That's to light a fire under the U.S. economy, particularly the industrial sector. In the language of the factory floor, the prospects for the Hoosier economy will remain cloudy until the national economy begins to "move the iron."

That's exactly what we thought was underway as recently as June. A surprisingly strong first quarter expansion in the economy seemed to lift the tide in the industrial economy, ending a long, painful decline that had reduced output by 8 percent and destroyed nearly two million factory jobs. The hoarding of skilled labor that had taken place during the downturn kept new hiring to a minimum, but in the first six months of 2002 factory output grew back by nearly 3 percent. For the first time since the spring of 2000, manufacturers saw a glimmer of hope on the horizon.

That hope has all but vanished today. The midsummer pause in factory production's rebound has turned worse with each new report. According to the Federal Reserve's Index of Industrial Production, manufacturing output contracted by 0.3 percent in September, the second consecutive month of significant decline. Instead of gaining altitude, it's beginning to look like the industrial economy is digging itself into a deeper hole.

The cruel irony in the situation for Indiana businesses is that the slide is occurring at the same time as housing and motor vehicle demand is at very high levels. Primed by very low mortgage rates and galloping appreciation in prices of existing homes,housing starts surged out to a 1.843 million unit pace in September. And while motor vehicle sales fell back to earth after an incentive-induced surge in August, they remain on track for another very respectable year.

What's pulled the carpet out from under the manufacturing economy's feet? The same culprit that has dogged the overall economy throughout this recession: business spending. The index for business equipment output fell by 1.7 percent in September, erasing most of the tentative gains posted in the five months prior to that point. Other than output ofdefense-related goods, which continued to rise, the news was universally bad. Industrial machinery, construction equipment, information processing equipment and even car fleet purchases were all driven down.

Even the strength of the economy -- consumer spending on housing and vehicles -- has rung hollow for industries with an important presence in Indiana. The consistent cutting of motor vehicle inventories, even in the face of incentive-induced sales volume, makes it clear that manufacturers do not think the pace of sales can be sustained. And the divergence of the fortunes of the housing and furniture industries makes one think that people in new houses must be sleeping on floors.

A contraction in factory output spells trouble for the Indiana economy, the most manufacturing-intensive in the nation. But, for now, there's nothing much state leaders can do but hope that the flame that lifted the national economy during the first six months of this year can somehow be relit.

Link to this commentary: https://commentaries.cberdata.org/400/economy-hitting-indiana-where-it-hurts

Tags: manufacturing


About the Author

Pat Barkey none@example.com

Patrick Barkey is director of the University of Montana Bureau of Business and Economic Research. He has been involved with economic forecasting and health care policy research for over twenty-four years, both in the private and public sector. He served previously as Director of the Bureau of Business Research (now the Center for Business and Economic Research) at Ball State University, overseeing and participating in a wide variety of projects in labor market research and state and regional economic policy issues. He attended the University of Michigan, receiving a B.A. ('79) and Ph.D. ('86) in economics.

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