The true test of any new sailing ship is to see how it handles in a storm. Thus we will find out in the upcoming months whether the rejuvenated Indiana economy, which outperformed the nation through much of the 1990's, can weather the pounding of an economic slowdown that is hitting the manufacturing sector with full force. 

In the course of the last twenty years, the manufacturing sector of the entire Midwest has undergone a metamorphosis. The process began in the midst of a devastating recession, with the painful loss of thousands of jobs as inefficient facilities were closed down. But the new ones that rose to take their place were leaner, more efficient, and more competitive. Those efficiencies translated into a need for fewer workers, leaving the state's labor force with no choice but to diversify into other ways of making a living. 

The figures behind these general trends are quite impressive. During the late 1980's and the early 1990's, Indiana manufacturers invested 30 percent more, per worker, in local facilities than the national average. Those investments significantly boosted productivity and Indiana's relative market share. And since the 1980's, the fraction of the state's workforce employed in manufacturing has shrunk from nearly one in three jobs to only one in five. 

The upshot is that the Indiana economy should be better positioned to weather a manufacturing downturn today than it was twenty years ago. But can the new ship weather the storm? 

What we know so far about state personal income growth suggests that it may. While data are only available through the third quarter of 2000 at this writing, they clearly show that manufacturing's turbulence predated the decline in motor vehicle sales at year's end. With business spending on equipment faltering much earlier in the year, the booming growth in manufacturing earnings in Indiana essentially came to a halt in the second half of the last year. 

Over the last five quarters ending in September of last year, manufacturing earnings have grown a meager 0.8 percent in Indiana. For durable equipment manufacturinggrowth was only 0.2 percent. That compares to a 4.5 percent growth average for the years 1997 through 1999. 

Yet overall personal income growth for the last five quarters has been a robust 5.7 percent, with a modest acceleration to a 6.8 percent annualized rate in the third quarter of 2000. This increase came about as other sectors of the Indiana economy -- government, finance, telecommunications, and particularly, proprietor income -- kicked in to make up the difference. These trends give hope that at least a short-lived downturn in manufacturing earnings will not hit Indiana communities as hard as it might have decades ago. 

But that is only a first quarter score of a game that has a lot of time remaining to be played. Indiana's dependence on manufacturing has lessened over time, but our concentration in factory employment remains among the highest in the nation. And if the national downturn spreads beyond manufacturing to become a general recession, all bets are off. You can't diversify enough to protect against a general downturn, but if the investments of the last twenty years bear enough fruit, it will take more than a hiccup in motor vehicle sales to bring the entire state economy to its knees.