Economy and Manufacturing & Technology

ECONOMIC ANALYSIS: Manufacturing sector keeps Indiana economy chugging

July 25, 2005

There is mostly good news on the economy. Both in Indiana and in the nation as a whole, we appear to be heading into the year's second half with reasonably strong momentum.

Buoyed by surprisingly low interest rates, a weak dollar and a strong rebound in business spending nationwide, the state economy has turned in a solid performance in the last six quarters.

Through the first six months of the year, the Indiana economy is on a pace to create 50,000 net new jobs this year. That's growth of 1.7 percent, just short of the forecast of a 2.0-percent gain in payrolls we made last November.

The reason for Indiana's recent good fortune seems pretty obvious-the manufacturing economy is still running hot.

The Federal Reserve reported that output in manufacturing industries nationally rose a healthy 0.4 percent in June, bouncing back from the weakness displayed in the previous two months. That puts the industrial economy back on the growth trajectory that has boosted output 10 percent since the spring of 2003.

And it is business spending that is leading the way. Led by double-digit gains in the information-processing equipment and defense and space industries, business equipment suppliers nationally boosted their output at a robust 7.9 percent annual rate in the second quarter of 2005. That far outpaced the fairly anemic 1.5-percent expansion in consumer goods output over the same period.

Yet this simple explanation for Indiana's good fortune runs up against the stubborn fact that none of our industrial neighbors seem to be on the same page. Illinois and Ohio have registered much slower job growth in the past year and a half, while Michigan continues to be the only state in the nation that is actually losing jobs.

That disparity underscores the danger in relying on simple rules of thumb to predict economic performance. We learned in the recent recession that strong motor vehicle sales aren't always enough to keep the Indiana economy afloat, just as we are learning today that the relationship between the national economy and energy prices changed.

Recent trends in employment in the state's 15 metropolitan statistical areas give some hints at what is behind recent growth. Strong growth in hiring by manufacturers in South Bend and Elkhart helped the Indiana economy register a net gain in manufacturing jobs in each of the last four quarters.

But much slower growth in recreational vehicle demand has produced the opposite result in recent months. Strong industrial equipment demand has helped Fort Wayne and Anderson manufacturers add to payrolls in recent months, while Muncie and Bloomington factory employment totals have moved in the opposite direction.

Growth in the Indianapolis MSA, the state's least dependent on manufacturing, has been less volatile. Its service-based economy has proved harder to accurately gauge with the survey methods relied on to produce preliminary job totals, judging from the recent history of data revisions. Those data show the metro economy on track to add 16,500 jobs this year.

The good news is that the fire that is propelling the state's economic engine-growth in the industrial economy-appears to be still burning brightly.

Manufacturing activity will eventually slow down as the expansion matures, but it hasn't yet. And there are a lot of communities around the state that are hoping that day doesn't come soon.



Barkey is an economist and director of economic and policy studies at the Miller College of Business, Ball State University. His column appears weekly. He can be reached at pbarkey@ibj.com.
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