After a sluggish period of recovery experienced nationwide, Wisconsin and the Midwest economy began to expand at a robust clip in 1993, with employment, consumer spending, housing activity and industrial output each showing substantial gains for the year as a whole. (The Midwest is defined here to include Wisconsin, Illinois, Indiana, Iowa, and Michigan‑the five states comprising the Seventh Federal Reserve District.) Growth accelerated as 1993 came to a close, helping to cement consumer and business confidence in further expansion. Bad weather curtailed activity in early 1994, but spending held up remarkably well in view of the weather. Partly as a result, consensus forecasts for national economic growth rose sharply during last quarter, with continued above‑average gains forecast for spending in sectors where Midwest productive capacity is concentrated and increasingly competitive. While declining long‑term interest rates, a declining dollar, and failing oil prices played important roles in boosting Midwest growth in recent years, improved productivity in the region's manufacturing base played a critical role as well. If Wisconsin and other Midwest producers continue to promote their efficiency and competitiveness, the economic prospects for the region will be as good or better than at any time since the recovery began. 

Midwest Labor Market Recovery 

Most regions in the nation have generated sub‑par job expansion since the economic recovery began officially in mid‑1991, giving rise to the widespread perception of a " joyless recovery." Employment growth nationally did not begin to gain much momentum until the latter half of 1992, but unemployment has now been failing significantly for over a year. Midwest labor markets also firmed up considerably during 1993, and continued to outperform the national average. In turn, growth in employment in Wisconsin significantly outpaced even the Midwest on average (see Chart 1). 

Despite recent gains, the employment recovery has lagged a typical employment recovery at the national level, but the Midwest had an unusually shallow recession and a slow but steady pace of job gains since mid‑1991. Hiring in the region slowed in the middle of the 1993, however, due to weather conditions, special factors affecting the auto industry, and perhaps most importantly, heightened uncertainty about health care reform. Employment growth accelerated late in the year, however, when the legislative process for health care reform deadlocked. More recently, the composite picture painted by government data, private surveys, help‑wanted advertising, and discussions with personnel firms and large employers indicated further labor market gains in early 1994. As the year unfolds, however, the health care reform debate may again rise in volume and importance and dampen employment gains once more. 

At the end of 1992, payroll survey employment estimates were initially showing little if any sign of recovery from the 1990‑91 recession. With the recent release of data revisions for 1992 and 1993, however, payroll survey estimates show that Midwest employment had recovered all of its recessionary losses by the end of 1992. Current estimates show fully 400,000 more jobs in the region than there were just prior to the onset of the recession (see Chart 2). The current estimates are preliminary, however, just like the ones they replaced. During periods of growth, these state‑level estimates tend to be revised upward. When the next benchmark revision is announced in February 1995, it is possible that the trend shown in the data for 1993 will be revised upward even further. At the same time, these estimates should not be expected to be revised upward every year. Should employment growth fatter, the initial estimates could miss the downward change in direction as well. 

The gains in Midwest labor markets in recent years fit into a developing trend that dispels the region's Rust Belt image. The aggregate unemployment rate in the Midwest fell further than the national average in 1993 and remained below the national average for the second consecutive year. Prior to 1992, the last time the Midwest's unemployment rate was below the national average was in 1978 (see Chart 3). From 1979 to 1982, Midwest payroll employment fell twice as fast as the national average, and the unemployment rate rose to a level fully 2'r4 percentage points above the national rate. Since 1982, however, the gap between the Midwest and the nation has consistently narrowed in the Midwest's favor. By the end of 1993, in each Midwest state, the unemployment rate had fallen below or close to its lowest level since 1977. 

The gap between the Midwest unemployment rate and the national average even narrowed during 1990 and 1991, a remarkable development considering the traditional recessionary sensitivity of Midwest labor markets. Manufacturing accounts for a greater share of employment in the Midwest than in the nation as a whole, and manufacturing employment tends to suffer greater losses during a recession than overall employment. Adding to the pressure, employment in cyclically‑sensitive durable goods sectors constitutes a greater portion of manufacturing employment in this area than in the nation. Midwest manufacturing employment fell precipitously in the twin recessions of the early 1980s, over twice as fast as the national average. Since that devastating period, however, manufacturing employment in the Midwest has accounted for an increasing share of manufacturing employment. The region's share continued to rise during the recessionary years of 1990 and 1991, and then rose even faster in 1992 and 1993. 

Motor Vehicle Sector ‑a Source of Wisconsin Strength 

Increased production in the auto and auto supplier industries made a material contribution to welfare in the region last year, with both auto assemblers and auto suppliers operating virtually at capacity and struggling to find need additional capacity to meet new demand. Nationally, sales of domestically produced cars and light trucks reached nearly 14 million units in 1993, up from 12.8 million units in 1992, and many forecasts call for similar gains in 1994. Domestically based automakers were cutting back on bulk sales to rental fleets during 1993, and underlying consumer demand strengthened more than the increase in the unit sales data indicated. Production surged as 1993 came to a close, and then climbed further in early 1994 in spite of bad weather, reaching its highest level since the late 1970s. For 1993 as a whole, Midwest output grew somewhat faster than the national average. Midwest output has benefited from a continuing shift in market share for domestically produced cars. In addition, domestically located "transplant" assembly operations have announced sharply higher purchasing goals for supply networks in the U.S. during 1994. 

The Big Three announced in March that significant hiring initiatives would be required in order to keep pace with demand. The most significant announcement came from market‑share gain leader Chrysler, which could boost light vehicle assembly capacity by as many as 500,000 units (or about 15%), and add as many as 6,000 jobs in the U.S. and Canada over the next three years. Ford and GM also announced plans to make incremental additions to capacity, principally involving additional shifts for light truck output. Several large Midwest suppliers announced expansion plans in recent weeks as well, and surveys of suppliers' hiring expectations have been upbeat. These recent announcements have helped buoy longer‑term expectations in many communities dependent on the industry, but motor vehicle employment has actually been on the rise for some time. Recently revised data show the industry has added roughly 50,000 jobs in the Midwest since the recessionary low in March 1991, a gain of about 15%. The rise in employment during 1992 and 1993 closely mirrored the pattern in auto industry output.

Manufacturing Growth May Slow

Led by auto industry activity, Midwest manufacturing output not only grew faster in 1993 than in 1992, but also grew at a faster pace than the nation on average. The pattern in the Chicago Fed's Midwest Manufacturing Index echoed purchasing managers' survey results, showing a mid‑year slowdown followed by faster growth at the end of 1993. The newly found relative strength in Midwest output during a recession can be seen in the difference between production component of the Milwaukee purchasing managers' survey and the national average since 1990 (see Chart 4). For much of the recovery, Greater Milwaukee's manufacturing sector has kept pace or exceeded the pace of production expansion nationwide. Since the end of the year, the pattern has been volatile, perhaps reflecting weather conditions. For example, the composite production index for the Midwest rose from 66% in December to 73% in March (on a seasonally adjusted basis), reaching a level fully five points above the previous high since the end of the 1990‑91 recession, while the Milwaukee index edged down from 73% to 70%. Still, expansion in the Wisconsin area was at impressively high levels.
 

Even with the prospects of a slowdown in manufacturing activity, Wisconsin can be expected to continue to outperform the rest of the nation in 1994. Following the long‑term process of improvement in its competitiveness and strength in its key manufacturing industries, Wisconsin has recently been able to expand its manufacturing employment faster than most other states. Indeed, during the 1988 to 1993 period, when the national economy was sluggish at best, Wisconsin was one of the few states that was able to expand its manufacturing jobs. And, if smaller, more volatile states are excluded‑states with less than one percent of U.S. manufacturing employment‑Wisconsin was among the top ten fastest growing states in the nation (see Chart 5). Wisconsin's position as a major producer of auto suppliers and capital goods that are consumed by auto producers makes it well placed as the economy moves forward in 1994.

Implications for 1984 and beyond
 

Consensus expectations for national economic growth in 1994 were on the rise in early 1994, with faster growth forecast for spending in sectors where Midwest productive capacity is concentrated and increasingly competitive. How long can the good times last? It should be noted that lower oil prices, the declining exchange rate of the dollar, and declining long‑term interest rates enhanced the relative performance of the Midwest economy in recent years. A substantial share of the region's industrial output consumes oil and its derivatives, and the relative price of regional output is more importantly determined by transportation costs (and oil prices) than the national average. The declining dollar helped boost exports in recent years, and export output provides a higher share of income in the region than in the nation as a whole. Declining long‑term interest rates helped boost demand for durable goods in recent years and, in turn, lifted the relative position of the Midwest economy. Predicting the future path of these three factors is a tall order. All in all, however, the outlook for the Wisconsin and Midwest economy seems the brightest in decades, with improved productivity in the region's manufacturing sector accounting for. much of the brightness in the overall outlook.