AmericanOpinion

Hold the champagne

Is the Midwest’s industrial recovery as real as it looks?

By Richard C. Longworth

After an economic winter that has lasted nearly a decade, the first green shoots of thaw are appearing in America’s industrial heartland. Headlines sprout words like “recovery” and “revival”. Factories that had slashed workforces are hiring again. There are even signs of jobs coming back from China.

This is good, of course. But how good? Is this a blip or a boom? Do these green shoots have roots?

No one knows yet, so it’s too early to celebrate the Midwest’s revitalisation. But it’s wrong to conclude, as some have, that manufacturing will drive the Midwest’s economy in the 21st century, as it did for most of the 20th.

We think of the current recession as something that began in 2008, just as Barack Obama became president. In the Midwest, it began in 2002. Just ask Jennifer Granholm, the Canadian-born Democrat who was elected Governor of Michigan that year and discovered that she had inherited an auto-dominated economy that already was in collapse. Granholm, like other Midwestern governors, had been fighting her state’s recession for six years before it spread to the rest of the nation; her political memoir, A Governor’s Story, is a primer on running a bankrupt state.

I began touring the old industrial areas of the Midwest in 2004-05, talking with people who were losing jobs—autoworkers in Michigan, appliance makers in Iowa, auto parts workers in Ohio and Indiana—and with civic leaders governing dying towns. Many of these workers are a lost generation, still unemployed or working two or three jobs to make ends meet. Their towns still are squeezing services, closing libraries, skimping on schools, turning off street lights, just to keep going.

But the workers’ kids flocked to community colleges to learn the science and maths that their parents never needed. Towns that subsisted on big old factories began promoting new high-tech industries and start-up businesses. Companies that had always competed with other companies in the town next door realised they lived in a global economy, and began retooling to meet competition 10,000 miles away.

In other words, a region stuck in the 20th century was coming to terms with the 21st. And now, suddenly, here comes the 20th century again, with its factories and jobs and gritty appeal.

Is it for real? Let’s see.

Some revival is solid. The auto industry, bailed out by Obama, is bouncing back. Auto and parts makers in Michigan, Indiana and Ohio are hiring again. All three states have gained jobs and cut unemployment faster than most other states. A Honda plant in Ohio is gearing up for a new model and a Chrysler plant in Illinois is adding a shift. The boom in natural gas drilling in Pennsylvania and Ohio has spurred investment in Midwestern factories making equipment for this industry. Youngstown, Ohio, which lost its steelmaking industry 30 years ago and has been suffering ever since, is getting a new mill to build natural gas piping.

In addition, there’s anecdotal evidence of off-shored industry being re-shored from China and other once-favoured destinations. A company making space heaters in China is bringing 250 jobs back to Ohio. Ford says it is moving some truck manufacturing from Mexico. A firm making wheeled plastic coolers says it will do it in Kansas, not China.

A report by the Boston Consulting Group (BCG) argues that a mix of economic forces “is fast eroding China’s cost advantage as an export platform for the North American market.” It predicts a shift back to manufacturing in the United States within the next three years. It doesn’t predict the job impact, but one of its authors says the US could add 600,000 to 800,000 jobs over the next decade.

Good news, indeed. Especially for President Obama; any economic upturn enhances his re-election chances in the crucial swing states of the Midwest.

But hold the champagne.

After a decade of industrial decline, some Midwestern rebound was inevitable, and this may be it. But there’s no sign it will begin toreplace the massive job losses suffered here. More than six million American manufacturing jobs have gone overseas, so the increase forecast by the BCG is pretty marginal. Ohio, all by itself, has lost a half million jobs: the few thousand being created by steel and automakers barely dent this deficit.

The BCG says many American manufacturers will lure production back from China because they’ve cut cost through automation. This is happening. I interviewed a maker of heavy batteries in central Illinois whose competition is entirely in Mexico. He said he had laid off much of his work force when the recession began and installed automated equipment instead. When the recession ends, he plans to rehire some workers, but will never employ as many as he once did. 

There’s another factor, and it casts a pall over the sunniest projections. Some jobs will return from China because the wage gap between Chinese and American workers has shrunk, eroding China’s cost advantage. Part of this stems from rising wages in China—good news for Chinese workers. But another part comes from falling wages for American factory workers. A new two-tier hiring system, endorsed by American unions, is enabling automakers and other factories to hire skilled workers for $14 per hour, with minimal benefits: these workers will work beside an older generation that makes twice that much, with good benefits.

No matter what happens, manufacturing never will propel the Midwestern economy as it once did. Many re-shored jobs will go to the non-unionised states where wages and other costs are lower. More important, manufacturing’s share of jobs is shrinking steadily. Fifty years ago, factories provided 35 per cent of all Midwestern jobs; today, it’s less than 10 per cent. This has been falling in good times and bad. Like farming, manufacturing never will be a major employer.

So growing industrial employment, whether it’s due to the recession’s end or re-shoring from China, is good. But it’s only icing on a cake that, in this post-industrial era, the Midwest has yet to bake.