The 2009 Economic Landscape 

Recession Adds to Long-Term Manufacturing 

Challenges in the Industrial Midwest 

The manufacturing sector has long been a primary 

economic driver of the Industrial Midwest.1 This region, 

which comprises eight states in the north-central 

United States, is known for its durable goods manufacturing, a sector that includes the production of automobiles and other types of heavy machinery. The emphasis 

on manufacturing has posed challenges for the region as 

the sector has contracted. This article discusses manufacturing trends in the Industrial Midwest, particularly 

with respect to the troubled auto sector, and the 

economic outlook for the region. 

The Industrial Midwest Has Not Recovered 

from the Last Recession 

The U.S. manufacturing sector has struggled throughout 

this decade. Historically, nationwide manufacturingrelated employment has tended to decline a few quarters 

before the U.S. economy contracts and then recover in 

tandem with the broader economy. However, job 

growth in the U.S. manufacturing sector did not 

1 In this article, the Industrial Midwest is defined as the region encompassing Indiana, Wisconsin, Michigan, Ohio, Iowa, Kentucky, Minnesota, and Illinois. 

Chart 1 

rebound after the 2001 recession, even while overall 

U.S. economic growth was strong (see Chart 1).2 

These manufacturing weaknesses have had a disproportionate effect on the Industrial Midwest economy. In 

each state in the region, manufacturing employment as 

a percentage of total employment is higher than the 

nation’s. Moreover, Indiana, Wisconsin, Michigan, and 

Ohio have the highest concentrations of manufacturing 

employment in the country.3 Because of its reliance on 

manufacturing during a period of weakness in this 

sector, total employment in the region has yet to return 

to pre-2001 levels (see Chart 2). 

Two long-term issues are adversely affecting manufacturing in the Industrial Midwest. First, over the past two 

decades, much of the region’s manufacturing base has 

2 The trend of outsourcing may contribute to overcounting of manufacturing job losses. As manufacturers “purchase” a growing number 

of services, the value of which is ultimately embedded in product 

value, manufacturing employment levels may have simply shifted to 

service industry sectors. See “Is Manufacturing at a Crossroads?” 

Chicago Fed Letter, Number 204a, July 2004. 3 Bureau of Labor Statistics, December 31, 2008. Manufacturing 

concentrations are defined as durable goods manufacturing and 

wholesale trade jobs as a percentage of total nonfarm payrolls. 

-10 

-5 

0 

5 

10 

Q1-79 Q1-83 Q1-87 Q1-91 Q1-95 Q1-99 Q1-03 Q1-07 

-10 

-5 

0 

5 

10 

Sources: Bureau of Economic Analysis; Bureau of Labor Statistics (Haver Analytics). 

Note: Data are seasonally adjusted. Shaded areas denote U.S. recessions. 

Manufacturing Employment 

Year-to-Year Percent Change 

U.S. Manufacturing Employment Did Not Rebound following the 2001 Recession 

Real GDP 

Quarterly Percent Change at an Annual Rate 

FDIC QUARTERLY 27 2009, VOLUME 3, NO. 1 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chart 2 Chart 3 

States in the Industrial Midwest Began Contracting 

before the Current National Recession 

90 

95 

100 

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 

Recent Cyclical Job Losses in the Industrial Midwest 

Have Proven to Be Long-Lived 

Indexed Total Employment, Seasonally Adjusted 

Prior Peak=100 

Source: Bureau of Labor Statistics (Haver Analytics). 

Quarters since Peak 

2007-08 1990-92 

2000-07 

1979-86 

been lost to competition, both foreign and domestic. 

Second, technological improvements in U.S. factories 

have led to much higher productivity levels.4 These 

productivity advances have been brought about by capital investments that require fewer low-skilled workers. 

More recently, the erosion of market share and structural cost problems at General Motors (GM), Chrysler, 

and Ford have led to large-scale restructurings and job 

losses. These challenges at U.S. automakers have 

contributed to the loss of more than 140,000 manufacturing jobs since 2005.5 Hundreds of thousands of additional workers at auto assembly plants and auto parts 

suppliers could potentially lose their jobs during the 

current downturn.6 

Auto sector layoffs have disproportionately affected 

Michigan, Ohio, and Indiana, the states most exposed 

to the troubled auto sector. These states were essentially 

in recession before the nation as a whole, with Michigan preceding the national downturn by more than 

three years (see Chart 3). Michigan is the state most 

heavily concentrated in auto manufacturing, with the 

most motor vehicle manufacturing jobs and the highest 

4 Bureau of Labor Statistics. From 2002 to 2006, U.S. manufacturing 

multifactor productivity growth—the increase in the ratio of goods 

output to labor, capital, and other inputs—averaged 2.2 percent, well 

above the 30-year average of 1.4 percent. 

5 The figure cited refers to job losses in the transportation manufacturing sector of the Industrial Midwest through 2008. These job losses 

have occurred mostly at auto parts suppliers and automakers. 

6 See CAR Research Memorandum: The Impact on the U.S. Economy 

of a Major Contraction of the Detroit Three Automakers, Center for 

Automotive Research, November 4, 2008. 

Minnesota, 

+4 months 

Illinois,

+1 month 

Iowa, 

+1 month 

Kentucky, -1 month 

Indiana, -3 months 

Wisconsin, -6 months 

Ohio, -6 months Michigan, -37 months 

-40 -30 -20 -10 0 10 

Number of Months Selected States Entered Recession 

before (-) or after (+) the Nation 

Source: Moody’s Economy.com. 

number and proportion of direct and indirect jobs 

connected to motor vehicle parts production.7 

Employment Weakness Has Also Spilled into the 

Region’s Housing Markets 

Although the Industrial Midwest did not experience 

the significant home price appreciation of the post2001 housing boom to the same degree as other regions, 

its residential real estate markets have still suffered. 

Existing home sales in the Industrial Midwest declined 

33 percent from their second quarter 2005 peak, 

roughly in line with the nationwide decline.8 In 2008, 

home prices fell in all of the region’s states, led by 

Michigan, where prices declined by more than 

10 percent.9 Further, in half of the Industrial Midwest 

states, foreclosure rates are at or slightly higher than the 

national rate.10 

Weak housing markets have, in turn, adversely affected 

the region’s construction industry. Construction 

employment was virtually unchanged across the Industrial Midwest from 2003 through 2006, while it grew 

more than 10 percent nationwide. Since 2006, the 

construction sector in the Industrial Midwest has 

declined by 7.7 percent, or 96,000 jobs. 

7 Contribution of the Motor Vehicle Supplier Sector to the Economies 

of the United States and Its 50 States, Center for Automotive 

Research, January 2007. 

8 National Association of Realtors, data available as of fourth quarter 

2008. 

9 Based on the Federal Housing Finance Agency Purchase-Only House 

Price Index. 

10 Mortgage Bankers Association, fourth quarter 2008. 

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2009 Economic Landscape 

The Industrial Midwest Faces a Potentially 

Long Road to Recovery 

Employment in the Industrial Midwest has declined 

substantially during the current downturn, and the 

near-term outlook for Detroit’s auto industry remains 

unclear. Automakers have been shrinking their businesses to match reduced market share. In addition, 

financial press reports and analytical studies indicate 

that hundreds of thousands of jobs are potentially at 

stake as Chrysler and GM continue to negotiate 

restructuring plans with the Obama administration’s 

auto task force. Though foreign-based automakers with 

production facilities in the region might increase output 

to partially offset this gap, their new hiring likely would 

not fully absorb jobs shed by Detroit automakers. 

Two other economic indicators also point to a 

prolonged path to recovery. First, the outlook for the 

metal fabrication and machinery manufacturing industries has diminished. These industries, which include 

companies involved in the transformation of metal into 

intermediate or final products and the production of 

machines used in industrial applications, provided some 

economic stability to the Industrial Midwest following 

the last recession. However, the weakening national 

economy has softened demand for their products. 

Nationally, investment in machinery and other fixed 

assets has slowed consistently since mid-2007, and fell 

21 percent during fourth quarter 2008.11 As a result, 

employment in fabrication and machinery manufacturing in the region declined 1.4 percent, or about 13,000 

jobs, in 2008. 

Second, contraction or slowing growth in the economies of U.S. trading partners will likely limit future 

export opportunities that had provided a counterbalance to the weakened auto sector over the past few 

years. Exports rose 13 percent and 11 percent, respectively, in 2006 and 2007, benefiting from strong foreign 

demand and a decline in the value of the dollar. 

However, the economies of foreign trading partners are 

now slowing or contracting and the decline in the 

dollar has reversed direction, returning to tradeweighted levels not seen since 2006.12 

A more positive outlook for the region hinges in no 

small part on the success of federal government initiatives directed at stimulating the economy in general and 

the auto sector in particular. Spending on infrastructure 

projects should generate new jobs, while other provisions of the $787 billion American Recovery and Reinvestment Act are intended to maintain existing jobs. 

However, most of the affected jobs will be outside of the 

manufacturing sector. While employment will likely 

continue to decline in the automotive sector, it is likely 

that fewer jobs would be lost under a governmentassisted restructuring than would occur otherwise. Over 

the long term, job growth is likely to become more 

dependent on emerging and expanding industries, such 

as those found in the energy, education, and health care 

sectors. 

Authors: Patrick M. Dervin, Regional Economist 

John M. Anderlik, Assistant Director 

12 The Blue Chip Economic Indicators consensus forecast as of 

December 2008 calls for a 0.1 percent decline in Canada’s GDP in 

2009 and only a 0.2 percent increase in Mexico’s GDP. Growth in 

China, one of the fastest growing export markets, is expected to slow 

from 9.5 percent in 2008 to 7.6 percent in 2009, well below trend. 

11 Bureau of Economic Analysis; seasonally adjusted, annualized 

growth in real private nonresidential fixed investment. 

FDIC QUARTERLY 29 2009, VOLUME 3, NO. 1