This Isn't Your Father's Rust Belt
They were monuments to the devastated economy of the Rust Belt. In the early '90s, the hulking machines of Caterpillar, Deere, and Case stood stranded on dealer lots, on farms, and at construction sites across America. The severe downturn in the industry helped make the Midwest the biggest regional victim of that recession. But thanks to changes in production and marketing strategies, these same manufacturers became the very engines of growth for a Midwest economy that was a key driver of the nation's export-led expansion.
SPUTTERING. Nearly a decade later, some of these growth engines are sputtering again. Buffeted by weak export markets and a bleak farm economy at home, Deere & Co. and Case Corp. are cutting production and laying off workers, bracing for a 20% fall-off in agriculture equipment sales in North America next year. At the same time, steel mills in Ohio and Illinois are thinning head count and idling blast furnaces in the face of a 40% surge in imports from Asia, eastern Europe, and Russia. And now the aggressive push by Midwest companies into Asia is haunting them.
Still, the Midwest is in far better shape to withstand a downturn today than it was eight years ago. Thanks to restructurings and a more diversified customer base, many executives feel Midwest industry will be more resilient in its first major test since the 1991 recession. And if the Midwestern manufacturing sector remains a bellwether for the health of the overall U.S. economy, that's good news for the rest of the nation as well.
Even now, the Midwest--which has been feeling the heat from the Asian meltdown for nearly a year--appears to be holding up. "The Midwestern economy has continued to show improvement despite the bloodiest trade losses it has ever experienced and the worst General Motors strike in decades," says Diane Swonk, deputy chief economist at Bank One Corp. Economic forecasting firm Regional Financial Associates concludes that while the Midwest is likely to weaken more than the overall economy in the near term, it will bounce back more quickly--barring a full-blown recession.
A huge difference is the cash cushion in Midwestern institutions. This time, banks, which entered the 1990 downturn stuffed with bad real estate loans, are not nearly as exposed to problems in Asia and elsewhere. And although the farm debacle is brutal across some of the Great Plains states, others such as Iowa have courted manufacturing and insurance companies, so that farm income is just 7% of total output, down from nearly 12% in the early '90s.
What's more, unlike in earlier downturns, low interest rates are giving a lift to consumers. That is fueling a boom in everything from auto sales to home construction. In fact, the Big Three are boosting production to keep up with demand and expect industry sales this year to again top a robust 15 million vehicles. And makers of big-ticket items from Harley-Davidson bikes to Cobalt boats see continued strong demand. At the same time, while labor shortages constrained the upturn in the Midwest, it may now soften any downturn. Unemployment in August was just 3.5%, a full percentage point behind the nation's.
And in general, management at companies that are feeling the pinch now are showing faster reflexes. Inventories of U.S. farm equipment are at six months, half the levels of the '91 recession. Says Case CEO Jean-Pierre Rosso: "We are addressing the downturn in the ag market much earlier than anyone has done in the past." Meanwhile, these same companies are keeping up investments aimed at a post-slump world economy. Case, for example, is plowing ahead with a new tractor line, while Caterpillar Inc., despite turmoil in Russia and the economic problems in Brazil, is pushing ahead with new projects in both countries.
Will it be smooth sailing through the uncertain economic waters? Far from it. The worst fears are a protracted farm slump, wider global turmoil, especially in key export markets like Canada and Mexico--concerns that are by no means confined to the Midwest. But, come a downturn, it's far less likely the engine in the Heartland will grind to a halt.