The Midwest Isn't Feeling Motor City's Pain

Many factories are on a tear, with business they haven't seen since 2000

At first glance, America's industrial heartland is looking rusty again. General Motors Corp. (GM ) and its Motown rivals are slashing production, hurting suppliers and anyone else that depends on the car industry to pay the bills (page 84). Parts-maker Meridian Automotive Systems Inc. filed for bankruptcy protection on Apr. 26. Tower Automotive (TWR ) Tower's ticker is TWRAQ Inc., which declared Chapter 11 in February, will shut three plants by July, shedding 800 workers. Michigan's jobless rate is now the second-highest in the land, at 6.9%, with Ohio not far behind at 6.3%.

Fortunately, there's more to Midwest manufacturing than Detroit. Just a four-hour drive south on I-75 is General Electric Co.'s (GE ) booming aircraft-engine plant. GE's factory in Evendale, Ohio, is gearing up to build 800 engines for narrowbody passenger planes for Boeing Co. (BA ) and Airbus this year -- up from 700 last year. And more than 1,000 are already on order for 2006. With demand for new aircraft surging in Asia and Europe, GE Chairman and Chief Executive Jeffrey R. Immelt says the division has now called back all of its hourly employees laid off after September 11 -- and has hired 200 more engineers. Most striking, for the first time in 20 years the plant is recruiting entry-level machinists. Says Immelt: "Our factories are full."

Indeed, much of the region's factory sector is racing along at its best clip since the economy's previous peak, in 2000. The Federal Reserve Bank of Chicago reported on Apr. 27 that its Midwest manufacturing index rose a respectable 1.7% in March from a year earlier, led by a 5.8% jump in machinery output. "The glass isn't half empty," says William A. Strauss, senior economist at the Chicago Fed. "It's more like three-quarters full."

Midwestern manufacturers owe much of their fortune to a spending spree by industrial, farm, freight, and mining customers who are enjoying their best markets in years. While sales of automobiles and light trucks have been slipping, orders are pouring in for bigger vehicles -- from trucks and tractors to trains and airplanes.

BIG RIGS

As a result, industrial heavyweights are hiking their 2005 forecasts for sales and profits, increasing capital spending to boost capacity, raising prices, and adding to their job rolls.

Cummins Inc. is a shining example of that other Midwest. The Columbus (Ind.) company has three shifts working around the clock to build engines for long-haul trucks. North American sales of big rigs are on target to hit 285,000 this year -- up 73% from a recent low of 166,000 in '03 -- as freight companies replace old trucks and add to their fleets to handle the growing flow of goods from the nation's ports and factories. With more growth expected in 2006, Cummins is investing $7 million on new equipment to expand engine output and is hiring more workers. "We are at capacity," says CEO Theodore M. Solso.

Cummins has a lot of company. Caterpillar Inc. (CAT ) recently bumped up its 2005 outlook, saying that profits will climb at least 35%, to a record $2.6 billion, thanks to increased sales of heavy-duty engines and earthmoving machines. Union Pacific Corp. (UPN ) is spending $700 million for 315 locomotives and 4,000 railcars, vs. $526 million in 2004. Electro-Motive Diesel Inc. in LaGrange, Ill., which is assembling 115 of those engines, has a backlog that will keep its factory workers busy well into 2006. At Deere & Co., in the meantime, employees in its Waterloo, Iowa, complex are logging overtime hours to meet the demand for tractors.

Of course, the heartland would be better off if the Big Three auto makers were expanding production, as the Japanese and European transplants are doing in the South. Nationally, the automobile sector grew 3.2% in March from a year earlier, while sinking 1.9% in the Midwest. Still, says Alexander M. Cutler, CEO of industrial-goods maker Eaton Corp. in Cleveland: "The industrial side of the economy is quite robust." Singing the Rust Belt blues may be appropriate for Detroit. But all around the rest of the Midwest, the tune they're singing is far more upbeat.

By Michael Arndt in Chicago

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