Demand for consumer goods slowing down.
by Michael J. Hicks
The economy of Northwest Indiana faces some difficult challenges through the coming year. The single biggest factor facing the region is an impending slowdown for the demand in consumer goods that will reverse the trend of recovery the region has so recently enjoyed. The dominance of manufacturing in counties in the region suggests that the remainder of 2012 and 2013 will be a difficult period for residents and businesses of Northwest Indiana.
Europe is now in recession, with almost every new forecast revising downward the projections for the continent. While Germany's growth hovers at near zero, other large continental economies such as the United Kingdom and France are clearly seeing all the signs of a recession, with rising unemployment, declines in home values and declining consumer sentiment.
Elsewhere the story is worse. In Greece, many Balkan states, Italy, Spain and Portugal residents face depression-like performance in their economies. In Greece, the monetary system has begun to crumble, with barter replacing the exchange of currency as Euros migrate out of the country.
In Spain, the unemployment rate hovers near 25 percent, which is modestly worse than the U.S. experienced in the darkest months of the Great Depression. The variability in economic performance across the continent strains the monetary and diplomatic union and will increase cross border migration.
Growth in China is near recession levels, as it is in Brazil and India. This source of emerging market demand for American made goods will temporarily slow, and in Canada, our largest trading partner, the government has announced it is preparing for a fresh recession.
Response to this slowdown has been varied. In Europe, the central bank and most governments struggle to secure the viability of the monetary union. In China, a stimulus package that rivals the 2009 United States stimulus has been enacted, in Brazil interest rates are at a record low, and throughout the remainder of the world, central banks work to ease monetary policy.
Exports account for a significant share of economic activity in the region. While supply chains are hard to track with great certainty, it is likely that 15 to 20 percent of all the consumer durable goods manufactured in the region eventually find themselves exported to Canada, Europe, China or South America. Even a slight tumble, which now seems inevitable, will challenge profitability of firms and lead to lessened demand for workers and intermediate inputs.
While manufacturing looks robust in Northwest Indiana – and its fundamentals surely are – the slowdown that is spreading across the globe will not leave the region untouched.
While recent forecasts by Ball State University for manufacturing output show continued growth through 2012, these same forecasts indicate near zero real growth in the first half of 2013. As recession strikes, the demand for motor vehicle parts, steel and metal products, electricity, and transportation services will slow. Manufacturing firms will reduce hours, and in some cases idle shifts. They will purchase fewer raw materials and services from local vendors, who will also face reduced demand from workers whose take-home pay is lower. This recession will be apparent in the region by winter.
Reduced factory orders will be especially pronounced in the volatile automobile market, and for firms providing machinery, tools and dies and other equipment for businesses. These sectors, which are the leading or second largest employer in each of the counties in Northwest Indiana, will struggle well into 2013.
The recession of 2012-13 will be milder than most. Firms are especially lean, with reduced and productive labor forces. These businesses and those which provide them financial services are flush with cash reserves. There is no bubble economy in place, so the downturn should be among the more modest in history. That will be sore consolation however, as unemployment rates rise and new jobs become again scarce in the region.
Michael J. Hicks, Ph.D, is director of the Center for Business and Economic Research and associate professor of economics at Ball State University in Muncie.