Regional President Speech

For Release on Delivery Expected at 2:00 p.m., E.S.T June 1, 1983 Statement by Silas Keehn President, Federal Reserve Bank of Chicago before the Subcommittee on Domestic Monetary Policy of the Committee on Banking, Finance and Urban Affairs U.S. House of Representatives June 1, 1983 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1 I appreciate the opportunity to appear before this Subcommittee today to discuss prospects for unemployment. The severity of the current economic dif ficulties in the Midwest and the concerns about the longer-term prob)ems asso ciated with economic adjustment have been widely reported and discussed. Nevertheless, it seems to me that the seriousness of the situation requires all of us, in both our official and private capacities, to do all we can to find.realistic and economically justified resolutions of the problems of in suring sustainable high levels of economic well-being both in our region and nationwide. I hope that my comments will be useful to this Subcommittee in its deliberations. The Federal Reserve Bank of Chicago, of which I am President, serves the Seventh Federal Reserve District comprising all of Iowa and the major portions of Illinois, Indiana, Michigan, and Wisconsin. While we often refer to the region of the Seventh District as the "Midwest," we have no monopoly on this term. "Midwest" is often applied to the entire area north of the Ohio River from the Appalachians to the Rockies, or to the Bureau of Census' designated North Central states, divided into the East North Central region (five states) and the West North Central region (seven states). (See map) The problems of western Pennsylvania and Ohio have been broadly similar to those of the states of the Seventh District. However, my testimony will concentrate on the five-state area with which we are most familiar. By any definition the Midwest has encountered serious economic difficul ties for the past four years, commencing roughly with the Iranian oil embargo of 1979. Trouble had been building under the surface for a much longer period, but prior to 1979 our region was still generally prosperous. Previous business recessions since World War II had impacted the region seriously, but activity always rebounded to new highs in a year or so once a recovery was firmly underway. Since 1979 there have been no sustained recoveries. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2 Employment Trends Trends in employment and unemployment constitute our best indication of the state of economic health of the Seventh District or any other region. In March, the latest.month for which consistent data are available for all states, nonfarm payroll employment in the five-state area was 3 percent below March 1982. Nationally, employment was down 2 percent. Manufac turing employment was down 8 percent from a year earlier in the District and down 6 percent nationally. (See table 1) Despite some callbacks in the auto and building materials industries, there is no clear evidence that employment has risen significantly in the District since March. Moreover, information on help-wanted advertising and surveys of employer hiring intentions offer little hope for a significant up turn in the near future. Summer jobs for students will be hard to find. An unusually large share of spring graduates from high schools and colleges find the end of the school year approaching with no firm job offers in hand. The trend of employment is particularly disturbing when viewed over a longer time span. I!!)1.a.rc:h, nonfarm payrol1 employment in the U.S. was '- ... ""'· ·~·- ,-~ ~· >, 1 percent below March 1979. From 1947 through 1979 payroll employment i \ increased nationally at a compounded rate of 2.3 percent annually. If this trend had continued, payroll employment, nationally, would be 9 percent higher currently than in early 1979. In the District, payroll employment in March was 10 percent below the level of March 1979, with declines ranging from 5 percent in Wisconsin to 14 percent in Michigan. Instead of being 10 percent lower than in 1979, employment in the District would be substantially higher now if growth had continued at the earlier rate. Manufacturir.g employment in the U.S. in March 1983 was 14 percent below March 1979. In the District, the decline was 26 percent, with declines ranging from 21 percent in Wisconsin to 29 percent in Michigan. In / Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 3 addition, many workers currently are on short work weeks. Aside from manufac turing, employment is at sharply reduced levels in construction and some types of transportation. Unemployment Trends Payroll employment data are based on reports of employers to government agencies. ~emp]ayment is much more difficult to measure accurately. Data on the number of people receiving unemployment compensation comprise a major input for state and local unemployment estimates which are derived through a complicated process. Unemployment compensation data do not include either people who lose jobs and are not covered by unemployment insurance, or new entrants and re-entrants to the labor force. Problems such as determining whether an individual is "actively seeking work, is a "discouraged worker," 11 or is insisting on unrealistic terms of employment (and other measurement problems) impose obstacles to precise estimates of unemployment. Despite these provisos, we can assert unequj_vQ..caUy_that_u_nem,ployment is high--at the ---------··. ---· • • • • ••• . ~hi-g-he-s-t- l-evels since the Gr:en_Depression of the 1930s--and that the problem -------- . is more severe in the District than nationally. ------··-- • - ~-- ----·-·•------...... --.... ~ In March unemployment was estimated at 10.3 percent of the labor force nationally and l2.5__percent in the five-state ar~~-Lwi~h a range from 9.8 percent in Iowa ,!_o 15~en_t i~_i_~hi~-~ A year earlier the rate was 9.0 percent nationally and 11.5 percent in the District. (See table 2) In early 1979, unemployment nationwide was high by standards of the 1950s or 1960s, but low by today's yardstick. In March 1979, the rate was 5.8 percent, nationally, and 5.8 percent in the District, with a range from 4.0 percent in Wisconsin to 7.1 percent in Michigan. In short, four years ago --~~--~--~ ~ployme_r:it.was cibout equally serious in the District and nationally. Since then the prob~~.b.ee-l+-mo.r:-e-.. .s.e.r:.i.Q_us here, and subs tan ti ally- s-o. -----· ---· • ---------- Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4 Local Unemployment Unemployment problems vary by locality. In the past year or two jobless rates have been estimated at 15 to over 20 percent for industrial centers such as Rockford, Illinois; Gary, Indiana; Dubuque, Iowa; Flint, Michigan; and Racine, Wisconsin. Unemployment is chronically high among minorities in the large cities, especially Chicago and Detroit. (See tables 3 and 3A} Depressed conditions in smaller centers often reflect declines in jobs, temporary or permanent, at the principal establishment in "one industry towns." Also, local labor markets often are not clearly defined. Many workers are willing to drive 50-60 miles or more to work and return each work day. A different situation exists in the inner cities where unemployed workers may be unable to commute to suburbs--where jobs often are more available--because of limitations of public transportation. Dimensions of Unemployment The distribution of unemployment by age, sex, and race is similar in District states to the national pattern. (See table 4) Unemployment has increased substantially in the recession for all groups. Unemployment, as always, is particularly high for teenagers compared to adults, and for blacks relative to whites. One pattern of unemployment, however, has shifted in the past two years, both nationally and regionally. Historically, jobless rates were lower for men than for women. Currently, -------=---:.-=----------- ·------- .Jobless rates are higher for men. Partly, this may reflect legal pressure to ------... _•a••m-•-• •••-•--------• hire and retain women employees. A more important reason, however, is that _ unemployment has been heaviest and most prolon • ....durable goods manufac- -----------~--• ---~ ~ ---.,----..._,..__c_ .,_, turing and in construction, ""sec~_wh.er_~_ _ f~!!!ale wqrker..s.._~_r~relatively few. ------ --- -------···---· ···- _C_on_c_e_r_n_in~g'--""u_Demployment by i_~~!,Y, the current recession has repeated the course of earlier declines, with the heaviest layoffs in the most cyclical industries--hard goods and construction. The main difference this time is the Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 5 long durati9_t:L~coupled with increasing concern that cyclically depressed industries will never fully recover, at least not in the form in which they existed prior to 1979~ Many factories have been closed and demol- . ----··--·--·-··--·----·---·-····- ished. In others equipment has been removed and disposed of at auction. Population Growth Population in the five-state area has been growiRg less rapidly than in ·--······-·--- ----·--·------------------- the nation for a century. In 1930, the area had 17.1 percent of the nation's population. By 1970, this ratio had dropped to 16 percent. In the 1970s the drop in the ratio accelerated. By 1980 the five states had only 14.9 percent of the nation's population, and by 1982 14.6 percent. (See table 5) From 1960 to 1970 the U.S. population rose 13.4 percent while population in the five states rose 10.8 percent. In 1970-80, growth was 11.4 percent for the U.S., and 4.2 percent for the five states. From 1980 to 1982 U.S. popula- ) tion rose 2.2 percent (according to Census estimates), while the five-state area declined by 0.3 percent. Indiana, Iowa, and Michigan lost population in 1980-82. The reduction or reversal of population growth reflec;_t_s, in large ----- - -------· ------- ...•• - ------- part, migratio~~f_jq~_seekers to the South and West. -- -------------···-···--· • .... . ... . .. - ·----· ··-·- Population loss is associated with redu_ced job opportunities. Fewer \ people means less need for all consumer goods and services, including housing. ) _ JJ Fewer workers are required to supply these needs when population grows at a ,-~ slower pace or declines. i~.J {,v-I£-l _-/- 1 The Industry Mix In large degree the relative increase in unemployment in the Seventh Federal Reserve District reflects the composition of industry and the distri bution of employment in the region. In 1978, when business activity in the Seventh District was still robust, 15.7 percent of the nation's nonfarm payroll employment-was in the five-state Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 6 area, somewhat more than the proportion of the nation's total population re siding there. These states accounted for 19.3 percent of the nation's employ ment in manufacturing, and 23.4 percent of employment in durable goods manufac- . turing. Within durable goods, these states accounted for 31 percent of employ- ment in steel, 55 percent in engines and turbines, 56 percent in farm machinery, 35 percent in construction machinery, 35 percent in metalworking machinery, and 54 percent in motor vehicles. (See table 6) The five states accounted for a very high proportion of the nation's em ployment--ranging up to 70-80 percent--in farm tractors, heavy earthmoving equipment, industrial cranes, diesel engines, recreational vehicles, and outboard engines. Reasons for the Decline in Durable Goods Employment In the past four years, all of the durable goods industries reduced em ployment sharply. Moreover, in many cases the District's share of the nation's employment in those industries has declined. Among the causes are the following: 1. §~neral ly depressed conditions in the nation which always affect - ---------------. , durables most severely because these are relatively expensive, postponable purchases. 2. High interest rates that increase the cost of financing investments in long-lived equipment, customarily purchased on credit both by consumers and business. 3. High fuel costs which have deterred outlays on types of motor vehicles--larger cars and trucks and recreational equipment--output of which is concentrated in the Midwest. 4. A relatively small District __ p~~p_o!:'!].?n of production of energy -----------.-~-···". --------··--····-- development equipment, which, until late 1981, was a booming industry. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 7 5. Relatively small District __i nyolv_ement i_D._ production oJ defense equipment, .which has been expanding rapidly in recent years. --------·· ••••• 6. Low farm income, which has caused farmers to curtail purchases of equipment. 7. Migration of industry to the "Sunbelt," encouraged by lower employment costs, lower fuel costs, and financial incentives offered by southern states. 8. Concentration of production by some producers in more modern -------- southern plants that had supplemented northern operations in earlier years when demand was strong. 9. _I_~E._r~ased co_'!_lpetitiqr_i frn_m_ aJ2rpad with the high value of the dollar ~!!~.~f9reign ~u.bsidization of industr,Y., including favorable credit terms, tending to reduce U.S. exports and encourage imports. (Components, as well as complete machines, increasingly are imported.) 10. Much lower labor costs abroad, sometimes only a small fraction of &#45;&#45;&#45; domestic costs. (Frequently foreign plants that utilize American technology are owned in whole or in part by American companies.) 11. A slippage in American technological leads, partly because of the export of U.S. technology through licensing or other means. 12. In the past year, reduced exports of U.S. capital goods to oil exporting nations whose oil revenues were cut by smaller shipments -... . . . and soft prices. Energy Costs The huge rise in the price of energy since 1973 has had a direct, adverse effect on demand for vehicles and other District products that use fuel. There is another dimension to the problem. Per capita energy use in the -._..___ _____ J •• ~-.. '-··~ - • ••• •·. ,._,.,..,_._, •• ,_ •• ·--. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 8 District is relatively high. This includes fuel for heating homes and other ----~·~ ··~· buildings, for transportation, and for industrial processes. District states produce only a very small proportion of the energy they consume--oil, natural gas, and coal. Illinois has vast underground supplies of high sulfur coal, but usage has been closely restricted by anti-pollution regulations. As a result, coal burned by Midwest electric utilities is now largely imported from the Rocky Mountain states. Oil and natural gas come mainly from the South, the Southwest, and abroad. The price of fuel at the source or at ocean ports becomes even higher when transportation costs to the Midwest are added. In addition, energy-producing states levy heavy severance taxes on coal, oil, and gas ------.. .. ,. ____ ,,._, ,., production. ~esult, fuel users in District states help pay costs of • -·•·· ···-··~- ···- -·•----- government in fuehproducing-states. In 1981, severance taxes as a share of total tax revenues in the principal oil and coal producing states ranged from 21 to 50 percent. High Labor Costs Wage rates in the District have been above the average for the nation for ---···~ ··• ., . many years. The gap is widest in Mic;higan, where hourly earnings of 11 11 _____ ,-.,·•-···•··""·• production workers in manufacturing in 1982 averaged nearly one-third higher than for the U.S. Wage rates in other Seventh District states were 10 percent to 18 percent higher than the national average. (See table 7) In addition to wages, total worker compensation includes benefits such as vacation pay, pensions, medical and dental insurance, workers' compensation, supplementary unemployment benefits, and many others. These benefit packages tend to be very liberal in durable goods industries as a result of successive improvements obtained in union contracts over the years. In heavily 11 11 unionized areas such as the Michigan automotive centers, worker compensation Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 9 in non-unionized industries such as banking tends to be influenced by the terms won by unions. Unionization in the District has become increasingly important in state and local government, education, and food retailing. Total compensation of production workers in the steel, auto, and construction and farm equipment industries averages at least $20 per hour, well over $40,000 on an annual basis. This compares with total costs estimated ~t $12 per hour in Japan, and much lower levels in other parts of the Orient and in Mexico. These areas are involved increasingly in off-shore sourcing of components. 11 11 In the past year, unions have yielded some "concessions" on wages and benefits. But, overall, there is still a wide gap in compensation differentials in District industries compared with other regions and foreign nations. Productivity .Hi_gh levels of hourly compensation can be countered by gains in labor productivity, output per hour. Productivity had been rising at a rapid pace '-- < of 2 to 3 percent annually through most of the postwar period. Since 1977, however, there has been no growth. Increases in productivity are expected to resume in 1983 if economic activity increases as expected. Productivity growth in District industries has been hampered by a number ·---····--·~--·· of factors. Some relate to labor problems such as absenteeism, strikes, and . ----·---"---···--·····••" ·-•··•· ..••• restrictive work rules on job assignments, overtime pay, and discipline. The District also has a disproportionate share of the nation's older industrial facilities which compete with newer plants (often located in other regions or ,., ...... countries) planned and constructed at a higher "state of the art. Managerial 11 2~pr..t.~Q!l1in_gs_ •. ,now undergoing correction, also have limited improvements in productivity. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 10 Federal Spending The five District states contribute a much higher proportion of the federal government's revenues than they receive in federal disbursements. ~--- This is especially true in the case of national defense. This disparity te, n' ds to reinforce other factors adversely affecting economic activity in the region. The five District states have 15 percent of the nation's population and generate about 15 percent of its personal income. Their contribution to federal revenues is probably slightly in excess of 15 percent. These states receive a much smaller share of federal outlays disbursed in the United States, only 10.7 percent of the total and only 5.1 percent of the outlays for defense. (These data exclude interest paid and certain other items not allocable by state.) (See table 8) The relatively low participation of the District in federal outlays stands out dramatically in comparisons with other states on a per capita basis. The five states have five of the six bottom slots among the 50 states in per capita total federal spending and four of the lowest seven positions in defense spending. Indiana ranks highest in the District in defense, but is ............. , ....... ~ still only 34th. States with the highest per capita federal outlays are those with relatively high proportions of federal payrolls, civilian and military, and defense procurement. State and Local Governments Until the late 1970s, state and local government employment in the District had tended to offset periodic declines in private employment, rising r--~• .... ••- ••"•• ,k• ,~ •••'>" • even in recession years. In_~~e pa~t two years, state and loca~_ govern~~n!~ throughout .t~g Qis:t,rict have been grappling with serious financial problems. '. _.,. ____ ..,,_., .. .,. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 11 Revenue shortfalls have reflected both the recession's effect on tax revenues and cutbacks of federal aid. Meanwhile, requirements for social programs and welfare outlays have increased. State and local governments are dealing with their financial problems by ( 1} ~.!'.!,~-~-!!~-~!.r~~-~~ms ( often reducing employment}, ~.nd ( 2) !:.~2-s~~!1w~ .. ~a~.es: - these st~p~_a,r,~_~n~-~~~_s_ar,Y.__.,t.E.~.~hiey~ finan_cial ___ solvenc:_y_, :t.tt~.Y_"work to ~ .... _.__,_, The Farm Economy In some periods in the past when durable goods manufacturing was curtailed, the farm economy of the District was relatively prosperous. In the past three years, declining farm income has coincided with and reinforced the ....... ~;.,..: ~:,;:1;,,•·~-:~-.. ~•,•""'">.:..•u,v~,,..,;;.., .. ,_, •• ,.,, - • ,.,'" , ••, ••. •.·~ ··•·-~· ,.~ •.... contraction in manufacturing. Many smaller communities are dependent on sales , ...., ..... ··•·. - •,•"! of equipment, supplies, and services to farmers. Data on agriculturally-related employment are sparse, rendering precise characterizations of the situation difficult. Yet, there is no doubt that rural communities and the industries serving agriculture have suffered extensively in the economic downturn of recent years. There are signs that .. _farm sector is beginning to recover. But any reco.ru~gE_1.<::~l_!_u~a,-~ly ~~~ r-e-la-t-ed- -e-m-p~loy-m-e!l.t, __ j_n._Jh~ Midwest and n~:t.j<:>_r:i\'lide,. is li~_ely_to be slow. •• -·. .. '•' •' ..... _, ..... ,. .. , ...... , 1983 Acreage Set-Aside The level of farmer enrollment in government farm programs suggests some 82 million acres will be removed from crop production in 1983. Even allowing for slippage in final compliance, it is probable that the acreage removed from production this year will be nearly a fifth of the area planted to principal crops in 1982--the largest removal ever under government programs. The de.£lin.e .Jn. .. .a.c.r.e.!l9e. . will.be _. suf f_i s:J ent to.._r:e.tu-r-n· the fa rm sector to a much ~er. . financi al footing. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 12 In the interim, industries that furnish inputs and services to farms will experience weak sales. Sales of seeds, fuels, fertilizer, and pesticides probably will decline at least 10 to 15 percent this year. Purchases of grain storage facilities also will decline. Unit sales of farm equipment, down 50 percent from the levels of the late 1970s, will remain at very depressed levels, but may begin to strengthen late this year as farm earnings improve. Transportation needs will be reduced. The demand for new farm loans will weaken, but creditors will still be restructuring older problem credits. TJ1e_.a.cr..e.a.g,~_ .. _cutback wi 11 affect employment in spmJ~ industries. more than •-•r-.,..,_.•,,••- •,,, ---,~••••-~--••,-;•-.,-••••••-""-n•·n·, ... ,•-•- ~••••••- others. In fertilizer and farm equipment, where product inventories are high and sales are primarily to agriculture, job losses will be substantial. Industries that rely on nonagricultural markets more than agricultural markets, such as transportation and pesticides, will be much less affected. Big City Problems A large share_ _ .~f "~_nen.ipl?yment in the District is concentrated in the di.stressed ..i nne,r,7city areas of the larger centers. Job opportunities of residents are restricted by inadequate education and other problems associated with disadvantaged groups. EEO and affirmative action programs may fail to improve access to jobs in affected areas because some employers will move their operations elsewhere. __ gespite. bigb unemployment, ther.e. i~ a ccmtinuJng_JJ~ed for workers Jn. ~-_e_~_g_Lles2_desirab1e t~_bs~. Availability of such jobs has brought a steady influx of aliens to the District--mainly from Latin America, the ..___ ____, ,_,.,.--.--.,. "'• ,. ~-~--,.:,.-,-,,.,,..,._,__.. __. .~ ,•r<."'" S•• • - Orient, and Eastern Europe. Many of :tb.t~e aliens are in the underground 11 11 --- •-• .,, • -•-•• "->' •-• ••••,,•••'\.•, "'"• --•• ... •••• ••••"'"-- ..,..,,, ...... economy, not counted in the labor force . ........._._~._..,. . ,-~· .,,,;:.,-· :.-- ·-~-· High crime rates deter businesses from locating in the inner city, and in -·•-----••t····" "'·•---- .,,. ..... some cases may be the dg_ciding factor irL.d.e..<=J.~jo~_~Q..E!i.9_!:_at~-~ Fear of violence may make valued employees unwilling to travel to inadequately policed Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 13 neighborhoods. Insurance costs are high because of possible damage to property, especially through arson. Theft of supplies, materials, and finished goods also raises operating costs. ~Pl o~.!..J}TO.~-t~ ... Jn. . ,J~_e .c~riJ C{iJ .P..Y.~t'-1~-~~~2:..i.~~~f_lc! r_g~ f.i t_i e~ has ~~9.sll!lP.~.!1~d by a number of factors, including decentra,l jzati.9!.l....Q.L~.<?!'P.~ratE} headquarters and automation of financial and other services. Many banks, insurance companies, public utilities, and government bodies have reduced staff in the past year or two. Until the mid-197Os, most of these employers were hiring actively year after year. Currently, they offer few new job opportunities with openings often filled by transfers of redundant workers 11 11 from other departments. Pollution Controls Re.g11Jatioos_,c,Q.tttr9J.Eng industrial emissions--air, water, and solid ,. .,. ' .... ~--... ··- ~ ,~.,,,--.. ' -, wastes--have. . )lad a, dispr:apartjonate impact _on the? -~-i d~est.: Emission controls can be incorporated at lower cost in newly constructed facilities. Deadlines for meeting emission standards imposed on older plants may be satisfied easily by closing the plants. Often closings have b~en the answer, especially for foundries .. Such decistons. b.ave be~ri encouraged by _the income tax code. Many Midwest plants, once locally owned, have been acquired by conglomerates whose owners may benefit from tax write-offs when older facilities are shut down. This has been the major incentive for some acquisitions. On January 31, 1983, the EPA propos_ecJ a ban on construction of major ----·~ ,.,_ ..... ...,..,~ .... -,o\,,,...... .. ,,..-·~ ··•:· ..,,,,. " ••• < - • ~~tr:JilJ.fa.ctli,tie~ .. t'l.~14. U~t~~fLjJ~.t.~5-_coun.ti~~-including those in the ~~ Qf_£h1£~Q 1 P!tr9-.2.!,,.. . ~..Dd~.~,!J!"~~~-for failure to meet deadlines and requirements for improving air quality. The EPA maintains that the ban is mandated by existing law, even though it would slow the~.. .. ~~.'!:.t~.i!!~ .. ___ the use of old facilities with high levels of harmful emissions. ---------··•··--.,,.,._,, _.,. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 14 Business Environment Business groups complain of "unfavorable business climates" in the industrial states of the Midwest. Costs of unemployment insurance and ------... ____, .. -··"•'".,,•.. . •• ·•· ···•-·····-- ... workers' compensation are.relatively high in this region, especially in ~ .., ,. . .....,.~q•••• .,,.., ' -·• ., •.•r · •·• _.,-.4,••- Illinois and Michigan. (See table 9) These costs reflect both the size of payments and the ease of establishing claims. Other complaints involve high ---•-.-... .~ ----- .. .,,.~.,.,_ ta~es,._sta.te. . p.ollu.t\Q_n controls, restrictions on cutoffs of utility services, ·"·'~ "· "'- ........, ..,., .,. ........- -..... ~~•---·. ...- ·}--~·-.,... .. ,;;,,p.~. ....., , and laws affecting hirin~and personnel_practices ... ·--~ • --- Earlier this year Alexander Grant a_nd Co. published. its fourth study of --··-··,. .. .....;;;,.....-,-,,.-.,.:~""--... General Manufacturing Business Climates in the 48 contiguous states. States --·~. .....! '..-+·,_.-.,,... ;.-":"_~,,,.,-7, .. ,;. .,,._ •••• "">;-' " • were assigned overall rankings for 1982. Florida, Texas, and North Carolina took the top three spots. Indiana was 29, Iowa 35, Wisconsin 36, Illinois 42, ----· and Michigan 48. --Among the adverse factors considered: .. - .. ·--··• Relative cost of fuel and electricity. Costs in the Great Lakes states were 41 percent greater than in the South Central Region, and 4 percent more than the national average. Wage costs. Michigan had the highest wage costs of any state. The average for the Great Lakes states was 40 percent higher than for the Southeastern states, and 18 percent above the national average. Unionization. In the Great Lakes states 31 percent of nonfarm workers were organized, compared to less than 10 percent in the Carolinas. Taxes. Taxation in the Great Lakes states, relative to incomes, was about equal to the national average, but higher than in the Southeastern states. Financial Condition of Business District companigs that.were in excelle.nt financial condition ~~~~J~rge a decade ago are now ()pe_ra~in~ un.der sev_e,re stress. Their problems usually are a result of several factors--sales falling below expectations, intense Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 15 competition, rising costs of labor and other inputs, and heavy debts incurred at high interest rates. Some of these firms are operating under special agreement with creditors who could force them into bankruptcy under cbntractual agreements. Erosion of executive morale and confidence which has developed over the past several years will not be corrected in a year or two. Until financial strength is solidly reestablished and the general economy is clearly in a new _____________ growth trend, business caution will restrain commitments for capital spending, ·--- . ,, ________ _. -·-··-~" -·· ...., . . inventory investment, and hirings. The Outlook Projections of employment and unemployment are subject to substantial error. Forecasts by District state governments and regional development organizations in recent years have proved much too optimistic. The main factor affecting conditions in the Midwest in the future will be the trend of the national economy. A strong and sustained recovery would eventually bring sharply higher orders for the District's capital goods. -... -~-~ ,...,. ....... ,. -~ ,•· .• tlowever,._mo...s.Lof.-the--adv-erse factors described above can be corrected only gradually. Many manufact1,.1Y:ing operations closed .in recent years will never reopen. Steel will be a lesser factor in economic activity than in the past. ~ .., ,· Y::-' ='-' ~ •• • • " Some of the service industries--for example, financial futures trading--are .-... .... ·- growing steadily, but this wn 1 not_ _ re_pl ace a vi gp_r_o.u~ _rnanuf~cturi ng sector. A number of other fact~!~----~-~u-~~ influence District deve 1 opin.ents: / 1. Successful labor-management agreements to reduce costs. - • •• • • ----··· -••·.,.-·· ., .... , . .,. .. .,,-,,,.,.~-..... ,, .. , ·---.-..... ~ • 2. less opgr~ss i v_e .. r.egu.lator.}cclimate_, including admi ni strati on of ~ pollution controls. 3. Re.s.tricti.an ...o f -tb.e -~_qle .. 2f_._~~,c~~r.~ .. !~--:Ef!~ -~nd losses that encourage plant closings. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 16 4. Restrictions on severance taxes imposed by fuel producing states. -·~---- .. --~ • • • • ' - - .. ·• 5. Dj.r.e.c.ti.an of a l.a.rge.r shar..e of federal disbursements to District E~!g$._ __ _ In the long _.!:,~-~..! the..~ .. ~; dw_e~~.l..!Lr.~.9.<!.1.~ j ~s __ ~-~ono~J-~. _heal th, although not in the same form as in earlier decades. Adjustments in business, a~~LG-Yltu~--lahar__._ iind government are al ready underway. The basic resources that b~~u-~h_t prosperity to the regi_~n are still present--excellent transportation, ready access to raw materials and markets, ample fresh water, a well-educated work force, and a hi~hly productive agricultural hinterland. Role of the Federal Reserve A major precondition for sustainable economic growth and reduced ----~----•-··.. . ---.-,-;,, . .... , ...... ; ~ .... unemployment in the nation, and especially in the Midwest, is the maintenance of __ a __ __ n ....., o ,..._, n .,. ... _-. iuf1.atJQn~X::Y.~nyjropment., The Federal Reserve has a vital role in the effort to achieve and maintain price stability. A resurgence of inflation would recreate the distortions in business and individual decision-making that have led to ever higher rates of unemployment in the successive business cycles of the post-World War II period and would seriously limit chances for economic expansion and improvement in job opportunities. I emphasize the importance of price stability because of the havoc caused .........____,_,,_,~,.._,,... •'- _,-,-.,,,. •·-"k-.- •,••·•~-c·, • ., •.· • ..• • by inflation on the Midwest economy. In large degree the economic problems of --. ._.... ........ ~--,,-.,-........ -· ,_,. _____ -• the Midwest have been caused, or at least exacerbated, by inflation. For many years, _i_~~-!~!ion_nurtu_red_a_n illusion of economic well-being • • ... .,,.__,...._ __. .,_,_ __ . ...., _____ .,_~,..,_.,. . u, ·---..-- - . while cuttin~ deeply into the region's economic strength. Inflation is ....__,__,___...-""''...,..., ••-"•""t'•.,...,....-....... ,., ••• ~,.,,,._,,__,.,, •• a., -~- .......... ., •··,.,•~.-, • •• "' ' ·-~·•· __ ,, • ~ accompanied by increases in operating costs, costs of carrying inventory, and -------···-·-· • capital investment. If rising costs are not fully reflected in increased -;· selling prices, real profits decline. Lenders fearful of the erosion of their investment through inflation insist on shorter maturities. Long-term funds Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 17 become less available and borrowers with long-term horizons are less able to undertake investments. Cut-off rates of return are raised and corporations look for investments with shorter pay backs. Purchases of existing assets may appear preferable to fina~cing new plant and equipment. With a large proportion of its manufacturing employment in durable goods, our District has been hard hit by the sluggishness of new investment. A non-inflationary environment will revitalize long-term financial markets, ----•• -,,...-~¥~'-'•··-···~-, ~-- ·- ...• • ~e~-~~ -~h-~---~~centives _for invest~-~-~~'-"~_QQ g.r~~:tly __ !!f!P.!:~~e the employment outlook. This does not mean that our industries will fully recover their ~-- -~-.... , ... former positions of strength. The basic structure of the market for capital .,. -_;. ,,, ' goods has changed . ....,__"~·.,._;,. ••~ ••,.-,.,, ..- •;•""".,.,..,,., ••• ~ CiP:"-~ The process of recovery appears to have started in manufacturing, but it could be sidetracked by another surge of inflation. The process of adjustment is painful and the costs are high. But an attempt at short-term improvement by acceding to inflationary economic policies would cause even greater long-term losses to the Midwest. Price stability fostered by appropriate national monetary policy under the guidance of the Federal Reserve System is a necessary condition for the reduction of both inflation and unemployment. There is also a role for the individual Reserve Banks. Th~- <:.C?IJlJ?l.~X..Pl'.'.9'=-~.?..~. . -~f. ~c:o_n_q111jc_ adjustme~t involves social as well as economic objectives that may be in conflict. Moreover, the objectives of various regions may clash. Cooperative national and regional efforts are required. !n thi~ intricate environment the Reserve Banks cannot determine the changes to be made, but they can assist, serving as a focal point for studies of the region and as a catalyst for cooperative efforts. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 18 To this er191.Jhe~federal Reserve Bank of Chicago is expanding its ..___~_.,.---~---·'· _. ... -~.,-~.,.-,... .. .,.,.. . __ ,. ... , ...~ ., ···-· --,.,,, •·-:. . __ .._ ... economic i!lformation faci 1i ty. For many years we have provided information on -~---~-----~· current and prospective developments in our region. We are now supplementing this function to provide regional economic data quickly_to interested ·----·· --------~- .... ~ analysts. We are also increasing our own research efforts in the analysis of • • •••••• r~~_r-_c~~--qf the r:~gi_0!1. and. ~he ar~_as of opportuni t~ fo'. economic growth. Impediments to growth and developme.n:t. :;u_ch as usury ceilings, excessive ____. ........ ,~ .,.. __ , ..• ·--···· -.•- regulation, and unnecess.ar:ily costly aspects of workers' compensation and unemployment compensation are b~i ng tdentified.and. . the opportunities for modifying these restraints are being evaluated . •• • - _.. ..4 ~•---. --- • •• , ~ ~.-.- • ••• ' • ··---- - • We are aware of severe financial strains on Midwest state and local governments faced with the heavy costs of caring for the poor and restoring a deteriorating infra-structure, despite serious revenue short-falls. Recent tax increases may adversely affect local economic activity. We are undertaking a special effort to understand the financial problems of state and l.9,t.a.L-9O¥-e.r:-nme-n-ts. In this connection, we plan to host a conference this fall to explore possible solutions. Finally, we are increasing our involvement with regional groups ---- .. -~~·-' ..,.. ; .irtte.reste.d.in.!;!yaluating al'ld implementing programs to assist local ~djustments. Effective programs to advance the welfare of the region require the cooperative efforts of all segments of the community. We hope that our ~tt~ipa:t,j <>_n. in_ PfQQ.u.~JmL~i~~!!Ja,J:.igJ1.L}3..O~JY.?...1§ ,. a_nd_ ideas wi 11 further this vitally important objective. I appreciate your invitation to testify and your interest in the problems of our region. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis CENSUS REGIONS AND GEOGRAPHIC DIVISIONS OF THE UNITED STATES WYO. COLO. N.MEX. .... ·.~::: '.. )---=-si•~=ii;;;:::;= HAWAII 200 U.S. DEPARTMENT Of COMMERCE BUREAU Of THE CENSUS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Table 1 Employment Nonagricultural Payrolls (not seasonally adjusted) Mar. 1980 Mar. 1981 Mar. 1982 Mar. 1980 . Mar. 1979 to to to to to Mar. 1981 Mar. 1982 Mar. 1983 Mar. 1983 Mar. 1983 (----------------------percent change----------------------) Total United States 0 - 1 - 2 - 2 - 1 Five States - 3 - 3 - 3 - 9 -10 Illinois - 4 - 2 - 3 - 9 - 7 Indiana - 2 - 4 - 3 - 8 -12 Iowa - 3 - 5 - 2 -10 -10 Michigan - 3 - 5 - 2 -10 -14 Wisconsin - 3 - 1 - 3 - 7 - 5 Manufacturing United States - 3 - 4 - 6 -12 -14 Five States - 7 - 8 - 8 -21 -26 11 l i noi s - 9 - 7 -11 -24 -26 Indiana - 4 - 8 - 9 -19 -27 Iowa - 8 -11 - 7 -24 -25 Michigan - 6 - 9 - 6 -20 -29 Wisconsin - 8 - 4 - 9 -19 -21 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Table 2 Civilian Unemployment Rates (seasonally adjusted) March Apr. 1979 1980 1981 1982 1983_ 1983 =-=-r T==- ---- - ---------- - --percen - t-------- - ------------ United States 5.8 6.3 7.3 9.0 10.3 10.2 Five states average 5.8 7.6 9.5 11.5 12.5 Illinois 5.7 6.9 9.0 9.9 12.2 12.2 Indiana 5.8 8.4 10.0 12.1 11.8 Iowa* 5.0 5.2 7.5 9.7 9.8 Michigan 7.1 10.1 12.0 15.8 15.7 14.9 Wisconsin 4.0 5.6 7.8 9.4 11.0 * Not seasonally adjusted. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Table 3 Civilian Unemployment Rates in Seventh District States and Metropolitan Areas (not seasonally adjusted) February February 1982 1983 (percent of labor force) Illinois 10.1 • 13 .8 ·Bloomington-Normal . 7.3 10.0 Champaign-Urbana-Rantoul 5.0 7.3 Chicago 9.4 12.4 Davenport-Rock Island-Moline 10.4 18.2 Decatur 12.3 19.3 Kankakee 15.8 21.4 Peoria 10. 7 19.2 Rockford 14.5 18.1 Springfield 7.6 10.6 Indiana 12.7 13.2 Anderson 21.2 16.5 Elkhart 11. 7 9.1 Evansville 11.3 11.9 Fort Wayne 12.6 13.3 Gary-Hammond-East Chicago 13.9 17 .3 Indianapolis 9.8 10.6 Lafayette-West Lafayette 7.3 8.7 Muncie 16.9 14.7 South Bend 11.0 10.7 Terre Haute 13.1 14.9 Iowa 9.2 10.8 Cedar Rapids 9.6 11.1 Des Moines 8.3 8.8 Dubuque 12.9 16.9 Sioux City 8.4 9.2 Waterloo-Cedar Falls 10. 9 14.2 Michigan 16.1 16.5 Ann Arbor 9.7 10.4 Battle Creek 15.6 17.1 Bay City 18.6 19.0 Benton Harbor 16.8 18.5 Detroit 16.5 16.7 Flint 22.8 19.5 Grand Rapids 12.7 13.2 Jackson 14.8 17.7 Kalamazoo-Portage 11.1 12.0 Lansing-East Lansing 13.2 11. 7 Muskegon-Norton Shores-Muskegon Heights 16.0 19.6 Saginaw 20.2 17.2 Wisconsin 10. 7 12.7 Appleton-Oshkosh 10.9 12.4 Eau Claire 10.5 11.6 Green Bay 9.7 11.3 Janesville-Beloit 19.1 13.5 Kenosha 12.1 12.4 La Crosse 9.5 10.1 Madison 7.3 7.7 Milwaukee 8.9 12.4 Racine 12.2 19.0 United States 9.6 11.3 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Table 3A High Unemployment Areas The Emergency Jobs Act, signed into law on March 24, requires that a list of towns, cities, and counties with high unemployment be published by the Department of Labor. Federal agencies will use the list in conducting public works and service programs. To qualify, areas must have had average unemployment rates in 1982 of at least 8.8 percent, 90 percent of the average rate for all states. Number of high Percent of unemployment areas United on Aeril 23, 1983 States United States 2,163 100 Five States 404 19 Illinois 105 5 Indiana 91 4 Iowa 35 2 Michigan 104 5 Wisconsin 69 3 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Table 4 Unemployment Rates by Age, Sex and Race . Black and Total Teenagers Men Women White other races (---------~-unemployment asa percent of labor force-----------) United States 1978 6.1 16.3 5.2 7.2 5.2 11.9 1982 9.7 23.2 9.9 9.4 8.6 17.3 Illinois 1978 6.1 15.0 5.3 7.1 4.8 14.8 1982 11.3 23.3 11.8 10.6 9.2 24.1 Indiana 1978 5.7 17.3 4.4 7.4 4.9 14.8 1982 11.9 24.8 12.5 11.3 11.0 23.0 Iowa 1978 4.0 9.8 3.8 4.2 3.8 * 1982 8.5 17.4 10.0 6.6 8.2 * Michigan 1978 6.9 17.4 5.7 8.6 5.9 14.4 1982 15.5 28.7 15.7 15.1 13.3 31.9 Wisconsin 1978 5.1 12.8 4.3 6.3 4.8 16.4 1982 10. 7 21.6 11. 7 9.3 10.1 25.6 *Statistics not sufficiently reliable for publication. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Table 5 Population United Five States States Illinois Indiana Iowa Michigan Wisconsin (----------------------percent of United States----------------------) 1960 100.0 16.3 5.6 2.6 1.5 4.4 2.2 1970 100.0 16.0 5.5 2.6 1.4 4.4 2.2 1980 100.0 14.9 5.0 2.4 1.3 4.1 2.1 1982 100.0 14.6 4.9 2.4 1.3 3.9 2.1 (---------------------------percent change---------------------------) 1960 to 1970 +13.4 +10.8 +10.2 +11.4 + 2.5 +13.5 +11.8 1970 to 1980 +11.4 + 4.2 + 2.8 + 5.7 + 3.1 + 4.3 + 6.5 1980 to 1982 + 2.2 - 0.3 + 0.2 - 0.4 - 0.3 - 1.7 + 1.3 (------------------------------millions------------------------------) 1982 231.5 33.7 11.4 5.5 2.9 9.1 4.8 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Table 6 Nonagricultural Payroll Employment (annual average, 1978) United Five States States Illinois Indiana Iowa Michigan Wisconsin (------------------percent of United States------------------) Total 100.0 15.7 5.5 2.6 1.3 4.1 2.2 Manufacturing 100.0 19.3 6.1 3.6 1.2 5.6 2.8 Durable goods 100.0 23.4 6.8 4. 7 1.3 7.6 3.0 Primary iron and steel 100.0 31.1 8.7 10.7 0.4 8.7 2.5 Engines and turbines 100.0 54.9 15.8 9.0 0.8 9.8 19.5 Farm machinery 100.0 55.6 21.0 3.1 16.0 4.3 11.1 Construction and related machinery 100.0 34.5 17.6 1.6 5.7 4.1 5.4 Metalworking machinery 100.0 35.0 10.2 3.5 0.3 17.8 3.2 Motor vehicles and equipment 100.0 53.7 2.8 6.9 0.9 39.8 3.4 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Table 7 Average Hourly Earnings of Production Workers in Manufacturing United States Illinois Indiana Iowa Michigan Wisconsin (------------------relative to United States------------------) 1965 100 108 112 107 123 105 1970 100 109 111 110 124 108 1975 100 114 114 112 127 109 1980 100 110 117 119 131 110 1982 100 110 115 118 132 110 (----------------------dollars per hour-----------------------) 1982 8.50 9.31 9.79 10.00 11.18 9.37 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Table 8 Federal Outlays, Fiscal Year 1982 Total Defense Total Defense (billions} {percent) United States $603 .6 $178.8 100.0 100.0 I 11 i noi s 22.4 2.8 3.7 1.5 Indiana 10.1 2.6 1. 7 1.4 Iowa 5.2 .5 .9 .3 Michigan 18.0 2.2 3.0 1.2 Wisconsin 8.9 1.1 1.5 0.6 Five States 64.5 9.1 10. 7 5.1 Per Capita Federal Outlays Relative to U.S Averafe State Rank Total De ense Total Defense {percent) United States 100 100 Illinois 75 31 46 44 Indiana 71 62 49 34 Iowa 69 22 50 49 Michigan 76 31 45 45 Wisconsin 72 30 48 47 Five States 73 35 Source: Federal Expenditures by state for Fiscal Year 1982, Bureau of Census. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Table 9 State Unemployment Insurance Average Weekly Benefits--Current $ 1981 - % of Amount U.S. United States $107 100 Illinois 133 124 Indiana 91 85 Iowa 122 114 Michigan 128 120 Wisconsin 123 115 Source: Statistical Abstract 1982-83 p. 338 Maximum Weekly Payment for Temporary Total Disability Under Workers' Compensation Insurance 1982 % of Amount U.S. Forty-eight states $238 100 Illinois 403 169 Indiana 140 59 Iowa 501 211 Michigan 307 129 Wisconsin 269 113 Source: U.S. Chamber of Commerce, quoted in General Manufacturing Business Climates 1982 p. 47. Alexander Grant & Co. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Silas Keehn (1983, May 31). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19830601_silas_keehn

@misc{wtfs_regional_speeche_19830601_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1983},
  month = {May},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19830601_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}