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Regional Report: Industrial Diversification Helps Midwest Meet Today’s Economic Challenges

Directory 2016
The economy of the Midwest is being whipsawed these days, as some robustly positive trends struggle to offset some negative ones, and the tensions manifest themselves in development as well as in the economy as a whole. The largely Midwest-based automotive industry, for example, is humming along, pushing almost unbelievably to new records in U.S. sales and hauling hundreds of companies in the region along with it.

Manufacturing in general continues to benefit from the reshoring phenomenon. Call centers increasingly favor the Midwest over any other region of the country. And technology companies — native-born, as well as those headquartered on the coasts — have begun to warm up to the talent and work ethic that resides in America’s heartland.

What’s more, the Midwest has been the capital of much of the innovation at the state level that directly benefits economic development, ranging from tax cuts and deregulatory thrusts put in place by Republican governors to the spread of right-to-work laws that threaten the traditional Rust Belt industrialized union ethos. Indiana, for instance, recently was named the third most business-friendly state in America according to a report released by Pollina Corporate Real Estate. The state’s business climate under Governor Mike Pence rose in the Pollina ranking from No. 7 in 2014 and from No. 23 in 2010.

Missouri legislators were able to pass a bill that would have made the Show Me State the nation’s 26th to join the right-to-work movement, but Gov. Jay Nixon vetoed it. Meanwhile, Republican Gov. Bruce Rauner is going head-to-head with the Democratic legislature in Illinois in an attempt to root out the public-union protection that Wisconsin Gov. Scott Walker successfully attacked across the northern border in Wisconsin.

Some Challenges
But, meanwhile, a handful of formerly very positive factors for the Midwest have been mitigated somewhat. They include a stronger dollar and struggling economies overseas, which hurt manufacturing exports. The continued decline in oil prices has taken much of the spark out of the exploration and production boom in new energy fields. The eclipsing of traditional Midwestern consumer packaged goods giants by startup food and beverage companies has sapped the region of a long-time source of well-paying jobs. And declines in the prices of major agricultural commodities have shaken everything from rural stability to farmland prices to employment at agricultural-equipment giants such as John Deere and J.I. Case.

Thus, toward the end of 2015, the Mid-America Business Conditions Index maintained by Creighton University continued to slump, indicating what the Omaha-based school called “contraction in manufacturing and point[ing] to slow negative economic growth over the next three to six months for the overall regional economy.

As has been true for at least a century, as goes manufacturing, so goes the Midwest economy. And lately, observed Ernie Goss, director of Creighton’s Institute for Economic Inquiry, “the strong U.S. dollar and global economic weakness are having a negative impact on manufacturers and businesses linked to manufacturing in the region.”

Double-digit-percentage declines in wholesale prices for farm products and energy, he said, have taken a huge toll on the Midwest, starting with its manufacturers. In fact, between late 2014 and late 2015, the region’s manufacturing sector lost almost 12,000 jobs, or about 1 percent of the total manufacturing jobs in the Midwest.

Automotive Comeback
It was a good thing, then, that auto sales continued their remarkable seven-year arc into record territory by pushing the 2015 total in the United States to more than 17 million, an accomplishment last seen a decade ago — and reasoned by many experts since then as a level that domestic sales in the American auto industry never again would achieve.

One huge indicator of the industry’s accomplishments of the last seven years was that the United Auto Workers was able to obtain very lucrative settlements for its members who work at the strongly profitable Detroit Three automakers, in new contracts concluded in late 2015 after the rank-and-file had gone without a raise since 2009. The new pacts include not only significant raises in base wages for veteran workers but also, significantly, the gradual phasing out of the significantly lower “Tier 2” wages that had enabled General Motors, Ford, and Fiat Chrysler to make small cars profitably in the U.S.

Another factor that will hugely affect the Detroit Three automakers is the future of the “self-driving” car, which will be propelled by advances in an array of digital technologies. Carmakers are staking more and more of their own investments on autonomous driving. Ford, for example, became the first automaker to test autonomous vehicles at M City, a new, 32-acre facility designed to replicate a city environment located at the University of Michigan in Ann Arbor. “The goal of M City is that we get a scaling factor,” says Ryan Eustice, a principal collaborator for the university with Ford. “Every mile driven there can represent 10, 100 or 1,000 miles of on-road driving in terms of our ability to pack in the occurrences of difficult events.”

In the meantime, it’s not just the traditional American Big Three that are pumping more money into the Midwest’s auto manufacturing sector. Honda, for example, has continued to expend hundreds of millions of dollars building up its huge car-manufacturing complex in central Ohio, and Toyota continues to invest heavily in its plant in Indiana.

In fact, Indiana is benefiting from an overall aggressiveness in landing new companies and new plants that goes a long way in explaining its rising reputation. “Since day one of this administration,” Pence said, “we have made job creation job one by cutting costs and taxes for families and job creators, reducing regulations that make it hard to do business, and investing in our growing workforce.”

And solidifying Missouri’s position as a leader in the automotive sector, auto-parts maker LMV Automotive Systems completed a $90 million manufacturing facility and Innovation and Training Center in Liberty, Mo., in September. The new center, located in the company’s recently completed 469,600-square-foot facility, is expected to train hundreds of employees in its first year in skilled trades and world-class manufacturing best practices. The training center will also be a focal point in LMV’s new partnership with Northland CAPS, an organization that provides high school students with opportunities to gain exposure and skills related to high-demand/high-skill professions such as engineering, computer software development, and advanced manufacturing.

Significantly, the Midwest overall is developing more and more pockets of company expansion and job growth tied to healthcare, digital technology, and other verticals not always associated with an area so dependent historically on manufacturing and agriculture. This includes a burgeoning medical-equipment manufacturing business in Minnesota, for example.

Iowa also exemplifies the diversification of business in the Midwest. It has built an environment that fosters success for insurance and financial services, with Principal Financial, Wells Fargo Mortgage, John Deere Financial, and nearly 6,400 other financial and insurance companies locating in the state, including nearly 140 insurers.

State officials note that Iowa has built an environment that fosters success for insurance and financial services. There is no state corporate income tax on out-of-state sales, federal tax deductibility on in-state sales, and a premium tax of just 1 percent. And both Drake University and the University of Iowa have highly ranked actuarial science programs; Drake’s Kelley Insurance Center provides tailor-made programs to mold industry leaders.

In a home-grown example, Alorica, a financial services firm in West Des Moines, announced in 2015 that it plans to hire another 150 people, a huge multiplication of its existing workforce of 40 in the Des Moines suburb.

Iowa also retains a primary place in the crucial Midwest food processing industry. In fact, three days after Tyson Foods closed its beef plant in Denison, Iowa, axing 400 jobs, another Denison company picked up the slack and announced plans to bring new jobs to the community. Quality Food Processors says it plans to add 200 jobs after a $20 million expansion of its plant that makes bacon products and ready-to-eat smoked meats.

Wisconsin’s economic performance has been in the spotlight for a few years as it climbed various rankings of business performance under Gov. Scott Walker. And while Walker wasn’t able to generate as much job growth as he promised, Wisconsin’s increasingly diversified economy keeps notching some impressive wins, mixing both companies new to the state and existing corporate citizens in the process.

Fast-growing Dollar General, for example, selected Janesville, Wis., for its one-million-square-foot Midwest distribution center — its first operational outpost in the region — and the hiring of 552 full-time employees by 2019.

And few companies in the Midwest can match the expansiveness of Epic Systems, a company that makes the software on which about 50 percent of Americans’ medical records are stored; the company hit revenues of $1.7 billion in 2013. Epic already employs about 8,000 people at its fast-expanding campus in Verona, Wis., in suburban Madison, and continues to expand. Campus Five, now under construction — even though Campus Four isn’t finished yet — would add a half-million square feet of office space.

Finally, in western Michigan, a Las Vegas company plans to build a high-tech data center in a pyramid-shaped building formerly owned by business-furniture giant Steelcase, which moved to a new facility. The company, Switch, said that at two million square feet, it would be the largest data center in the eastern United States. Part of the appeal of Michigan, a Switch spokesperson says, is that the state is far from traditional earthquake zones and other natural risks on the coasts. It’s always been said that the Midwest is solid. And that’s not just a metaphor.

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