Thursday, August 27, 2009

What comes out of the churn? 

I got a call last night, and spoke this morning, with a reporter from the New York Times discussing St. Cloud, the economy here and the impact of the New Flyer layoffs (discussed on this blog last week.) St. Cloud seems to have become a magnet for stories about jobs and the stimulus. Describing this city's economy is part of my job, and I remind readers who are curious to look at what we write at the St. Cloud Quarterly Business Report.

Central Minnesota has long been a place that had a higher-than-average share of manufacturing jobs. It's hard to really say why; it's on Interstate 94 and has good rail traffic, so the transportation is here to support it, but there are many, many places like that. The area bucked this long-run trend of declining manufacturing employment, but how much longer remains to be seen. Recessions tend to take declining firms and industries out of business much more, and you get rotation towards other industries as you come out of the recession.

So the question we ask up here, the one I keep asking to local audiences, is "if we're going to stay strong in manufacturing, what's our advantage? And if we're not, what do we rotate towards?" Those who answer positively point to lower labor cost when factoring in relatively high productivity. Take Federal Reserve economist Toby Madden, for one.

Overall, Madden said he's very bullish on the manufacturing sector's prospects for recovery -- if you gauge recovery on the basis of productivity, which he said is an important economic measure.

"If you take a look at what really matters, which is people's consumption of goods and services and leisure time, productivity is the key," he said. "It's hard to measure and it's not reported as vibrantly as job numbers are, which are easy to obtain, yet maybe not as important as the overall increase in productivity and output of goods and services."

Madden said many manufacturing jobs simply will not come back, as companies do more with fewer people.
That won't be New Flyer's (or Arctic Cat's) story, since their plants are relatively new and most of the productivity gains are already in place. If those places grow business, they'll probably add new labor. But many longer-established places in town maybe will have that opportunity before them. That will mean we converge towards the lower manufacturing shares in employment in Central Minnesota, even if we still have a comparative advantage.

The ones who think the comparative advantage is gone? You can call it creative destruction or the churn, but predicting the outcome of this dynamic process is hard. Nobody has a good idea for what comes next. Everyone pumps health and the local hospital. That will serve much of the population to the north and west of us who used to go to the hospitals in Minneapolis, St. Paul and Rochester. But what's happening to their demographics? Central Minnesota might have population growth, but the western part of the state has falling population. Will servicing that population with health, education, retail, leisure and hospitality really work here? We have no I.T. sector to speak of, even though it appears we have some great infrastructure here. Finance? Why would those firms move here? These are the questions I have wrestled with, and will more this weekend as I start writing the next QBR (due out at the end of September.)

Labels: , ,