Midwest's Pain Now Yields Gain For Its Economy

CHICAGO -- Though Michael Jordan and his world champion Chicago Bulls provided much of the good news for this city in recent weeks, it took seven years of pain and hard work before the basketball team reached peak performance.

The same can be said for the region's economy.

Although a shakeout of its manufacturing sector clouded the Midwest during the past decade, the region's steady but unspectacular expansion has caused it to experience only a muted downturn during the latest recession.

That's good news for the the region's banks, which are on more solid footing than the big northeastern and California banks. On the whole, mid-western banks are posting higher returns on equity and reporting fewer bad loans than their coastal peers.

Banking in the region "is boring but healthy," said Steven Schroll, a regional banking analyst at Piper Jaffray & Hopwood, Minneapolis. "It's a slow lending environment, but the quality of loans is good."

Region Seen as Winner

A study by the Federal Reserve Bank of Chicago makes a strong case that the Midwest will be the regional winner in the 1990s, growing faster than the nation as a whole after experiencing the slowest growth in the 1980s.

For one thing, the Midwest is benefiting from the boom in exports and the free-trade agreement with Canada, this country's largest trading partner. The Midwest accounts for almost one-third of all trade between the United States and Canada.

Exports a Strength

"Export growth currently underpins much of the forward momentum of the Great Lakes economy," noted Eleanor H. Erdevig, an economist at the Chicago Fed.

What ails the coasts is harder to find in the Midwest: There is little in the way of a real estate overhang in the region. The Chicago and Minneapolis markets are smarting, but in general have decent absorption rates.

Commercial real estate accounts for just 12% of all loans among midwestern banks, compared to almost 20% elsewhere, according to Oppenheimer & Co. Residential real estate values in the Midwest are below the national average, keeping costs in check.

The Midwest's agricultural economy also has turned around sharply in recent years. The Chicago Fed estimates that farm loan growth expanded by 1.0% in 1990, after falling 30% between 1983 and 1990.

Manufacturing Dominates

To be sure, the region is still dependent upon manufacturing. It has the highest distribution of durable goods producers in the country, according to Diane Swonk, an economist at First Chicago.

While that was a bane in the early 1980s, it has become a boon in the early 1990s. And the durables are diversified between industrial and consumer, so that a sluggish automotive industry does not automatically mean an economic downturn.

Consumer income, which drives two-thirds of the country's economic activity, is expected to grow faster in the Great Lakes region than any other region of the United States, Ms. Swonk concluded.

A Darker View

Still, there are some economists who do not take such a sanguine view of the region. DRI/McGraw-Hill, an economic consulting firm based in Lexington, Mass., expects just the opposite: Growth will lag the nation and the region will continue to lose both jobs and people to Southern and Western states.

The labor force peaked in 1990 and is now declining. Baby boomers have not flocked to the region, and the elderly have sought warmer climates.

"The population patterns of out-migration have not been reversed," said Sara Johnson, regional economist at DRI.

Distribution Uneven

Even the economists bullish on the region acknowledge that not all states stand to benefit.

Michigan, in particular, is expected to continue to underperform both the region and the U.S. economy as a whole, according to Ms. Swonk. Even though manufacturing as a share of its employment has slipped to 21.3% from 25.6%, the state's manufacturing is not well diversified between capital and consumer goods.

And because the auto industry's wages exceed the national average, costs remain high in the state.

Still, given that the decade of the 1980s saw massive retrenchment, job displacement, there is more to cheer around here than just the Bulls' victory.

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