Indiana manufacturing turns out remarkably good news

June 19, 2013 — By Michael Hicks

I am always reluctant to fill this column with my recent research, but last week’s release of the annual Conexus Indiana Manufacturing Scorecard begs comment.
Indiana did much better in the cost of worker benefits and continued to lead in the size of manufacturing and logistics. Indiana also ranked third in the pace of manufacturing recovery since the Great Recession, trailing only the tiny but energy-rich manufacturing states of Alaska and North Dakota.
Our human capital scores took a surprising downturn, but the problem is a good one to have.
The classes that entered community colleges in 2007 saw graduation rates drop 3.8 percent. There’s a clear and happy reason for this anomaly.
Enrollment growth in these schools jumped from 25th place to first during the recession (and has subsequently returned to trend). To no surprise, some of these students have yet to graduate; in fact, with enrollment growing more than 15 percent a year during the recession, we should have seen a far deeper drop in graduation rates.
Over the next two or three years, the spike in associate degree students we experienced during the Great Recession will boost our human capital, hence our ranks.
The most interesting part of our research this year was productivity growth. The downturn took a heavy toll on manufacturing cars and trucks, which are high value-added goods. This left us with a greater share of low value-added production of commodity-type products, and so reduced our ranking slightly.
However, last week we reported an even richer story about manufacturing productivity over the past decade.
Manufacturing productivity consists of four things: technology growth, plant and equipment, workers and something economists call “total factor productivity.” This TFP is growth that cannot be explained by other factors. It is really the sole source of economic growth in a developed economy.
In the pre-recession bubble days, productivity growth in manufacturing nationally was led by new capital investments. Labor productivity and TFP shrank, likely due to the effects of the bubble, which kept open too many uncompetitive factories.
Another possible cause is that many factories restructured their production process in the last decade to take advantage of broad investments in information technology. This temporarily reduced TFP.
Since the start of the recession, TFP rebounded and has accelerated within the sector since the end of the recession. This is a major turnaround from the last decade.
Moreover, Indiana leads this productivity growth in the Midwest and ranks high nationally. This is a clear bit of good news for the most manufacturing-intensive state in the union.

Michael Hicks is director of the Center for Business and Economic Research at Ball State University.

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