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Indiana economy navigated worst of pandemic, but another storm is brewing

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Howard Schneider and Timothy Aeppel
·4 min read
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By Howard Schneider and Timothy Aeppel

WASHINGTON, Feb 10 (Reuters) - Allegion plc is a lock makerthat still churns out its venerable emergency "panic bar" inIndianapolis, where the device was invented over a century agoafter a deadly Chicago theater fire in which hundreds of peoplewere trapped by locked exit doors.

But the future of locks, according to the American-Irishcompany’s chief executive, David Petratis, is digital - cloudtechnology, smart home devices and other connected applications,and for that it has turned outward, most recently acquiring aColorado tech company.

"You have to take the old world and connect it to the newworld, otherwise you become a commodity," Petratis said.

Allegion is part of an industrial heritage that helpedIndiana weather the COVID-19 crisis with a headline unemploymentrate that was down to 4.3% as of December - less than half thatof California - and an employed workforce that's about 99% ofwhat it was before the pandemic.

But in a warning for heartland states, and indeed the nationas a whole, a new analysis from the Brookings Institutionconcludes that the same trends that caused Allegion to send itscapital to Colorado may be part of a coming painful readjustmentfor industries that seemed relatively less exposed to thepandemic's fallout.

The immediate job losses suffered during the year-longhealth crisis may have been heaviest in close-contact serviceindustries like hospitality, food service and tourism. But thosefirms also may remain more labor-dependent and be quicker torehire once vaccines make people feel safe about dining indoors,attending concerts and boarding planes, trains and buses.

Using Indiana as a case study, the new analysis suggests thepandemic, in speeding the economy's digital transformation,risks leaving behind legacy manufacturing states like Indianathat have been slow to invest locally in leading-edgetechnologies and worker training.

"Indiana has been shielded from the gravest disruptions ofthe pandemic," and its large logistics industry has helped itregain jobs fast, Mark Muro and a team from Brookings'Metropolitan Policy Program wrote. But beneath that short-termstrength, "industry and firm productivity growth ... has beendeclining ... Economy-wide, efficiency has slumped."

Wage growth, in turn, has trailed the nation and neighboringstates, and middle-income jobs are getting harder to find.Between automation and the tendency of firms to "upskill" theirlabor demands during recessions, those trends may continue.

The finding, which the authors feel is relevant throughoutthe heartland - generally the area encompassing the industrialMidwest and Great Plains states - may mean the divide willcontinue to widen between the larger coastal states that tend todrive the U.S. economy and the rest of the country.

Some economists expect the major cities in thosehigher-powered states to see an exodus of residents because ofthe pandemic, but that doesn't mean capital and skilled laborwill flock to the country's interior. With President Joe Biden'sadministration promising to "build back better" nationwide, hissuccess and his Democratic Party's prospects in future electionsmay hinge on fixing problems that took root well before thepandemic in parts of the country whose politics skew Republican.

The study was commissioned before the pandemic by theCentral Indiana Corporate Partnership, a coalition ofbusinesses, foundations and universities, to study how to makethe state more competitive.

It included separate reports by other think tanks, includingthe conservative American Enterprise Institute, which painted ableak picture of the long-term demographics in a state expectedto face "gradual decline" and "swift aging" in the years ahead.

Academics in the state have rung similar alarms.

Michael Hicks, an economist at Ball State University inIndiana, notes that the state spends more than $1 billion a yearon workforce training, a respectable amount. But more than halfof the money goes to remedial training in basic subjects likemath. "Only a single-digit share of that goes toward trainingfor high-end, digital jobs," he said.

Those jobs tend to produce more and pay more.

The problem of how to bring lagging parts of the countryinto step with the emerging economy is not a new one, but it maybecome more pronounced after the pandemic.

Ideas have ranged from boosting immigration - theWashington-based Economic Innovation Group has proposed using"heartland visas" to steer new arrivals to places that need morebodies - to having the government invest in new research labs inmiddle-sized cities.

According to the Brookings' analysis, Indiana could use it.

The state by some measures performed well during the lastfew years, with manufacturing centers like Elkhart booming inthe last years of the economic expansion that ended with thepandemic.

But underlying that were some corrosive trends. Output peremployee has been lagging, as have rewards for the less educatedworkers for whom manufacturing had been a ticket into the middleclass.

The pandemic may have masked those weaknesses for a time,but it could also speed the reckoning once the crisis passes.

"The understandable impulse to simply 'get back to normal,'may not suffice," the report concluded. Despite the lighter blowfrom the pandemic on the economy, "Indiana - like other states -is facing a critical moment."

(Reporting by Howard SchneiderEditing by Paul Simao)