Midwest Picks Up Steam for 1990s

THE industrial Midwest is entering the 1990s in a stronger position than it entered the 1980s. Its companies are leaner, smarter, and much more aware of foreign competition. The question for the '90s is whether government can follow suit.

``At the company level I see people doing all the right things,'' says John Rau, president of the Exchange National Bank of Chicago. But ``if the 1980s were the test when companies got religion, the '90s will be the test of whether the government and the voters get religion.''

What's most needed is federal and state investments in the region's education and basic infrastructure, such as roads, bridges, and airports.

Up to now ``we haven't made them,'' complains Morton Marcus, director of the Indiana Business Research Center. ``We have been putting money in on a maintenance level and not advancing.''

Without these long-term investments, the Midwest won't be able to hold its own in the international arena, these economists say.

During the early 1980s, the Midwest slipped into the worst recession in 50 years. Many of its manufacturers closed down. Its farm sector withered under high debts and low farm prices. From 1980 to 1986, the region's share of national output shrank from 25.4 percent to 23.7 percent. Only the oil patch posted a worse record of growth. Of the 12 Midwest states, only Minnesota has been able to maintain the same share of national income that it had in 1978, Mr. Marcus says.

These hard times forced a significant change in the way the Midwest does business, says J. Lee Juett, president of a large Detroit-area machine-tool distributor. During the boom times of the late 1970s, his salesmen visited customers when they pleased and shot the breeze before settling down to business. ``That can't happen anymore,'' Mr. Juett says. ``You have to go in with a purpose.'' Customers don't have time for much small talk. Neither do his salesmen.

Juett's company suffered a string of three years of losses in the early '80s - the first ever for the 66-year-old company. So Juett trimmed staff by 25 percent, halved the number of machine-tool lines he carried, and stopped offering some services to focus more narrowly on serving the auto industry. Boom times aren't back, but annual sales volume has doubled since those dark days.

For all its restructuring the industrial Midwest still is more reliant on manufacturing than any other region of the United States. Ohio, Michigan, Indiana, Illinois, and Wisconsin represent 26.8 percent of US manufacturing, according to the latest figures available. Traditionally a very cyclical region, the Midwest in this recovery has its cycles out of sync.

``Cyclically, we're in places that we have never been,'' says Jake Haulk, senior economist with Mellon Bank in Pittsburgh. ``It's like the clock struck 13.'' Some areas and industries in the region have rebounded from the early 1980s. Others haven't recovered at all.

In September, for example, the Labor Department reported average annual pay increases in US metropolitan areas for 1988. Anderson, Ind., which had the nation's highest unemployment rate for a brief time early in the 1980s, recorded the third best jump with a 9.6 percent increase over 1987. The third worst on the list? Beaver County, Pa., home to the old steel town, Aliquippa, which recorded a 1.6 percent drop in pay.

Economists caution that such year-to-year data don't represent a trend, but they do signal the quirkiness of the region's economy.

Government investment won't help the immediate prospects for the Midwest, which are mixed.

Except for last year, the Midwest's hiring outlook for the first three months of 1990 is more positive than any first-quarter period this decade, according to the quarterly survey released this week by Manpower Inc., a company that provides temporary services. Economists here say no recession is in sight, but a slowdown is imminent or already under way.

``Ohio, Indiana, and Michigan are the wheels and the landing gear of the American economy,'' Marcus says. No matter how softly the economy lands, these industrial states will bear the brunt of it.

The automobile sector is causing the greatest concerns right now, heightened this week by reports of a sharp reduction in November new-car sales. The slowdown there implies deepening trouble for auto-dependent states such as Michigan, Indiana, Ohio, and Missouri. A similar slowdown in defense spending would have important implications for the St. Louis area.

In addition, ``the defense industry right now is the big question,'' says Jeff Karrenbrock, an economist with the Federal Reserve Bank of St. Louis. McDonnell Douglas, for example, has contracts that run into the 1990s, but a slowdown would hurt eventually.

The long-term prospects for the Midwest are more difficult to predict.

The good news is that the dramatic restructuring of this decade is over.

``When this slowdown finishes within the next 12 to 18 months, the region will not have come through the same kind of problems it did from 1975 to '85,'' says Daniel Pavsek, an economist with Ameritrust Bank in Cleveland. ``If there is going to be some continuation of the hollowing out, it will be much slower now than what we experienced in the last 20 years.''

The problem is that no one knows whether the restructuring will be enough to maintain its position in the world.

``I think the Midwest would be better off if it continues to be a manufacturing center,'' Mr. Rau says. ``The key question is: Can it hold or build its share of world output?''

Without a well-trained, educated work force and a well-maintained infrastructure, the long-run answer is no, these economists say.