Internet implosion! Dotcom depression!
To read the headlines, one might think a Silicon Valley slump had turned the country into a soup kitchen overnight. Far from it. While the bursting financial bubble ripped through the Internet world, throwing thousands out of work, its impact on the national employment picture barely registered a blip on the screen.
But it's on the nation's factory floors and construction sites - especially concentrated in the nation's heartland - that a more accurate picture of the economy will emerge. The manufacturing sector will reveal more about the potential severity of an economic slowdown in the coming months than all the felled startups of the New Economy. By one estimate, just the closing of General Motors' Oldsmobile division will lay off as many people as all the Internet failures last year.
Here in the heartland, where manufacturing is concentrated, the damage reports from factory workers, construction contractors, and retail clerks are, for now, far from devastating.
This guarded optimism stems from big changes that have occurred since the manufacturing sector's last real recession two decades ago.
First, the double-digit interest rates of the 1980s, which sent manufacturers hurtling off an inflationary cliff into the depths of a prolonged depression, are nowhere to be seen.
Second, manufacturers have adopted the New Economy's information technology to both modernize and globalize. For many, their futures depend on Japan's Nikkei index at least as much as America's NASDAQ.
With foreign markets still relatively strong, the US downturn doesn't look as threatening. "The economy is clearly slower than it was, but it's not showing signs of falling in recession," says Michael Miller, an economics professor at DePaul University in Chicago.
Last week's surprise interest-rate cut by the Federal Reserve further eases concerns in the heartland.
"The interest-rate drop alone should disproportionately help the region," says Oscar Gonzalez, economist with John Hancock Financial Services in Boston.
The immediate gain will probably be felt more in the Northeast, with its heavy concentration of financial companies, than in the Midwest, says David Ingram, senior economist with Economy.com in West Chester, Pa. But in the second half of the year, lower rates will likely heat up everything from housing starts to appliance purchases and automobile sales, all of which showed weakness late last year.
Almost everywhere one looks, the Old Economy shows signs of slowing. Auto sales have garnered the most attention. Salomon Smith Barney estimates that unit sales dropped last month to their lowest level since August 1998. But home sales have also fallen. Appliance manufacturers are laying off workers. Since November, two steelmakers have filed for bankruptcy and a third has laid off 1,000 workers. Overall, manufacturing activity fell in December to its lowest level in nearly a decade, according to the National Association of Purchasing Management.
"I don't see a cliff in front of manufacturers at this point, but I'd say they're in for a rough ride," says David Huether, director of economic analysis for the National Association of Manufacturers in Washington.
The picture isn't all bleak. Deere & Co., the Moline, Ill., manufacturer of agricultural equipment, has struggled with a weak farm economy. But the sector could improve if foreign demand for US grain grows and crop prices rebound.
"So far, so good," says Tom Burns with Dresdner Kleinwort Wasserstein in New York. "Farm exports have been improving throughout the fiscal year."
Caterpillar sells roughly half its heavy equipment overseas and has diversified into so many businesses that the slowdown in construction, while significant, hasn't sunk the company.
For example: The Peoria, Ill., company has set up a dealer network in China and is working on one in Russia. Through the first three quarters of 2000, Caterpillar reported slightly better sales and profits than a year earlier.
In greater Cleveland, auto-related companies are seeing a decline, as is LTV Corp., the nation's third-largest steelmaker, which filed for bankruptcy two weeks ago.
But the rest of the region's goodsmaking sector is in far better shape to weather a downturn than in the early 1980s, says Paul Gottlieb, associate director of the Center for Regional Economic Issues at Case Western Reserve University.
"There's this paradox," says Adam Zaretsky, economist with the Federal Reserve Bank here in St. Louis. When he surveyed regional employers last month, "you'd hear: 'A little slowdown in orders,' but at the same time, 'We're having problems finding workers,' " he says.
But Mr. Zaretsky adds that mass layoffs often don't occur until well into an economic slowdown.
Outside the Midwest, manufacturers report an equally mixed picture. For example, computermakers have hit the skids, as US sales last year fell for the first time since PC Data began tracking the industry. But on the East and West Coasts, defense companies are buoyed by the prospect of a GOP administration with a surplus to spend.
And in Washington, the downturn in software (as well as forestry, mining, and agriculture) could be offset somewhat by aerospace giant Boeing Co., whose order books are bulging with big purchases from abroad.
"What we're headed for is relatively slow growth compared with what we had, but no disaster," says Michael Parks, editor of Marple's Business Newsletter in Seattle. His one concern: that a rapid US decline would snowball into a worldwide recession, shrinking US exports.
"All bets are off if we get a crash landing," he says.
(c) Copyright 2001. The Christian Science Publishing Society