Factory slowdown hits these states hardest

A factory worker at the Toyota Industrial Equipment Manufacturing facility in Columbus, Ind.
Luke Sharrett | Bloomberg | Getty Images
A factory worker at the Toyota Industrial Equipment Manufacturing facility in Columbus, Ind.

You may not have noticed a slowdown in factory work lately, unless you know someone who works in a factory or you live in one of the handful of states that rely heavily on manufacturing jobs.

But a report Thursday on orders and shipments for so-called durable goods has added to the list of reasons that many economists, investors — and possibly Federal Reserve officials — are entertaining doubts about the strength of the U.S. economy.

The impact of any possible factory slowdown, though, depends a lot on where you live.

The report by the Commerce Department on durable goods caught most observers by surprise. Orders and shipments of manufactured goods — those designed to last for more than a few years — plunged in December after dropping more slowly in four of the past five months.

Even more troubling, the December decline hit most product categories — a possible sign that an ongoing slowdown in the global economy may be cutting into demand for U.S.-made products.

"While the economy may be growing due to decent consumer spending and a fairly solid housing market, the strong dollar, low oil prices and uncertainties overseas have combined to crater the manufacturing sector," said economist Joel Naroff of Naroff Economic Advisors.

Overall, the U.S. economy appears to be chugging along at a respectable clip — if weaker than many past periods of expansion.

"Despite the weakness of investment, the wider economic outlook is still OK, with consumers likely to drive growth in 2016," said economist Steve Murphy of Capital Economics.

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But a strong dollar isn't helping. That hurts American factories because it makes U.S. goods more expensive when overseas customers paid with depressed local currencies.

In addition to weak demand for exports, manufacturers are seeing orders thinning from their U.S. customers. While growth in the job and housing markets seems to be on track, some companies are apparently holding off on making new capital investments because of widespread uncertainty about whether the economy has just hit a soft patch or may be headed for a deeper slowdown.

Lower crude prices also have forced big cuts in equipment spending in the oil patch, where once-profitable exploration projects are now money-losers. While the pullback in orders cut across a wide range of products, any broader slowdown in manufacturing will have a much bigger impact on some parts of the country. As in past manufacturing cycles, the "industrial heartland" remains at greatest risk.

Most states have yet to recover from the devastating factory job losses of the Great Recession, which followed a long, steady, decadeslong decline in U.S manufacturing. But after bottoming out in 2009, U.S. manufacturers have staged a revival. In many cases, heavy investment in technology and advanced manufacturing techniques have produced a new wave of higher-paying jobs that have helped boost both wages and profits, fueling economic growth.

Despite its long decline in the national economy, manufacturing drives much of the economic prosperity of Midwestern states like Indiana (30 percent of total output), Michigan (19 percent), Wisconsin (19 percent) and Iowa (17 percent), according to data from the National Association of Manufacturers. In Indiana, 1 in 6 workers has a manufacturing job.

Those jobs also tend to be much better paid than the factory work done by overseas workers who have steadily displaced American manufacturing work as globalization prompted a wave of "outsourcing" by U.S. companies.

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In 2013, the latest data available from the manufacturers group, the median annual, state-level salary for manufacturing workers was nearly $70,000. That's about a third more than the overall median salary for U.S. workers that year.

Those wages help boost consumer spending and pay the taxes required to keep state government revenues flowing. So any loss of factory jobs will have an outsized impact on states that rely heavily on manufacturing for economic growth.