Why the Industrial Heartland Still Matters: Q&A with Mark Schweitzer

Why is the Cleveland Fed invested in studying manufacturing trends and impacts?

We want to have a good understanding of how our region is developing, and the Cleveland Fed’s multipart study—the industrial heartland working paper, the Economic Commentary, and the Industrial Heartland Series—offers a view of the area’s performance and the factors behind that performance. Our region is gradually diversifying away from manufacturing, and this change is normal. It should happen.

Yet, our region is still sensitive to manufacturing trends. When Loretta [Cleveland Fed President Loretta J. Mester] speaks at the FOMC [Federal Open Market Committee] meetings, the anecdotes and analysis that are more focused on a manufacturing perspective are an important part of the regional information that the Fourth District provides the committee. In order to be well-informed about manufacturing in the region, we need to know the big picture and not just the short-term issues. This study offers that big-picture view.

The Cleveland Fed’s Fourth District comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia. Tell us about how the District fits into the industrial heartland, which you’re defining as a historically manufacturing-heavy area that includes New York, Pennsylvania, Ohio, Michigan, Illinois, and, to a more limited extent, Wisconsin. Why has manufacturing been so important to the Fourth District’s economic health—and is it still?

In many ways, Fourth District boundaries reflect manufacturing history. The industrial heartland has developed during a more-than-100-year span, and the Cleveland District has long been in the heart of the region. In terms of Cleveland District’s specialties, even today they are predominantly manufacturing sectors. There is higher employment in primary metals than the nation’s average, for example. Fabricated metals, miscellaneous manufacturing, manufacturing equipment, electrical equipment, the Cleveland District has that history, so when we’re thinking about how the District performs today, manufacturing still matters.

You identify two periods of major declines in manufacturing employment in the United States, from 1979 to 1983 and from 2000 to 2010. What shocks precipitated these declines?

There’s a large shock to manufacturing in the late 1970s, and it was brought on by a combination of factors: the oil crisis, foreign trade, and industrial relocations within the United States. Many manufacturing plants closed within the industrial heartland, while plants and factories that had previously moved or that had opened in the southern United States didn’t end up closing. Not surprisingly, sector-specific shocks also coincide with a deep recession.

Regarding the latter, there’s been a vibrant academic discussion about what went on in manufacturing in the 2000 to 2010 period. There’s a debate between the people who focus on technology and manufacturing’s growing more efficient and the people who note that this period occurs when China’s becoming a major exporter had far-reaching effects for manufacturing around the world. It is always hard to identify the underlying cause, but the effects of the shocks were large in this region’s manufacturing sector.

Do you see similarities or differences in the ways in which these declines affected three of the largest metropolitan statistical areas (MSAs) in the Cleveland Fed’s District, Cleveland, Cincinnati, and Pittsburgh?

Each of the three MSAs had manufacturing concentrations in 1969, so the reactions and development of the three stand out as interesting contrasts.

Cleveland is clearly an industrial stalwart, and there’s no question that it’s industrially focused. What’s really surprising is that out of the nation’s MSAs, it was relatively well off. People think of the industrial heartland as a prosperous region pre-Rust Belt period, but that’s not uniformly true. Pittsburgh was actually a below-average-income metro area in terms of per capita income in 1969, as was Cincinnati. Cleveland was an outlier in that it was well above average, in the top 10 for MSAs. Over time, Cleveland has held more jobs in manufacturing, but it’s also seen more job loss, slower population growth, and, recently, weaker income growth than the other two metro areas. Pittsburgh lost tremendous amounts of manufacturing employment in the 1980s, and it never really recovers that lost employment in the manufacturing sector, and then the city ultimately goes on to become more much service driven, with notably higher income growth since 2005. Cincinnati is seeing more population and employment growth over most of the time period that is closer to the pattern seen in MSAs that were not manufacturing intensive in 1969.

Isn’t manufacturing fading nationally? Is Pittsburgh’s transition from manufacturing to a service-oriented economy typical?

In the industrial heartland as a whole, manufacturing’s share of earnings declines across the board. It declines in the nation, too, so that the Fourth District is still more industrialized, still more manufacturing-centric than the nation as a whole. The District’s manufacturing intensity is still roughly in proportion to its proportion in earlier decades. Actually seeing the manufacturing share drop below the nation’s is rare in the industrial heartland. Pittsburgh is really the outlier in that way, so Pittsburgh’s transition is not typical.

What currently drives business and economic growth in Cincinnati, Cleveland, and Pittsburgh, and how does manufacturing play a role in that growth?

Cincinnati has become more service providing, as well, and it also has significant growth in the management of companies and in other services. It has become increasingly focused on the management of companies, with several large corporate headquarters, along with banking, but it still has significant focuses on several traditional manufacturing activities, including primary metals, chemical manufacturing, and transportation equipment.

Cleveland is still relatively manufacturing focused: We’re seeing some interesting growth linked with manufacturing and the management of companies. There may be fewer headquarters than there used to be in Cleveland, but there is still an unusually large share of employment focused on managing companies. Cleveland’s hospitals are extraordinary in their employment share, because they reach a far larger customer base than typical.

There’s certainly a lot of “eds and meds”—higher education and hospitals—in the Pittsburgh area, but fracking and oil and gas exploration has become a really important part of that region, as well. It is interesting to see that educational services are a relatively large employment focus in Pittsburgh, even considering the fact that each of the MSAs has notable universities and colleges. And, again, like the other two metro areas, Pittsburgh has a strong presence in the management of companies, a sector that is both growing and pays relatively well.

What geographic or intellectual resources do the Cleveland, Cincinnati, and Pittsburgh MSAs benefit from in terms of economic development?

There are many reasons businesses locate where they do. Some of those reasons may be tied to history, such as the medical imaging plant that used to be Picker International, founded by Dr. James Picker, who helped create one of the first commercial x-ray machines here in Cleveland. Some of those reasons are related to happenstance.

Others are related to geography. Cleveland is a great location to produce steel because resources are easily transported to the city. That’s why ArcelorMittal still has one of its largest US plants here, because fundamentally it’s just a logical place to produce steel. The city sits at the juncture of iron and coal, the components of steel, with iron mines on the north Great Lakes and coal that, historically, came from the south. The Pittsburgh–Youngstown–Cleveland region was a huge part of US steel making. Once the iron resources in the northern part of Michigan were made available on the lakes, Cleveland had a cost advantage over Pittsburgh because of less expensive shipping costs.

In the service sectors that have arisen in each of these MSAs, both history and geography are important. Cincinnati’s focus on retailing and management of companies reflects long-standing firms that grew into nationally and internationally recognized corporations, while transportation service reflects more of its central location. Pittsburgh’s education focus gained more prominence even while the local population base declined.

What resources can our Fourth District MSAs employ to spur additional growth in newer high-tech-heavy manufacturing industries?

If an area has a workforce skilled in high-tech manufacturing, that activity is more likely to locate in that area. The skills and abilities and expertise of the people, companies, and assets are significant drivers of high-tech growth. The Fourth District does have assets that can contribute to a high-tech future. For instance, Pittsburgh has been attractive to high-tech companies. It’s been pretty successful in the automated car world, in part because of the ties to Carnegie Mellon and the ability to provide skilled engineers to work in those fields. Cincinnati continues to grow a bit better than the other two MSAs as it has continued to see more service-sector growth, so manufacturing is probably a smaller part of the future of both Pittsburgh and Cincinnati.

Another indicator of high-tech growth is the number of patents granted in an area. When the Cleveland Fed looked more than 10 years ago at the long-run determinants of growth, patents and innovation were very important. When you think about patents and innovation, people have a tendency to focus more on educational institutions, but you really want to see a good company environment for patents, too, because most patents are produced by companies, not by educational institutions.

The largest patent producer in Cleveland from 2000 through 2015 was Lincoln Electric, headquartered in Euclid, Ohio. They have a lot of actual production on top of very sophisticated engineering. Next are Rockwell Automation followed by the Cleveland Clinic. And the Cleveland Clinic has been moving up these rankings a lot. It used not to be in the top 10, and now it’s third. Innovation is a critical path to keeping both the companies and the region prosperous.

While completing this study, did you encounter anything you didn’t expect?

The big surprise to me was that the Fourth District has spent a lot of time diversifying away from manufacturing, and manufacturing has gotten to be a much smaller part of the economic activity in the region, but the region is just as sensitive to manufacturing employment losses as it was in the early 1980s.

Exports are a key indicator of economic performance in a region. From a city’s standpoint, exports are goods and services that are saleable to another city or another part of the United States, not just internationally. Things that are not exportable are services to our own communities. The grocery store, for example, is going to prosper or not prosper based on where people are living and what their incomes are. But a larger company may be selling its goods or services throughout the United States, not just in its own locality. That company’s growth is completely independent of how its own community is faring economically, so the effects of its having good or bad years are larger. These larger companies are often a community’s conduit to better prospects, and in many cases, they are the source of a region’s ongoing connection to its manufacturing heritage.