Midwest’s Economy Is on the Mend, Fed Researchers Say

Like an old rusty car that has been sent to the shop for major body work, the economy of the upper Midwest is well on its way to restoration. Maybe the patches haven’t been sanded yet or a new coat of paint applied, but the holes are filled and the structure looks solid once again.

Silas Keehn, president of the Federal Reserve Bank of Chicago, says it’s time to junk the “Rust Belt” label the region has worn for so long. “Maybe it ought to be called the ‘Thrust Belt,’ ” Keehn quips.

Few people have watched the Rust Bowl’s shifting fortunes more closely than Keehn, whose bank--one of 12 in the Federal Reserve System--covers most of the industrial areas of Michigan, Indiana, Illinois and Wisconsin. It also includes all of Iowa, where the vast array of competitive problems that hobbled American manufacturing during the 1980s were compounded by a collapse in agriculture.

From a remarkable network of sources in the region, Keehn and his research staff gather an unending stream of information about the health and direction of its economy. Combined with similar assessments from the 11 other Fed districts, the reports create a national mosaic that gives Federal Reserve policy-makers an up-to-the-minute reading on developments in the nation’s economy. This changing picture is an essential part of the Fed’s decision-making process on interest rates, banking issues, financial markets and the amount of money and credit available to the economy.

Thus, the Chicago Fed president’s assessment about the resurgence in his region is based not just on economic statistics, but also on anecdotal evidence covering the broad range of industries in the area.

Neither he nor his research director, Karl Scheld, can think of a single industry where things are getting worse.

In every instance, conditions are improving or at least stable, and in some, such as basic steel and heavy equipment manufacturing, companies are working flat out and even allocating future production to customers anxious to buy more than is likely to be available, the two Fed officials say.

In the next Fed district to the west--the Minneapolis Federal Reserve Bank covering northern Wisconsin, Minnesota, the Dakotas and Montana--the information-gathering network is showing a similar pattern of stability or growth all across the region. Even sectors that lagged far behind the national economy in the earlier part of the current economic expansion-- agriculture, iron mining and other natural resource based industries--have turned the corner, said economist Gary Stern, president of the Minneapolis bank.

And so it goes around the system, even in the Dallas district, where the basic economy is still growing but where billions of dollars worth of bad loans, primarily on commercial real estate, have devastated many of its commercial banks and thrift institutions.

Given the inevitable delays between economic events and the reporting of them in official statistics, the Fed relies to a considerable extent on its own network to keep it informed of what is happening. Fed Chairman Alan Greenspan said that one of his pleasant surprises when he became chairman last summer was the amount of information that network passed upward to the Fed policy-makers.

The formal result of this process is a publication called the “beige book,” which is prepared eight times a year before each of the regular meetings of the Federal Open Market Committee, or FOMC, the system’s top policy-making group. Its actual title is “Summary of Commentary on Current Economic Conditions by Federal Reserve District.”

The beige book includes a three-page report prepared by each Fed bank on conditions in its district and a national summary written by the staff at one of the 12. “It is not designed to be exciting, but factually correct,” said Scheld dryly.

When the latest issue of the beige book was released, just over a week ago before an FOMC meeting set for this Tuesday, stock traders and other financial market participants decided the book’s message was one of greater strength in the economy than they had been expecting. To the markets, that meant that the Fed was not likely to seek lower interest rates any time soon, and the traders’ actions sent long-term interest rates up and bond prices down.

“Without exception, reports confirm a moderate expansion of the nation’s economy,” the book’s summary said. “Strength in the manufacturing sector and continued moderate growth in employment are sustaining the current expansion. Consumer spending, which had provided much of the earlier stimulus to the economy, has continued to expand sluggishly. Auto sales, however, improved and have risen strongly in some districts. Construction activity remains mixed, while bank loan demand is generally flat. Consumer lending has declined sharply in keeping with the slower growth of consumer spending. The farm sector outlook remains positive.”

It was not a description of a booming economy, but neither did it paint a picture of the sort of economic weakness that many forecasters had expected to show up in the first quarter of this year following the trauma of last October’s stock market plunge. It also came in the wake of comments by Greenspan at a congressional hearing a few days earlier that had indicated he no longer was concerned about a recession this year.

Given that picture, most analysts expect the FOMC to make no changes soon in policy governing credit. The FOMC includes as voting members the six Fed governors--there is one vacancy on the Fed’s board--the president of the New York Federal Reserve Bank and four other reserve bank presidents serving on a rotating basis. The remaining seven bank presidents attend and participate fully in the discussion but do not vote.

Except for Gov. Martha Seger, who last week said she still believes that economic activity has contracted this quarter, FOMC members generally seem to agree that the risk of recession has all but vanished. At the same time, they see little evidence of any imminent surge in growth or an acceleration of inflation that would cause them to want to step on the monetary brakes right now.

The latest batch of economic statistics showed that while new orders for durable goods fell in February for the second month in a row, orders remained above the level of shipments, so that the backlog of unfilled orders continued to rise. The decline in new orders suggests that there are some production cuts in the works as businesses try to bring inventories back into line with sales after a sharp increase in the fourth quarter of last year. However, the growing backlog of unfilled orders also suggests new production gains in the future.

Personal incomes rose strongly in February, and so did consumer spending. Meanwhile, the Labor Department reported that consumer prices increased only 0.2% in February and that they have gone up at only a 2.8% annual rate in the last three months.

Against such a background, and with the value of the U.S. dollar not under significant downward pressure on foreign exchange markets, analysts think that the Fed simply has little reason to make even a small policy shift right now.

In an interview before the latest figures were released, Stern declared, “In these circumstances, I can’t see why anyone should want a sharp departure in policy. I know that sounds complacent, and that we are paid to worry . . . (but) the expansion is intact and the transfer from a consumption-driven economy to an export-driven economy is well under way.”