Midwest Economy Blog

State Economies Hit Hardest by the Pandemic Are Still Playing Catch-up

May 12, 2022

The pace of economic growth continued to slow in the Seventh Federal Reserve District1 during the first half of 2023. While total employment was still growing during the first six months of this year, the pace was slower than in 2022—and for manufacturing employment, even more so. As demand weakened and supply chain pressures subsided, manufacturers began reporting higher-than-comfortable inventories and declining backlogs. Growth slowed as financial conditions tightened in response to interest rate hikes by the Federal Reserve and turmoil in the financial system. In this blog post, we explore these developments and consider their implications for the rest of 2023.

Growth continued to slow in the first half of 2023

In our year-in-review blog post for 2022, we wrote that the Seventh District and the nation were slowing toward their long-run growth trends following a period of very strong activity, which took place as the economy climbed out of the hole created by the pandemic. The slowdown trajectory continued in the first half of 2023, as can be seen in panel A of figure 1, which shows year-over-year growth in total nonfarm payroll employment for the U.S. and Seventh District.2 But while employment growth has been slowing, rates for the U.S. and the Seventh District remain solidly above their ten-year averages, indicating the labor market has stayed strong over the first half of the year. Panel A of figure 1 also shows that the Seventh District’s employment has been growing more slowly than the country’s. The recent gap in employment growth rates between the nation and the Seventh District is quite similar to the gap between their respective ten-year averages, suggesting that long-run, structural factors are behind the District’s relatively weaker growth.

A. Total employment

Figure 1, panel A is a line chart plotting the year-over-year percent change in employment for the U.S. (solid blue line) and the Seventh District (solid red line) from January 2020 through June 2023. The Seventh District and U.S. lines closely track each other, with the District line being below the U.S. line for all time periods except the first half of 2021. There are two dashed lines representing the U.S. compound annual growth rate of employment over ten years (dashed blue line) and the Seventh District compound annual growth rate of employment over ten years (dashed red line). Both the U.S. and Seventh District year-over-year percent change lines end slightly above their respective ten-year average lines.

B. Manufacturing employment

Figure 1, panel B is a line chart plotting the year-over-year percent change in manufacturing employment for the U.S. (solid blue line) and the Seventh District (solid red line) from January 2020 through June 2023. The Seventh District line is more volatile than the U.S. line and is below the U.S. line for all time periods except the first half of 2021. There are two dashed lines representing the U.S. compound annual growth rate of manufacturing employment over ten years (dashed blue line) and the Seventh District compound annual growth rate of manufacturing employment over ten years (dashed red line). The Seventh District’s year-over-year percent change line has recently fallen below its ten-year average line, while the U.S. year-over-year percent change line remains slightly above its ten-year average line.
Notes: U.S. and Seventh District ten-year averages are calculated as a compound annual growth rate for the ten years prior to the final observation date. The compound annual growth rate is the fixed rate of growth that transforms the employment level at the start of the reference period to the level at the end. The formula is \[100\,\times \ {\left({\left(\frac {EmpJune2013}{EmpJuly2023}\right)^(1/10)-1)}\right)]. Seventh District data are the combination of state data for Illinois, Indiana, Iowa, Michigan, and Wisconsin.
Source: Authors’ calculations based on data from the U.S. Bureau of Labor Statistics from Haver Analytics.
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