Why the Midwest Fared Best in the Recession

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NEW YORK (MainStreet) — Throughout much of the Great Recession and the long, slow recovery since, there has been one consistent glimmer of hope for the U.S. economy: the Midwest.

When unemployment hit its worst point in October 2009, rising above 10% nationwide, several states in the Midwest like North Dakota, South Dakota and Nebraska all had unemployment rates of 5% or less. As the foreclosure crisis continues to ravage housing markets across the country, forcing one in every 501 homes into foreclosure in December of 2010, neighborhoods in the Midwest have fared much better by comparison. In Nebraska, one in 2,839 homes were foreclosed on that month, and in North Dakota the rate was even lower, with just 1 in 10,805 homes entering into foreclosure.

If you focused your attention solely on the Midwest right now, you might not even realize there had been a recession.

“People don’t often zoom in on the Midwest that much, but so far, it has kind of led the way out of the recession,” said Steve Cochrane, an economist and managing director of research at Moody’s Analytics, which regularly analyzes financial indicators to determine the regions of the country that have the healthiest economies.

According to Moody’s data, every state in the Great Plains portion of the Midwest, starting with Kansas and Missouri and heading north, is now in recovery mode and no longer at risk of another recession. At the same time, this region also boasts one of the only two states in the country whose economy is actually expanding beyond pre-recession levels: North Dakota.

The picture becomes slightly bleaker if you consider states like Michigan and Illinois to be part of the Midwest, something that several economists we spoke with were hesitant to do, given that both of these economies are still in recession. But even with these states factored in, the Midwest has a better batting average than other regions like the West and Southeast where the majority of states remain stuck in the recession, or at risk of falling back into one.

How the Midwest Dodged the Recession

Much of the reason for the Midwest’s current financial stability is that most of the region was never hit quite as badly by the recession in the first place.

“There were two reasons why places got hit really hard during the recession,” said Howard Wial, an economist at the Brookings Institute who directs the Metropolitan Economy Initiative, which monitors the financial health of the 100 largest cities in America. “Either they had a big housing boom followed by a big housing bust, or they relied heavily on the auto industry. The Great Plains did not have either of these problems.”

Indeed, the auto industry proved to be the major difference between some of the Great Lakes portion of the Midwest and the rest of the region, as states like Michigan and Ohio saw their economies plummet when the nation’s demand for new cars dropped. But it may be the housing market that truly separates the region as a whole from the rest of the country.

“We were never as entrenched in the high-flying real estate market,” said Ernie P. Goss, an economics professor at Creighton University who oversees the Mid-America Business Conditions Index, a monthly survey of businesses in the region. “We didn’t have as much of an upswing on real estate leading up to the recession, so we didn’t have as much of a downswing either. And today, the housing sector is still doing better than elsewhere in the country.”

Cochrane, the Moody’s economist, agrees with this assessment and notes that states in the Midwest had less subprime lending and excess housing construction than the rest of the country, which ultimately helped this area avoid the housing meltdown that pushed the U.S. into a recession in late 2007.

This can be seen as the first and perhaps most important lesson that the rest of the country can learn from the Midwest. Allowing a massive run-up in housing prices and availability may boost the local economy in the short run, but it increases the risk of a collapse down the road. Or, as Goss puts it, “If you live by the sword, you die by the sword.”

However, while a stable housing market may have insulated much of the Midwest from the worst of the recession, the growth this region has enjoyed in recent months has largely been due to the increasing strength of the nation’s agriculture and manufacturing sectors, which are concentrated in this part of the country.

“Commodity sales have been very strong here,” Cochrane says, pointing to healthy sales of agricultural products like corn and livestock. “This has supported income growth, which in turn supports state tax revenues.” Meanwhile, manufacturing output in the Midwest increased consistently each month throughout the end of 2009 and all of 2010.

In fact, some economists argue that the Midwest is the rare part of the U.S. that has truly benefited from globalization recently, as the declining value of the dollar has made it more attractive for countries like China to import soy beans and other crops from this region, in addition to continuing to import our farming equipment.

“The lesson from the Midwest is that globalization can be a very good thing for us if we focus on producing equipment and products that can only be made in this country,” Cochrane said.

Will the Midwest Continue to Prosper?

While the economies in many Midwest states have fared the best in recent years, that may come to an end soon, not necessarily because this region’s economy will start to decline, but rather because other regions will see their economies improve at a faster pace.

“I think the first states to grow will likely be in the Midwest, but come 2012, 2013, I don’t think these states will be the fastest to grow,” Cochrane said.

In a sense, the Midwest’s potential for growth is limited for the same reason that it’s potential for decline during the recession was limited. It is not subject to the extreme lows of those economies tied to the housing market and auto industries, but it is not entitled to the extreme highs, either.

“It has a very stable economy that is very tied to agriculture,” said Wial, the Brookings Institute economist. “This looks to be a region with a slow and steady growth going forward, but it’s not going to lead the economic recovery on any kind of nationwide level.”

Still, after the massive economic downturn the country has just endured, and the financial wreckage that remains, slow and steady growth may look pretty good right now.

“If U.S. states were stock, there’s no doubt you would be selling California and buying  Nebraska right now,” said Goss, the economics professor. Goss speculates that many Americans from elsewhere in the country would eagerly move to the Midwest today if they weren’t saddled with debts and underwater homes.

For the time being then, as Americans wait for the recovery to come to a city near them, we may have to simply take solace in knowing that even in the toughest times, the nation remains strong in its core.

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