The Fifth Inning - Illinois' Economic Recovery Is Just Warming Up

Jan 1, 2015

Charlie Sheen has been more stable than the Illinois tax climate. --Mark Denzler of Illinois Manufacturers Association

For fans of baseball, the midwinter tradition is underway — counting down the days until the pitchers and catchers report for spring training.

When evaluating Illinois’ recovery from the recession, James Glassman uses a baseball analogy. The head economist for commercial banking with JP Morgan Chase says Illinois has only reached the fifth inning in the recovery.

“We are only half way out of the hole we are in. It has taken five years to get where we are. Most recoveries take seven years,” says Glassman, but to emerge from the severity of this type of recession, Illinois is on a 10-year course. Glassman’s view is that there is plenty of recovery left.

Imagine the Illinois economy is a baseball team, with the motto “wait until next year.” Stretching Glassman’s analogy a bit more, here is a scouting report on a couple of key segments of the economic recovery.

On the employment side, the manufacturing sector would be a veteran player who has been on the disabled list and is still trying to get back in the game. Twenty-five years ago, Illinois had 925,000 working in its manufacturing sector. In recent years, that number was below 580,000, although it experienced a small bit of growth in the first three years of the decade. Projections are for a slight decline in the coming year.

Let’s go back nearly 30 years, when Chrysler and Mitsubishi announced their partnership to build a high tech auto factory in central Illinois. The gleaming new plant with the latest in robotics at what was then known as Diamond Star Motors was a big boost in a state that had become very much a part of the rust belt.

Unfortunately for Illinois, construction of what is now Mitsubishi Motors at the edge of Bloomington-Normal was the last new project of that scale for the state. Since that time, many manufacturers moved operations south and eventually overseas.

During the two years of the Great Recession, 114,000 manufacturing jobs disappeared from the state. Bouncing back has been difficult. Manufacturing has regained nearly 14,000 jobs. However, that claw-back of 12 percent of the jobs pales when compared against the 100-plus percent gains that business services and the leisure and hospitality industries are experiencing. If manufacturing has been on the injured list during the recovery, the professional and business services sector has been a star player, driving much of the job growth since the recession.

Those inside the manufacturing industry point to factors such as the higher cost for workers’ compensation insurance as a reason for the sluggish rebound.

Mark Selvaggio, President of Selvaggio Steel in Springfield says workers compensation cost and unpredictable tax environment are slowing manufacturing.
Credit WUIS/Illinois Issues

Mark Selvaggio is president of Selvaggio Steel in Springfield. Jointly owned with his brother and sister, the firm employs 28 people. At their facilities, they use high-tech equipment to fabricate and customize steel for specific construction projects. The company takes the raw steel, cuts it to size and puts the holes for the big bolts in the correct places.

Selvaggio says that other states like Missouri and Indiana are more conducive to the manufacturing industry. Because of what Selvaggio says is a shortage of work in downstate Illinois, his company is working as a subcontractor for a Missouri company that has too much work. The company closed its Chicago office a few years ago because of the economic downturn.

He puts major blame on the cost of workers’ compensation insurance in Illinois, saying he has to pay up to $90,000 per year, while the cost could be a third of that in Indiana. That complaint is there despite some 2011 reforms in Illinois that improved the picture slightly. “The state could start growing tomorrow, if it would take a look at workers’ compensation,” he says.

While there’s no doubt workers’ compensation is a direct hit to his company’s bottom line, another thought he offered may point to the bigger problem. “There’s no advantage to being in Illinois. Nobody knows what the tax rate is going to be in the future,” Selvaggio says. That uncertainty is likely a much bigger factor in the growth rate of manufacturing. The reality is that workers’ compensation insurance rates are higher, and Illinois has a perception problem after corruption landed two governors in prison — but looming above it all is uncertainty over taxes.

Almost nobody likes uncertainty. “Charlie Sheen has been more stable than the Illinois tax climate,” jokes Mark Denzler, vice president of the Illinois Manufacturers’ Association. “Facing this barrage of tax legislation doesn’t give them predictability.”

Illinois is facing a decision on what to do as the temporary income tax increase expires. Past arguments over whether the state should have a graduated income tax, and even an idea floated when Rod Blagojevich was governor — the gross receipts tax, a levy on almost all business revenue — leave companies skittish. Throw in the state’s $100 billion unfunded pension obligation and the potential for two tax credits to leave the landscape, and companies fear they could get the bill.

“Most companies have considerable choice in their location. Why would they want to come to the state? The degree of uncertainty is not conducive to retain or attract business. How much growth has not occurred because of this uncertainty? Word on the streets is it’s a lot,” says Geoffrey Hewings, director of the Regional Economics Application Laboratory at the University of Illinois.

If gov.-elect Bruce Rauner and the Illinois legislature can figure out the stability part, there are some trends that make observers a little bit optimistic.

Labor costs are rising in China, there is some unhappiness with the quality of some of the goods manufactured there, and logistics costs are competitive in the United States.

Hewings sees the potential for new high-tech manufacturing jobs in Illinois. “If they start manufacturing with 3-D printers at the Ford campus in Chicago, they could build a lot of components cheaply there and walk them across the street to the assembly line. There’s not much difference in the cost of doing that in Illinois or doing that in Georgia or North Carolina.”

Admitting he is more optimistic than many, Hewings says that these are not jobs that will migrate back to China. They would be new jobs requiring high-tech skills. “We will never recover the half-million jobs we lost in that sector, but I think there is an opportunity for us to build some competence and offer some very attractive prospects in terms of careers for young people graduating high school, community colleges and universities.”

Denzler believes the manufacturing sector will show growth around hydraulic fracturing coming to southern Illinois. He points to the announcement of construction of the Cronus Fertilizer plant near Tuscola. He credits proximity to natural gas production as one reason the company located the $1.4 billion facility in east central Illinois. “We are seeing manufacturing jobs come back to the U.S. We want Illinois to take advantage of that,” he says.

Returning to the scouting report, we need to look at the bench. There are a lot of people who want to be in the game, but don’t get to play as much as they hope to. Known as involuntary part timers, they are workers who would like to have full-time jobs, but right now are in part-time situations. Nationwide, there are about 4 million.

The official unemployment rate doesn’t tell the whole story because the involuntary part timers are counted as working, but experts say they would give the economy a shot if they had the spending power that they would get with full-time work. Glassman estimates that if you included people who would prefer full-time work in the unemployment numbers, you could add 2 percentage points to the national rate.

John Glassman

Glassman says the number of people in this category doubled during the recession. He’s quick to point out that this was not a result of the Affordable Care Act. It is yet again the result of uncertainty, but it was more pronounced. “Companies have found it’s better for them to cut back hours of full-time people rather than laying off. If you have people with experience, you don’t want to lose them. This always happens during downturns, but it was much more severe in this recession. It kind of exploded between the fall of 2008 and March of 2009.”

Hewings, who studies foreign employment matters as well, has seen this in other countries, too. It is unpleasant. “It causes big issues psychologically, and it can be devastating for a large number of people.” In terms of the economy, “it has a very deflating effect in making big-item purchases such as houses or cars. People become more risk averse.”

Numbers from the federal Bureau of Labor Statistics show there are slightly less than 350,000 Illinois workers who fall into the involuntary part-time classification. That’s down from 418,000 who fell into that category four years ago.

Retail holds the largest concentration of the involuntary part timers, but it goes beyond the traditional seasonal hiring, which people expect to be temporary and part time. In addition to retail, the recent holiday season meant an uptick in hiring by UPS and FedEx. Those were not permanent full-time jobs, however.

From a policy perspective, there’s not much that can be done with the involuntary part-time workers. “The market has to create the full-time jobs. At the moment, the recovery is not as robust as we would like it. If the country was generating 300,000 jobs per month, there might be pressure within the labor market to expand those jobs to full-time, but there is so much slack in the labor market,” says Hewings.

After making mathematical adjustments based on participation in the labor force, Hewings’ lab says Illinois needs about 621,000 jobs to truly recover to the previous employment peak back in the year 2000. The latest three-month report showed an average monthly gain of 16,500 jobs.

The review’s forecast for the coming year is an overall growth rate in the state between 1.02 percent and 1.2 percent, which would translate into as many as 74,000 new jobs. That would have Illinois reach “recovery” by 2019. Those numbers are similar to Glassman’s projections.

Manufacturing will plod forward with slow growth at best in the short term, thus it won’t have a dramatic impact on the state’s unemployment rate. While getting those involuntary part timers into full-time work would not affect the unemployment rate, it would certainly be a driver in pumping more money into the economy.

Glassman says he doesn’t look at being at the midpoint in a recovery as a bad thing. For fans of that club whose motto is “wait until next year,” perhaps slow and steady growth is what is needed in the fifth inning. For his scorekeeping, he says the inflation rate and wage rates would have increased more if it were later in the game. Inflation is the key stat to watch. Glassman predicts that if inflation is kept in check, there may be extra innings in Illinois’ recovery.

Illinois Issues, January 2015