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Indiana’s long history of making things has developed a diverse manufacturing base that could make the state one of the first stops for companies reshoring their operations — but to attract new employers, an Indiana University economist says, Hoosiers will have to resist getting entangled in the culture wars and, instead, focus on making their workforce healthier and more skilled.

Philip Powell, academic director of the Indiana Business Research Center at the Indiana University Kelley School of Business, offered the assessment of the Hoosier state’s economy Friday during a special webinar hosted by the Indiana Fiscal Policy Institute.

The economist listed the reasons he is bullish – national unemployment is below 4%, leading indicators show rising interest rates are bringing inflation under control and the chances of a recession appear to be dissipating. Indiana with its strong manufacturing base could attract new facilities and jobs as labor costs overseas rise and companies look to North America to expand or open new factories.

Even so, Powell said, as the Indiana General Assembly crafts the new biennial budget, legislators should be asking what they can do to bolster the state’s resiliency especially since the post-COVID economy is “a more risky place.” He advised funding big projects like upping the investment in public health, saying small- and medium-sized projects that are not immediately important for Indiana’s economic future could be tabled until the next budget session in 2025.

“I don’t think conditions are so risky that the General Assembly should back off big projects that the state needs,” Powell said. “If you want to hedge, don’t pull back on the big important projects but you could maybe table some of the smaller, sort of second-tier projects….”

The reason for making the large investments is to keep Indiana competitive.

At one time, Indiana and other states lured businesses by offering tax breaks but today, companies are more interested in talent. In this new environment, the Hoosier state’s labor force is a disincentive. Indiana workers not only lack the post-secondary vocational training that many companies want but they also tend to be in poorer health.

“Lower education, lower skills mean Indiana workers are not as productive,” Powell said. “And when they’re sicker, when our obesity rates are way above the national average  and the disease that follows, that means companies come in, they have … higher health care premiums.”

Powell noted the Legislature has appropriated a lot of money to the state’s education system yet it has a lot of inefficiencies. Indiana, he said, is not on the cutting edge of education and it is one of the lowest-ranking states in terms of public health investments. Consequently, the state is not well equipped to take advantage of the opportunities that are coming.

If Indiana had put the dollars toward making a better workforce 10 years ago, Powell believes  the state could have gotten Intel’s $20 billion twin chip fabrication plants that is now being built in Columbus, Ohio, as well as Amazon’s $230 million supply chain hub that landed in Nashville, Tennessee.

“It’s all about competition. It’s all about the market,” Powell said. “We have to compete with other states. If we don’t make the investment in public health, another state will and they’ll get the jobs.”

Still, Indiana will likely not miss out as the return of manufacturing, known as reshoring, continues to grow. Companies are bringing production back to the United States after decades of shifting work to lower-cost countries like Mexico, China, India and Vietnam.

Overseas manufacturing has always been challenging, spurred by the difficulty of maintaining quality and managing higher error rates. But the very cheap labor has overcame those production headaches. As wages have risen in those countries, the cost differential has shrunk so no longer does the price of labor trump the price of making things.

Companies started reshoring about 10 years ago and recent geopolitical events like the COVID-19 pandemic and rising price of oil have accelerated the trend. Now, when looking to replace a decaying facility in another country or wanting to expand production, businesses are increasingly opting to grow in the United States.

Powell described reshoring as “a sea change” and said Indiana workers are likely to see new jobs and bigger paychecks as a result. Already the state’s manufacturing sector makes a variety of products from pharmaceuticals to recreational vehicles and the sector as a whole has switched to automation so producing goods relies more on technology than labor.

Hoosiers should not fear that the shift to advanced manufacturing will mean fewer jobs. Powell pointed out that manufacturing employment in Indiana grew 1.6% from January 2020 to January 2023 and, overall, the state’s unemployment rate is 3.1%, a few ticks below the national rate of 3.6%.

“What gets lost in all this fear of automation and all this fear of artificial intelligence is that when machines work better, as a worker, I can actually produce more stuff,” Powell said. “And when I can produce more stuff, I’m more valuable to the company. And when I’m more valuable to the company, I’m going to get a higher wage.”

However, Indiana’s economy is getting buffeted by some headwinds.

Short term, like every other state, Indiana is grappling with inflation. Powell is optimistic the higher interest rates will continue to slow rising prices so that inflation will fall to just below 4% by the end of the year.  Already the producer price index fell 0.1% between January and February which indicates the consumer price index will start dropping as well.

Cutting inflation, even at the cost of a bump in unemployment, is vital for economic growth, Powell said. Yet, even with the higher interest rates and recent bank failures coupled with the layoffs in the tech industry, the IU economist does not see any contamination spreading or slowing the country’s economy.

“I’m expecting no recession,” Powell said. “(The IU business center’s) forecast is a growth rate of about 1% to 1.5% by the end of the year as the year-end total.”

Long term, Indiana is facing the headwind of a declining population because Hoosiers are having fewer babies. The number of high school graduates in the state will fall 8% by 2030 because of the decline in fertility rates. To counter the trend, Powell said, Indiana will have the dual challenge of attracting workers from other parts of the country as well as preventing workers from being poached by other states.

A key to making Indiana a destination for talent is by placemaking or emphasizing the unique aspects of its economy and location that show creativity and innovation can grow here. Powell pointed to Nashville, Tennessee, which 20 years ago embraced its reputation as a music capital and translated that into the message that “creative, entrepreneurial, young professional(s)” could thrive there. Now Nashville has the highest growth rate in the number of college-educated workers between the ages of 25 and 44.

Powell highlighted Fort Wayne and Evansville as examples that different regions in Indiana can copy the Nashville playbook. Political and business leaders have come together in those two cities to create pleasant downtowns and focus on economic development without engaging in partisan politics.

The intangibles of a community that are used to attract workers will not be overshadowed by controversial social issues, according to Powell. Every state and community has a diversity of views and many areas are prospering despite their political leanings.

“It is healthy to talk about some of these social issues in terms of how we’re going to attract labor but at the end of the day, it’s one of many factors that we have to look at and should be talking about,” Powell said “Being on one side of one social issue is not going to condemn us to eternal economic degradation.” — Marilyn Odendahl

 

 

 

 

 

 

 

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