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The IBR is a publication of the Indiana Business Research Center at IU's Kelley School of Business

Kokomo Forecast 2016

Dean, School of Business, Indiana University Kokomo

This article provides a brief snapshot of several key measures frequently used in judging economic well-being for the north-central Indiana region. Given the diverse nature of the 14-county service region1 for IU Kokomo, from heavy manufacturing to agricultural, this article addresses aspects key to the overall region, but places more emphasis on Kokomo, Howard County and the immediately surrounding region.

Continued Gains in Employment

As seen in Figure 1, Indiana’s unemployment rate fluctuated throughout 2014, but trended downward. Despite a noticeable uptick in January 2015 to 6.7 percent, the statewide unemployment rate has continued to fall and, as of August 2015, was at a seasonally unadjusted rate of 4.4 percent. Over this same time frame, Howard County’s unemployment rate tracked quite closely to the state average (typically being two- to three-tenths of a percentage point higher) and was 4.6 percent as of August.

Figure 1: Unemployment Rates, January 2014 to August 2015

graph

Note: Data are not seasonally adjusted.
Source: STATS Indiana and Hoosiers by the Numbers

The fluctuations in the unemployment rates for the other 13 counties in the region have for the most part followed a similar pattern to the state. Many of the more rural counties have unemployment rates consistently lower than the state average. For example, Clinton, Carroll, White and several counties north and west of Howard County had unemployment rates ranging from 5.6 percent to 6.3 percent in January 2015, but by June these counties had unemployment rates as low as 3.8 percent. Several other counties in our region continue to experience noticeably higher rates of unemployment than the state overall, including Wabash, Grant and Madison.

Dodging a Bullet

The considerable progress made over the last two years in reducing the unemployment rate in Indiana, and especially in Howard and Tipton counties, may have been quickly erased just recently. In September 2015, negotiations on a new contract between the United Automobile Workers (UAW) and Fiat Chrysler Automobiles (FCA) were continuing. On October 1, however, the union voted down the first contract offer by a margin of 2-to-1. While negotiations continued, a strike deadline was set for 11:59 p.m. on October 7. Fortunately, a tentative deal was brokered with less than 30 minutes to spare, and the new four-year contract was approved by the membership by a margin of 3-to-1. This agreement signaled that the nearly 8,000 workers among the four FCA plants in Kokomo and Tipton would remain on the job.

The potential for a work stoppage may have had a limited impact on FCA, at least in the short-term. Dealership inventory levels, especially of the most popular models, were quite healthy. However, for Kokomo and the regional economy, the possibility that a labor agreement might not be secured and a resulting work stoppage could have proven devastating to the regional economy. Currently, the total labor force within Howard County numbers approximately 38,000 people. The effect of nearly 8,000 lost jobs at the plants would have sent the unemployment rate skyrocketing. Many others in related businesses, such as parts manufacturing, are dependent on FCA—and certainly many depend upon spending by the workers and their families. The possibility of a protracted strike and workers being paid only strike benefits would have rippled through the local economy. Fortunately, this potential crisis was narrowly averted, but the possibility highlights the region's dependence on a single industry and major employer.

The Importance of FCA and Growing Diversification

Recently, a study was conducted by MBA students at IU Kokomo on behalf of the Greater Kokomo Economic Development Alliance (GKEDA). It has always been generally accepted that the health of the regional economy was dependent on manufacturing, most notably the automobile industry, and much more recently and specifically, Fiat Chrysler. However, the actual extent of such dependence had not been statistically studied, so the GKEDA report attempted to examine both how several economic indices were related to U.S. automobile sales by FCA and how the local economy might also attempt to lower the level of dependence through diversification.

Several clear points evolved from the study. First, roughly 85 percent of the changes in the employment rate within Howard County could be explained by changes in FCA’s U.S. automobile sales. Somewhat related, one interesting pattern in the data was that prior to the start of the recent recovery in 2009, Howard County’s population tracked quite closely to FCA sales. However, since 2009, the county’s population has remained relatively stable at around 83,000 while FCA sales have continued their month-on-month growth for more than 60 consecutive months and have returned to about 95 percent of 2005 levels. The lack of recent notable changes in population is thought to reflect that while FCA has rebounded and is playing an even bigger role in the region, GM and Delphi did not significantly bring their workforces back into the region when the economy began its recovery.

Another key point in the study was the strong presence of Indiana as a manufacturing state given a strong work ethic and relative abundance of skilled workers. The IU Kokomo-GKEDA study, however, revealed another critical factor in regard to the relative dependence of Howard County on the manufacturing of durable goods vs. non-durable goods. Using Howard County GDP data for 2012 and 2013, the most recent years for which such detailed information was available, the study found roughly $2.16 billion to $2.24 billion (or 98.3 percent) of manufacturing in the county related to durable goods, while only $37 million to $40 million (or 1.7 percent) involved the manufacturing of non-durable goods.

To put such numbers into perspective, the study calculated durable and non-durable goods location quotients (LQs) in order to compare Howard County’s manufacturing to the rest of the country. An LQ having a value of 1.0 would mean a region is equally balanced relative to other areas. For durable goods, Howard County’s LQ was above 8.0, indicating it was eight times more dependent on durable goods. Conversely, the LQ for non-durable goods was only 0.16.

Clearly, the data indicated the extensive dependence on durable goods manufacturing and the need for diversification into more non-durable goods, as well as possibly the service sector. In this regard, multiple efforts are underway. With the newly developed industrial park situated between State Road 931 and U.S. 31 on the north end of Kokomo, the desire is to build upon the region’s work ethic and skilled labor force but to do so by promoting more non-durable manufacturing. Furthermore, the current revitalization of downtown Kokomo is also playing an important role in the diversification efforts by attempting to draw both locals and visitors to the region.

Agricultural Production

As mentioned earlier, a considerable portion of the region is rural and highly dependent upon the agricultural sector—more specifically, corn and soybeans. As has been frequently reported, 2014 marked a year of outstanding growing conditions with record levels of planted and harvested acreage, yield and production. This was true for many counties in Indiana where growing conditions were near ideal. In 2015, however, the growing season began, especially in central Indiana, with extensive rainfall and widespread flooding. Numerous rivers such as the Wabash overflowed their banks, and flooding was rampant. Many fields that had already been planted sat for weeks (if not longer) underwater, which destroyed the crops. Fields that had not yet been planted remained so wet that planting was significantly delayed.

Initial estimates from the damage suggested total production of corn and soybeans might be as much as 10 percent lower than the previous year’s records. However, the report issued in October by the U.S. Department of Agriculture’s (USDA) National Agricultural Statistics Service indicated that 2015 corn production was likely to only be 5 percent lower than last year and soybeans only 1 percent lower. Unfortunately, detailed county-level data for 2015 won’t be released by the USDA until February 2016. However, data for Indiana as a whole is shown in Table 1.

Table 1: Indiana Crop Harvest, Yield and Production, 2014 and Forecasted October 2015

  Area Harvested (1,000 Acres) Yield per Acre (Bushels) Production (1,000 Bushels)
  2014 2015 2014 Oct 2015 2014 2015
Corn 5,770 5,440 188.0 156.0 1,084,760 848,640
Soybeans 5,440 5,580 55.5 51.0 301,920 284,580

Source: U.S. Department of Agriculture’s National Agricultural Statistics Service

Statewide, harvested corn acreage is down by roughly 5.7 percent, yield has fallen by over 17 percent, combining for a drop in estimated production of nearly 22 percent. For soybeans, there was a slight 2.6 percent increase in harvested acreage, but yield fell by over 8 percent—resulting in an overall 5.7 percent reduction in production. Certainly, to the extent that many of the counties within the region are so heavily dependent on agricultural output and the resulting income, this year promises to present some financial challenges for the agricultural community in comparison to the last year—that is, unless risk management steps were taken to mitigate losses. Again, greater detail as to the impact on individual counties will be known more so in February 2016, but these initial data do not paint a promising picture.

Forecast

In terms of the employment picture, it is expected that the unemployment rates within the region will remain relatively stable for the foreseeable future, with the possibility of some slight continued downward movement. Currently, the state and the region are already experiencing what can likely be best described as full employment. Thus, considerable downward movements are not anticipated. Those that do, will likely only have minor impacts on the unemployment rate.

As previously mentioned, durable goods manufacturing is critical to the state and region, so eyes will be focused on economic conditions throughout the U.S. and even globally—as well as the likely actions by the Federal Reserve in adjusting interest rates. In terms of agricultural production, one question that may not be possible to answer yet is the longer term impact from the widespread flooding. Specifically, what impact will there be from rivers overflowing their banks into the surrounding farmlands? The possibility of silt deposits, pollution, or even the washing away of critical nutrients may lessen future productivity.

References

Notes

  1. The 14-county service region includes Carroll, Cass, Clinton, Fulton, Grant, Hamilton, Howard, Madison, Miami, Pulaski, Tippecanoe, Tipton, Wabash and White counties.