A growth diagnostic for Northwest Indiana

Northwest Indiana (hereafter referred to as Economic Growth Region 1) has entered a period of renewed economic expansion following the COVID-19 shock, marked by rising output, stabilizing labor markets and shifting sectoral patterns.

The time period of 2019 to 2025 captures the disruption caused by the pandemic and the subsequent recovery. With this context in mind, a growth diagnostics framework is applied to analyze growth constraints potentially caused by limited access to finance or low returns on investment. Although the framework is diagnostic rather than causal, it helps identify the key constraints on sustained and inclusive development.

Since 2020, regional output has increased substantially, labor market conditions have stabilized and employment has resumed its modest growth. At the same time, the population has grown, and new sources of growth have emerged in logistics and service-oriented sectors. These developments suggest that the region has moved beyond economic contraction. Yet the expansion remains uneven and is characterized by limited productivity growth and widening disparities across sectors and counties that raise important questions about the durability of this recovery.

Figure 1 shows that while nominal gross regional product (GRP) has grown steadily since 2020, real GRP growth has been considerably more subdued. This divergence points to a key concern. Has underlying productivity growth not kept pace with increases in economic activity? In other words, the region is expanding but not necessarily becoming more efficient or higher value.

Figure 1: Nominal vs. real GRP, EGR 1

Note: 2025 values are author estimates based on recent growth trends.
Source: U.S. Bureau of Economic Analysis and author’s calculations

A simple measure of output per worker has the potential to answer this question. Figure 2 presents an index of productivity, defined as real GRP per worker, with 2019 set as the base year (index = 100). While the index increases sharply between 2020 and 2022, this largely reflects pandemic-related changes in employment as opposed to a sustained improvement in efficiency. Excluding this distortion, productivity growth has been modest and has largely flattened since 2022. This suggests that recent economic expansion has been driven more by increases in labor input than by sustained gains in efficiency. The productivity index ranges from 100 to 109, indicating that output per worker has fluctuated within a relatively narrow band despite the pandemic-related shock. The lack of a sustained upward trend suggests that productivity gains have been limited and largely cyclical instead of structural. For comparison, sustained productivity growth would typically be reflected in a steadily increasing index over time, which is not observed here.

Figure 2: Productivity index (output per worker), EGR 1

Note: The increase in 2020 reflects a pandemic-related decline in employment rather than underlying productivity gains.
Source: U.S. Bureau of Economic Analysis, U.S. Bureau of Labor Statistics and author’s calculations

To put these trends in context, key regional indicators point to moderate but uneven performance. The population of EGR 1 is estimated at approximately 875,396 in 2025, while the real GRP remains around $41 billion. Employment growth has been modest and has increased by just over 2% between 2019 and 2025. Even though personal income has expanded at broadly similar rates across counties, median household income levels remain uneven. This reflects persistent disparities in the distribution of gains and suggests that recent expansion has not fully translated into broad-based improvements in economic well-being. More importantly, the evidence indicates that growth is uneven and driven by sector-specific differences in regional competitiveness.

Structural change and emerging sectors

The divergence between nominal and real output reflects the uneven growth across industries. Northwest Indiana’s economy is gradually shifting away from its historical dependence on heavy manufacturing toward a more diversified structure, although this transition remains incomplete.

Table 1 presents the current composition of employment across key sectors. Healthcare, manufacturing and retail remain the largest employers, but logistics, construction and professional services are playing an increasingly important role. At the same time, wage differentials across sectors also tell a story, as shown in Table 1. Even though legacy industries such as manufacturing continue to offer relatively high wages, some of the fastest-growing sectors are lower-paying service activities.

Table 1: Employment by industry, EGR 1, Q2 2025

Source: Indiana Department of Workforce Development, Quarterly Census of Employment and Wages

Manufacturing remains a central component of the regional economy, but recent employment growth has been concentrated in a narrower set of sectors, particularly those associated with logistics, services and knowledge-intensive activities. Table 2 shows where employment gains between 2019 and 2025 have been concentrated and uneven.

Table 2: Net employment change by industry, EGR 1

Source: Indiana Department of Workforce Development, Quarterly Census of Employment and Wages; author’s calculations

Educational services, transportation and warehousing, and professional services account for most of the net job creation, while traditional industries such as manufacturing and retail have declined. Growth rates vary widely across sectors, ranging from nearly 80% in educational services to substantial declines in arts and recreation. However, this expansion in educational services is driven overwhelmingly by local government employment. As a result, the growth reflects institutional expansion more than market-based competitiveness. This distinction matters because not all sources of job growth contribute equally to productivity or long-term economic outcomes. The data points to uneven and concentrated growth and raises the question of why these gains have not translated into broader regional performance. What is preventing the region from translating sectoral expansion into broader economic performance?

A closer look at competitiveness

To distinguish between growth driven by national trends and growth reflecting local conditions, Table 3 presents a shift-share decomposition of employment change, expressed in the number of jobs. Following the standard shift-share model, total employment change is decomposed into national growth effects, industry composition effects and regional (competitive) effects.

Table 3: Shift-share analysis of employment growth by industry, EGR 1, 2019 Q2 to 2025 Q2

Note: Analysis includes selected industries, focusing on major sectors and those with the largest employment change, in order to highlight key patterns of structural change. Results should therefore be interpreted as indicative of sectoral patterns rather than a full accounting of regional growth.
Source: U.S. Bureau of Labor Statistics, Quarterly Census of Employment and Wages; Indiana Department of Workforce Development; author’s calculations

The results show substantial heterogeneity in regional performance. Transportation and warehousing, professional services and educational services exhibit strong positive regional competitive effects, which indicates that these sectors are expanding more rapidly in Northwest Indiana than in the nation as a whole. These industries can be interpreted as areas of emerging comparative advantage with a shift toward logistics and service-oriented sectors.

In contrast, manufacturing and retail show negative regional effects, which suggests that these sectors are underperforming relative to national benchmarks. For example, manufacturing employment declined by approximately 5.5% in the region compared to 1.5% nationally. This is consistent with long-term structural pressures facing the manufacturing sector in the region.

Healthcare and social services results provide important insights. Despite generating positive employment growth, the sector shows a regional competitive effect of -4,472 jobs. This implies that expansion is driven primarily by national demand factors, such as demographics and rising healthcare utilization, instead of region-specific strengths in productivity, workforce specialization or industry concentration. The distinction is important because it shows that not all growing sectors contribute equally to regional productivity or competitiveness.

The shift-share results suggest that the region is not experiencing a generalized growth constraint, but a fragmented growth process in which a limited number of sectors exhibit competitiveness while others lag behind. The core challenge is not generating growth per se, but scaling and diffusing it across the broader economy.

Diagnosing constraints

The growth diagnostic framework provides a structured approach to identifying the binding constraints on regional performance. Is growth constrained by limited access to finance or by low returns on investment?

There is no clear indication that access to finance is a binding constraint. Northwest Indiana is well integrated into national capital markets, and there is no evidence of systematically higher borrowing costs or credit rationing relative to comparable regions.

Instead, the evidence points toward constraints on returns in the form of human capital limitations and coordination failures. The limited improvement in productivity supports this interpretation. As shown earlier, output per worker has shown only modest gains and has remained largely flat since 2022. Recent expansion may reflect the increased labor utilization instead of sustained efficiency improvements. This is consistent with constrained returns to investment, particularly in sectors that lack the complementary inputs required to achieve scale and productivity gains. The shift-share results further support this conclusion. They indicate that only a subset of industries demonstrates sustained regional competitiveness, and that these sectors tend to be more skill intensive.

To assess the region’s capacity to support these skill-intensive sectors, Figure 3 presents educational attainment across counties, measured as the share of the adult population (age 25 and older) with a bachelor’s degree or higher.

Figure 3: Percent of population with a bachelor's degree or higher by county, EGR 1, 2024

Note: The percentages are calculated using the adult population age 25 and older.
Source: U.S. Census Bureau, American Community Survey (ACS), 5-year estimates

Educational attainment varies significantly across the region. Porter County exceeds the state average of 29.5%, while several counties lag well behind. Because the data is based on ACS 5-year estimates, they provide a stable measure of underlying human capital conditions, particularly in smaller counties where annual estimates are more volatile. These disparities constrain the region’s ability to support higher-value and knowledge-intensive industries and contribute to uneven sectoral performance.

Spatial disparities and regional fragmentation

In addition to sectoral differences, spatial disparities play a critical role in shaping regional outcomes.

Figure 4: Median household income by county, EGR 1, 2025

Note: Values are author projections based on ACS data. They are not adjusted for inflation.
Source: U.S. Census Bureau, American Community Survey, 5-year estimates; author’s calculations

Median household income varies substantially across counties. Porter County consistently reports higher income levels, while Lake County and more rural counties lag behind (see Figure 4). Because these estimates are derived from survey-based data, they should be interpreted as indicative of relative differences and not precise point estimates. Nevertheless, the pattern shows that economic gains are unevenly distributed across the region.

These spatial disparities limit the diffusion of growth. When labor markets, infrastructure and institutional capacity are fragmented, firms face greater uncertainty regarding the availability of complementary inputs. As a result, even sectors that are locally competitive may fail to expand beyond narrow geographic or industrial niches.

Identifying the binding constraint

The evidence indicates that Northwest Indiana’s primary constraint is the difficulty of scaling and coordinating competitive sectors across industries and counties, not a lack of economic activity.

The coexistence of highly competitive sectors such as logistics and professional services alongside underperforming industries such as manufacturing and retail shows the fragmented nature of regional growth. Human capital constraints reinforce the relationship. This limits the ability of the region to transition toward higher-value activities.

The binding constraint, therefore, lies in coordination failures. Growth is occurring, but it is not sufficiently integrated. The complementary investments required to support expanding sectors such as workforce development, infrastructure and institutional alignment have not fully materialized. As a result, the region is unable to translate localized successes into sustained, broad-based development.

Conclusion

Northwest Indiana’s recent performance reflects meaningful progress. The region is growing, attracting population and developing new areas of economic strength. However, this growth remains uneven, fragmented and only partially anchored in sectors with durable competitive advantages.

From a growth diagnostics perspective, interventions should focus on creating coordination across sectors and regions instead of stimulating growth broadly. This includes aligning workforce development systems with the needs of emerging industries and improving connectivity across counties to attract complementary investments. At the same time, there may be opportunities to strengthen the region’s manufacturing base by supporting its transition toward higher-value, technology-intensive and specialized activities. This would allow manufacturing to complement emerging sectors while improving its long-term competitiveness.

If these constraints can be addressed, Northwest Indiana is well-positioned to convert its current trajectory into long-term, inclusive economic development.

References

• Hausmann, R., Rodrik, D., & Velasco, A. (2005). Growth Diagnostics. Center for International Development, Harvard University.
• Dunn, E. S. (1960). A statistical and analytical technique for regional analysis. Papers in Regional Science, 6(1), 97–112.
• U.S. Census Bureau. Small Area Income and Poverty Estimates (SAIPE): Median Household Income by County. https://www.census.gov/data-tools/demo/saipe/.
• Indiana Department of Workforce Development. Hoosiers by the Numbers: Quarterly Census of Employment and Wages (QCEW). https://www.hoosierdata.in.gov/nav.asp?id=234.  
• U.S. Bureau of Economic Analysis. Gross Domestic Product by County. https://apps.bea.gov/itable/.
• U.S. Bureau of Economic Analysis. Local Area Personal Income and Population Data. https://apps.bea.gov/itable/.
• Indiana Department of Workforce Development. Monthly Labor Force Estimates (Unemployment Rate). https://www.hoosierdata.in.gov.
• U.S. Census Bureau. American Community Survey (ACS) 5-Year Estimates, Table S1501 (Educational Attainment). https://data.census.gov.
• Shift-share analysis is based on employment data from the Indiana Department of Workforce Development and decomposes regional employment change into national share, industry mix and regional (competitive) effects.