Lessons from Elkhart, Indiana

In the 2008 presidential campaign then-candidate Barack Obama visited Elkhart, Indiana twice.  He visited again as president in February 2009 to make the case for his $800 billion stimulus package.  President Obama came to Elkhart three times because the city was in the midst of an economic freefall and seemed to epitomize the plight of the U.S. economy in 2008-2009.  Although Elkhart’s unemployment rate was 4.6% in 2007, by March of 2009 it would reach 20.2%.  Elkhart has bounced back from the recession much better than other cities.  Its unemployment rate is now 8.3%, slightly above the national average but dramatically lower than it was just three and a half years ago.

Indiana is the most manufacturing-intensive state in the U.S. with one of six private sector workers employed in manufacturing.  In addition, over 7 out of 10 manufacturing jobs in Indiana are in the durable goods sector.  Arguably, no city in the U.S. is more dependent on the production of durable goods than Elkhart, which has been called the recreational vehicle capital of the world.  While only 6.7% of private sector jobs in the U.S. are in durable goods manufacturing in Elkhart 43.6% of private sector workers are employed in the manufacture of durable goods, with the majority of those jobs in the production of recreational vehicles and motor vehicle parts.  Elkhart has been one of the top job creating cities in the U.S. since the recession ended.  In the past three years jobs in durable goods manufacturing have increased by 42.7% in Elkhart compared to 5.6% growth in the U.S. overall.

As a durable goods manufacturing center Elkhart’s downturn and recovery looks much more like the typical pattern for a deep recession followed by a brisk recovery.  Other cities hurt most by the recession (such as Riverside, CA and Las Vegas NV) suffered collapses in their residential real estate markets and residential investment.  These cities have not yet experienced the rebound seen in Elkhart.  The following chart indicates how the unemployment rate in Elkhart spiked much above the rates in Las Vegas and Riverside but has fallen more quickly since then.

Elkhart

There has been much discussion about why this recovery has been so slow and so weak.  Reinhart and Rogoff relied on cross-country and historical comparisons to argue that a slow and weak recovery is to be expected after a systemic banking and financial crisis.  It is difficult, however, to make consistent cross-country comparisons of unemployment rate fluctuations because of differences in the way each country measures unemployment.  Bordo and Haubrich limit their analysis to American historical data.  They find that “general recessions associated with financial crises are generally followed by rapid recoveries.”  They also conclude that one reason for the slowness of the recovery “is the moribund nature of residential investment.”

Another way to understand the 2008-2009 downturn and the subsequent recovery is by comparing unemployment rate fluctuations across U.S. cities.  Such a comparison shows that the unemployment rate has remained stubbornly high in cities where the housing bubble burst.  Durable goods manufacturing centers like Elkhart saw a big drop in the demand for the products they produce and a large increase in unemployment during the recession.  But manufacturing-intensive cities have recovered somewhat more rapidly – more typical of previous downturns.  That gives the edge, for the time being, to the explanations provided by Bordo and Haubrich.

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