COVID-19: Is America’s heartland in the right place?
Economic prospects in the U.S.
have dimmed recently with the coronavirus resurgence, resulting in more stringent social distancing in many places.
Consumers have become more cautious, a sign that their contribution to growth from discretionary spending could decelerate, even if Washington overcomes the impasse on further fiscal support.
Three large states at the center of the flare-up – California, Florida, and Texas – account for roughly a quarter of the U.S. labor market and almost one-third of U.S.GDP, and therefore have the potential to stall the national economy. But the coronavirus story is still unfolding in other regions as well.
Is America’s Heartland in the right place on the COVID count? New virus cases in the Midwest have mostly trended upwards since the trough reached in mid-June but are somewhat contained relative to the national figures.
Still, the risk remains that social distancing will have to be tightened further in the Midwest given the trend line, which has only fallen in recent days and may not prove to be sustainable.
Midwest manufacturing tilt has been a positive
Since re-opening, overall activity in the Midwest has shown signs of recovering alongside other areas in the country. Judging by business and purchasing manager indexes, the bounce-back appears to be due largely to the region’s exposure to manufacturing.
While it remains 7% below its pre-virus level, Midwest employment in manufacturing fell by less than other sectors and has rebounded faster. The Chicago Fed’s economic activity tracker for the region shows that services and consumption remain further below trend growth rates than manufacturing and construction, given the more direct impact of social distancing measures. The Fed’s Beige book also reported that factory activity in the region was experiencing a strong comeback as of early July.
Pre-pandemic weak spots still worrisome
Many Midwestern states entered the pandemic on shaky ground due to the impact of trade tensions on exports, so even getting back to pre-pandemic levels would fall short of a return to healthy conditions. Manufacturing payrolls were already on a downward trajectory as of 2019. Moreover, given the region’s sensitivity to commodity prices, the sector’s fate will also rest on how quickly global activity can be restored. Second waves in other countries such as Japan, Australia, Spain and Israel represent visible clouds on the horizon for the global picture.
In part reflecting lower prices, China is far from achieving the target for imports of U.S. agricultural goods set out in the Phase One trade deal so far this year. China still accounts for a sizeable 10% of the region’s agricultural exports. While China’s recent record purchase of American corn is a positive development, the rumbling of trade tensions in other sectors (telecom and other tech equipment) points to a risk that the trade détente could fall apart in the coming months.
Midwest businesses tapped government help
The good news for now is that Midwest supply chains are at least somewhat isolated from the virus-induced turmoil occurring in California, Florida and Texas. Trade corridors for domestic shipments appear to be highly concentrated within regions, as both the South and the West have the highest exposure to domestic trade with the latter states. Moreover, businesses in the Midwest have received more government support than other regions. A combination of federal support under the PPP loan program and a more modest impact from the virus given the reliance on goods-producing industries has led firms to report that they’re more likely to survive the pandemic than their regional peers.
Future clouded with virus uncertainty
Overall, given its somewhat better starting point on the virus, and the tilt towards the goods sector, America’s heartland could be in the right place to outpace the South and West in the third quarter. But that edge might not persist looking ahead to the remainder of the pre-vaccine period. With new virus cases still close to an all-time high, consumers remain as cautious about the future as those in more virus-impacted regions. Consumer mobility has flatlined well below what’s typical for this time of year.
Although manufacturing has largely driven the recovery so far, there’s a long way to go in restoring American and global goods demand on a sustainable basis, as signaled by fresh signs of consumer caution. Longer term, getting the virus under control will be key to the next leg of the expansion for the Midwest and the rest of the country.
Here to help
If you have a follow-up question for Katherine, are interested in other insights from our economists or would like to work through any other financial topics, we always welcome the opportunity to chat. Please feel free to contact your Relationship Manager any time for assistance.
Find the insights that matter to you
Check out our most popular topics and find articles, webinars and podcasts to elevate your business.