2014 Regional Report: The Midwest

In the late ’70s, William C. Kennedy Sr. was working as a registered pharmacist in Salem, Ohio, selling such products as compounded lotions to individuals and farmers. Among his bigger sellers was a moisturizer that reduced cow udder inflammation; sales peaked during the cold Midwestern winters. When he observed that the compound also moisturized human dry patches, he got an SBA loan and began commercializing the mixture for humans under the name—amber pun alert—Udderly Smooth.

Using packaging that comically featured bovine hide patterns, Kennedy pitched the moisturizer to regional retailers. Sales went national when a fledgling account—the big Phar-Mor drugstore chain, headquartered nearby—began stocking the mixture chain-wide. A guest on Oprah Winfrey’s TV show touted the lotion on air; sales skyrocketed.

Kennedy envisioned a global market. Learning export basics from seminars at the International Trade Assistance Center at Youngstown State University, Kennedy and his team attended trade missions and reached out to distributors on three continents. Today, Kennedy’s company sells Udderly Smooth in twelve countries, while continuing to bolster domestic growth.

Neighborly help from area businesses, government agencies and nonprofit institutes helps many Midwestern companies land their first overseas customers. Experienced globalists from locally headquartered multinationals often mentor younger executives on their own time, reflecting the neighborly spirit that characterizes the Midwestern business style.

In Indianapolis, Hoosier Gasket Corporation got its foothold overseas when a major customer, Chrysler, signed a contract with a Russian tractor manufacturer. “We piggybacked on the deal,” said Hoosier Gasket’s international vice president Oleg Gostomelsky. With the support of Jeff Jackson, president and CEO, Gostomelsky continues to pay it forward by promoting Indiana’s expanding network of export training programs. He regularly teaches seminars himself to a new generation of exporters.

The advantages of internationalism expand revenues while helping offset seasonally dependent sales. “In the U.S., we’re predominantly a skin moisturizer for the dry winter months,” says Kennedy. “In the UK our products are used as a chamois cream for athletes year round.”

Kennedy’s international orientation, it turns out, is a hallmark of Northeast Ohio—and emblematic of the entire Midwest. According to the Brookings Institution, the Youngstown metropolitan area paced U.S. export growth between 2009 and 2012. During that period, the value of regional exports shot up 22 percent, totaling $4.7 billion. The rising tide of greater-Youngstown exports—led by metal products, vehicles and agricultural commodities—helped area businesses weather the recession. Now, it drives economic recovery. Benefits of exporting accrue to business- and consumer-product manufacturers alike. In a report issued last winter, HSBC Bank found globally focused consumer goods companies were “twice as profitable as their domestically oriented peers.” As a case in point: Benton Harbor, Michigan-based Whirlpool, is the white-goods giant whose $18 billion annual revenue stream splits half domestic, half international.

Increasingly, the manufacturer who concentrates solely on domestic markets is a rare bird. “One of the reasons our manufacturers are doing so well is that exports have been so strong these past five years,” says Mike Ralston, president of the Iowa Association of Business and Industry. “Exporting’s profile has been raised. Just about every company, regardless of size, is exporting now.” Expect that trend to continue.

Indiana (No. 6): Inventing Incentives
Hammered during the Great Recession, Indiana’s sluggish recovery is edging back to 2007 employment levels. Bright spots include recreational vehicle manufacturing, growing at the rate of 7.5 percent annually and a vibrant life sciences sector. There’s “effective economic development at the state level,” says Darin Buelow, a principal with Deloitte’s Real Estate & Location Strategy services in Chicago. “They are winning major projects and then some,” including Nestlé’s large production plant in Anderson.

The Tax Foundation ranks Indiana 22nd highest out of 50 states in tax burden, and 10th in business tax climate. The Hoosier State spends over $921 million a year on incentive programs, according to The New York Times state subsidy database.

North Dakota (No. 12): Going for the Gas
Thanks to oil and gas, North Dakota’s economic output has more than doubled since 2002, approaching $50 billion a year in 2013. Gross domestic product rose 5.4 percent over the previous year. Other growth industries include real estate, agriculture and mining. In July, unemployment sunk to 2.8 percent in America’s tightest labor market. Says Deloitte’s Buelow: “The overriding challenge today is the labor shortage.”

The Tax Foundation ranks North Dakota 35th out of 50 states for tax burden and ranked its business tax climate 28th. The state’s “been very proactive in [readjusting] its tool kit in terms of incentives,” says Tracey Hyatt Bosman, managing director at Biggins Lacy Shapiro & Company, a commercial real estate firm in Chicago. North Dakota spends over $32.9 million a year on corporate incentives, according to The New York Times subsidy database.

Wisconsin (No. 14): Steadily Adding Jobs
Wisconsin’s economy continues to inch forward; job recovery proceeds at a 1.5 percent pace. Trade, transportation and utilities, the Badger State’s major cluster, contracted in 2013 before rebounding early this year. Healthcare expansion is slow but steady. Professional and business services are bright spots, although growth is measured mainly in temporary jobs. Gov. Scott Walker beat back a recall effort led by labor opponents of his right-to-work initiatives, pleasing many in the business community. Larry Gigerich, managing director of the Ginovus site selection firm in Indianapolis, lauds the state for “tremendous improvement” in business climate, citing recent financial reform and tax cutbacks, which aligned corporate tax procedures and depreciation rules with federal law. The Tax Foundation ranks Wisconsin 5th highest out of 50 states in tax burden, and 43rd in business tax climate. Wisconsin spends over $1.53 billion a year on incentive programs, according to The New York Times state subsidy database.

South Dakota (No. 15): A Need for Speed
South Dakota’s economic recovery has been “surprisingly slow,” according to JPMorgan Chase’s Economic Outlook, exacerbating the discrepancies between the Mount Rushmore State and its booming shared-name neighbor to the north.

Finance and insurance comprise South Dakota’s biggest cluster, followed by agriculture; government services account for nearly 12 percent of GDP. Ginovus’s Gigerich calls their education system “very good; as a result, their work force is very prepared. They have an excellent work ethic.” The Tax Foundation ranks South Dakota’s tax burden 3rd lowest out of 50 states and ranks its business tax climate second. The state spends over $27.8 million per year on incentive programs, according to the subsidy database of The New York Times.

Iowa (No. 19): A Turbulent Recovery Trail
Iowa’s post-recession recovery continues in fits and starts; JPMorgan Chase forecasts acceleration in Q4 2014 through at least 2015. Finance and Insurance tops the cluster chart, followed by Government and Manufacturing. Iowa’s “outsized exposure to agriculture is a benefit” declares JPMorgan. Job growth trails the national rate, but the state’s 4 percent unemployment rate beats the national average handily.

Consequently, “Everybody in this state is looking for workers,” says Iowa business association leader Ralston. The Tax Foundation ranks Iowa 28th out of 50 states for tax burden, and 40th in business-tax climate. Iowa spends over $223 million a year on incentive programs, according to The New York Times state subsidy database.

Nebraska (No. 21): Seeking Service Expansion
Nebraska has lagged national GDP growth since 2012. Softening in the agricultural sector carries over into manufacturing, much of which is farm-related. The Nebraska Business Forecast Council expects service-sector expansion to drive moderate (1.5 percent) economic growth in 2015. With unemployment standing at 3.6 percent in July, Nebraska ranked second-lowest in the country behind North Dakota.

Government remains the major Cornhusker State employer, followed by finance and insurance and agriculture; other major clusters include biotechnology, transportation and logistics and software and technology. Despite growing calls for tax reform, Governor Dave Heineman’s attempt at overhaul campaign sputtered out last year, defused by opposition from business leaders, who didn’t see the numbers working. The Tax Foundation ranks Nebraska’s tax burden 25th highest out of 50 states and ranks its business tax climate 34th. Nebraska spends over $1.39 billion a year on incentive programs, according to The New York Times subsidy database.

Missouri (No. 22): Weak Job Recovery
Missouri weathered the Great Recession pretty well but lags the Midwest in post-recession recovery. “Missouri has experienced one of the weakest jobs recoveries compared with its neighbors and the overall economy,” wrote Show-Me Institute analysts R.W. Hafer and Michael Rathbone in a June report. Civil unrest in St. Louis over the summer revealed structural, economic inequalities and displayed the vulnerability of business owners to unexpected upheaval. Following a divisive political battle, a tax cut was passed that will slice a mere half a percentage point off income tax rates over five years; more immediately, S corporations and LLCs will benefit from deductions. The Tax Foundation ranked Missouri’s tax burden 32nd out of 50 states, and ranked its business tax climate 16th. Missouri spends over $96.5 million a year in incentives, according to The New York Times subsidy database.

Kansas (No. 26): Aviation Booming
Kansas ranked 11th among the 50 states in economic outlook by ALEC, the American Legislative-Exchange Council, reflecting Governor Sam Brownback’s billion-dollar tax rollbacks and adherence to the federal minimum-wage baseline. Less convinced, the Center on Budget and Policy Priorities forecasts the Sunflower State will soon lag the nation’s economic growth rate for the first time in 20 years. Economic strengths include the aviation cluster in Wichita, claiming 30 percent of global aviation activity and a burgeoning veterinary technology corridor in the northeast. “I like the business dynamics in Kansas,” says site selector Bosman. “There’s a lot going on.”

The Tax Foundation ranks Kansas 25th out of 50 states in tax burden and 20th in business tax climate. Kansas spends over $1 billion a year on incentive programs, according to The New York Times state subsidy database.

Ohio (No. 27): Needs a Population Pickup
Ohio has been adding jobs at the fastest rate in the Midwest. Unemployment, which fell to 5.7 percent in July, was lowest in Ohio since October 2005. Manufacturing is on the rise, centered on the Dayton area and its export-fueled economy. According to Deloitte’s Buelow, the Buckeye State’s upsides include JobsOhio, “a very good, very well-funded program” that’s “putting the pieces in place to address retention needs.” One downside is labor supply; the state “needs population growth” in cities like Cleveland, says economist Bill LaFayette, who worries that sluggish population growth and Millennial Generation resistance to manufacturing careers will eventually deter growth.

Tax reform “has made the state very competitive,” says site selector Gigerich. Ohio ranks third in the nation in terms of pro-business tax environment, according to the Tax Foundation. A joint Ernst & Young and Council on State Taxation ranked Ohio third in tax burden. Incentive offerings “are not as large as they used to be,” says consultant Bosman. Ohio spends over $3.24 billion a year on incentive programs, according to The New York Times subsidy database.

Minnesota (No. 34): Taking on Taxes
Minnesota outpaces most of the nation in economic growth. The Gopher State ranked 66.4 on Creighton University’s Business Conditions Index in July, tops in the Midwest, and more than 10 points above its 2013 rating. State economic data show growth across nearly all industries, led by Construction and Health Care gains; medical-device manufacturing continues to expand its footprint. Minnesota business owners are optimistic; this spring, 52 percent of Minnesota business-service firms expect revenues to rise over the next 12 months, up from 46 percent last year, according to a Federal Reserve Bank/Minneapolis study.

Governor Mark Dayton signed a wide-ranging, tax-reform bill into law this spring that repealed much-reviled sales taxes on warehousing and storage services, electronic equipment repair and maintenance and telecommunications equipment, as well as lowering income taxes and estate and gift taxes. Minnesota spends over $239 million per year on incentive programs, according to The New York Times database.

Michigan (No.45): Reinvesting in Detroit
Michigan holds the dubious distinction of being the nation’s worst-performing state (ALEC’s 2014 Rich States, Poor States report), while bringing up the rear in economic outlook, by trailing only Vermont (No. 49) and New York (No. 50). Recent metrics suggest better days ahead: Michigan led the Midwest in GDP growth (2.7 percent versus the nation’s .4 percent hiccup) between July 2013 and July 2014, says the Fed’s Chicago branch. University of Michigan Ann Arbor economic forecaster George Fulton predicts job growth over the next two years in trade, transportation and utilities; professional and business services; and construction. In Detroit, the city’s filing for municipal bankruptcy has prompted business leaders to begin reinvesting, reversing decades of decline. Statewide, the elimination of Michigan’s business tax in favor of a corporate income tax, easier access to venture capital and growth of the R&D sector have given cheer.

The Tax Foundation ranked Michigan 21st highest out of 50 states in state and local tax burden and 14th in business tax climate. Recent upgrades to incentive programs are paying off, says site selector Gigerich. Michigan spends over $6.65 billion a year on incentive programs, according to The New York Times state subsidy database.

Illinois (No. 48): Ill-Annoy
Illinois faces—or perhaps avoids facing—three serious structural problems: a yawning $45 billion budget deficit, escalating health care costs and persistent high unemployment. Illinois could be “the California of the Midwest—without the technology or the sunshine,” says Gigerich drily, referring to the state’s highly regulated business climate, abundant nuisance fees and deferred-maintenance infrastructure. Real GDP growth has lagged the U.S. recovery rate since 2010.

An Allied Van Lines survey ranked Illinois tops in the nation for out migration; border-hopping business owners blame the “Ill-annoy factor” as they cross state lines into Indiana and Wisconsin. State bright spots include energy sector expansion and slowing bankruptcy and foreclosure rates. Manufacturing continues to rebound, albeit slowly, according to the Chicago Federal survey; JPMorgan Chase predicts continuing recovery through at least 2015.

Chicago remains the business capital of the Midwest, controlling 77 percent of the state’s economy. Yet, Chicagoland’s economic metrics have trailed national rates since the late ’90s. Insiders worry that pension and unfunded liabilities reduce municipal finances to a house of cards. The Tax Foundation ranks Illinois 13th highest out of 50 states in terms of tax burden and 31st in busines stax climate. Connections play outsized roles in getting government assistance; politics “gets further involved than it should,” says BLS’ Bosman.

Sidebar: St. Louis: Fighting Ferguson Turmoil

Sidebar: CEO Perspectives: Why We’re Here

" Warren Strugatch : Warren Strugatch is a writer, speaker and consultant based in Stony Brook, NY. He covers economic development, global business, management and marketing.."