Why the Midwest looks better in a downturn

As we begin 1980, the key economic uncertainty is the missing recession. The best advertised recession failed to make its debut in 1979, as the economy held up considerably better than anticipated in the second half of the year. Something along the lines of an Indian summer has been taking place in the economy.

But make no mistake about it, colder weather is ahead. The odds still favor an actual decline in real output and employment. The relatively high level of consumer debt, declining purchasing power, and increased layoffs should cool off the American consumer's buying binge.

In keeping with the expected national downturn, the Upper Midwest's economy will be less robust in 1980. Retail sales will slacken further. Housing starts will continue to decline, and the unemployment rate will show definite upward movement.

Even so, the economic downturn in the Upper Midwest will be moderated by a number of factors. First of all, this region's economy does not depend on highly cyclical industries such as autos and steel. The presence of many high-technology firms, which are expected to fare relatively well during the recession, will also help insulate the region from the national economic downturn.

Within this region, the Twin Cities -- Minneapolis and St. Paul -- will be buffered by the boom in commercial and industrial construction which occurred last year and by the relatively large concentration of white-collar workers in corporate headquarters, wholesale-retail trade, and other service sectors. Historically, these sectors have been less affected by economic downturns.

While rising energy costs will adversely impact economic activity in this region, there is also a bright side to rising petroleum prices. Development of oil and gas resources should increase in the western portion of the Upper Midwest, stimulating employment and growth in that part of the region.

Unfortunately, the agricultural sector will be less of a cushion during this downturn. This year farm production costs are expected to rise more rapidly than farm revenue, squeezing margins. The grain embargo is also expected to exert downward pressure on farm prices and incomes. The combination of these factors could reduce net farm income by over 20 percent after adjustment for inflation.

This is disturbing because the farm economy has been counted on as a source of regional economic strength. In the past, national economic downturns were barely noticeable in many rural communities. This time around, the slowdown in farm spending will tend to impact a number of rural communities.

Although the Upper Midwest will continue to be less impacted by a cyclical downturn than many other parts of the country, this regional difference is likely to be less pronounced during the current recession.

To cope with the combination of continued inflation and an economic downturn, firms will have to continue to exercise caution. Inventories should be kept lean. Excessive labor hoarding should be avoided. This would be a good time to take a close look at expenses, making cuts where prudent.

Business construction and expansion plans should also be scrutinized carefully. It does not matter how profitable the venture may appear in the long run if the firm is unable to survive in the short run. Cash flow positions need to be carefully evaluated; a little extra cushion is advisable. On the other hand, if a cash-flow squeeze is not anticipated, firms may want to look across the recessionary valley and commence with expansion plans, enabling them to take advantage of the next upswing in business activity.