Midwest Polishes Rusty Image, Forges Rebound

So long, "rust belt." Hello, "high-octane heartland."

The American Midwest, once a post-industrial showcase of ossified steel mills and wheezing auto plants, has rebounded as an exemplar of economic renewal.

"The Midwest economy is now firing on all cylinders," says a report by the Federal Reserve Bank of Chicago.

The industrial heartland has long been hauling itself out of the American economy's gutter.

But the Fed report - the most comprehensive regional survey in years - crowns the comeback with a sweeping review of accomplishment covering incomes, employment, and governance.

The report implicitly poses the Midwest as a model for the revival of decrepit smokestack regions.

And some economists say the region's strength also sends a timely message to Federal Reserve chairman Alan Greenspan: The Fed's recent move to raise interest rates may not be needed.

"The Midwest has been sending a clear signal for a long time that the US economy is more efficient than we thought," says Diane Swonk, an economist at First Chicago Corp. "The economy can tolerate lower unemployment and stronger growth than we once thought without triggering inflation."

Indeed, one of the Midwest's most far-reaching triumphs is its ability to put idle labor to work.

The region's unemployment rate surged to about 12 percent in 1983, three percentage points above the national average. But last year it simmered a full point below the US average.

Now at 4.4 percent, Midwest unemployment has ducked the national average for five years without significantly inflaming wage inflation.

Still, both per capita income and median household income have come from behind and nosed above the national average for the first time in nearly two decades, the Fed report says.

The report cites several reasons for the turnaround, some beyond the region's control: a reconcentration of the auto industry, declining energy costs, a comparatively low dependence on shrinking federal spending, and a dramatic growth in exports.

The Chicago Fed also credits the region with several wise moves, including the embrace of new technology and management modes such as "lean manufacturing." State governments have been especially thrifty and innovative.

The salad days won't last forever. Energy prices could reverse. Trade terms might tip more to the advantage of overseas rivals. The Midwest remains dependent on the highly erratic sectors of durable goods and farming. Industries like automaking could slow if interest rates keep rising.

And the region is short in skilled labor, putting a premium on education and training, according to the Fed.

"Education," says M.J. Carlson of the Chicagoland Chamber of Commerce, "is absolutely an imperative for future vitality."