The most interesting part of our manufacturing research this year was revelations on productivity growth in Indiana.
I am always reluctant to fill this column with my recent research, but this week's release of the annual Conexus Manufacturing Scorecard begs comment. The scorecard itself had just a few surprises. Indiana did much better in the cost of worker benefits and continued to lead in the size of manufacturing and logistics. We also report that Indiana ranked third overall in the pace of manufacturing recovery since the end of the Great Recession, trailing only the tiny manufacturing states of Alaska and North Dakota, where energy production has propelled their growth.
Our human capital scores took a surprising downturn, but the problem is a good one to have. The classes who entered community colleges in 2007 saw graduation rates dropping by 3.8 percent. This would typically be a worry, since improving graduation rates is the key to our long-term prosperity, but there's a clear and happy reason for this anomaly.
Enrollment growth in these schools jumped from 25th to 1st place during the recession years (and has subsequently returned to trend).
Unsurprisingly, some of these students have yet to graduate; in fact, with enrollment growing more than 15 percent a year during the recession, we should have seen a far deeper drop in graduation rates. Over the next two or three years, the spike in associate degree students we experienced during the Great Recession will boost our human capital, and hence our grades. In the short term, it placed huge stress on our public and private community colleges.
The most interesting part of our manufacturing research this year was revelations on productivity growth in Indiana. The downturn took a heavy toll on our manufacturing of big ticket items (cars and trucks), which are high value-added goods. This left us with a greater share of low value-added production of commodity-type products, and so reduced our ranking slightly. However, there's an even richer story about manufacturing productivity over the past decade that we reported this week. Manufacturing productivity consists of four things: technology growth, plant and equipment, workers and something economists call “total factor productivity.” This TFP is growth that cannot be explained by other factors. It is really the sole source of economic growth in a developed economy.
In the pre-recession Bubble Days, productivity growth in manufacturing nationally was led by new capital investments. Labor productivity and TFP shrank, likely due to the effects of the bubble, which kept open too many uncompetitive factories. Another possible cause is that many factories restructured their production process in the last decade to take advantage of broad investments in Information Technology. This temporarily reduced TFP. Since the start of the recession, TFP rebounded and has accelerated within the manufacturing since the end of the recession. This is a major turnaround from the last decade. Moreover, Indiana leads this productivity growth within the Midwest, and ranks high nationally. This is a clear bit of good news for the most manufacturing-intensive state in the union.