Shifting gears: recent changes in Indiana's economy.

• Author: Slaper, Timothy F.

In the days of yore, the story for the Indiana economy started--and ended--with automobile manufacturing. Not anymore.

There have been tremendous structural changes in the global, U.S., and Indiana economies in the last decade. The economic pressures resulting from the 2001 recession accelerated many of those structural changes. To paraphrase the old car advertisement, this isn't your father's Hoosier economy.

Recently released data show that the Indiana economy has been in transition. Some industries have been growing quickly, while others have been shrinking. Output of the automobile industry--motor vehicles and parts--has grown at a rate below the rate of inflation and primary metal manufacturing has been in a slow retreat. Other industries, such as chemicals and miscellaneous manufactured products, have done fairly well. This article examines Indiana's growth patterns over the last decade and, particularly, since the end of the last recession in 2001. There is at least one clear revelation: Indiana's largest manufacturing industry isn't automobiles anymore.

Starting with the big picture from 2001 to 2007, Indiana's real gross domestic product (GDP) rose at an average annual rate of nearly 1.5 percent, barely shy of the Midwest average and more than 1 percentage point below the U.S. growth rate, as Figure 1 shows.

As Figure 2 and Figure 3 show, Indiana has a particularly high percentage of its GDP and employment associated with manufacturing. As a result, as the national economy has transitioned from manufacturing to higher value-added industries, Indiana was particularly vulnerable to job loss. The size of the health care sector, the construction and utilities sector, and the transportation and trade sector are about the same for Indiana and the nation. In other sectors, the differences are more dramatic. Manufacturing, for example, comprises 12 percent of U.S. output; in Indiana, manufacturing's contribution is more than twice that. On the other hand, Indiana's professional and business service sector, one of the faster growing sectors in the U.S. economy, is less than half that of Illinois and the nation.

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The state's industrial composition favors durable goods manufacturing. While the state's proportion of output devoted to durable goods manufacturing is the highest in the nation, Indiana's growth in durable goods manufacturing was 4.4 percentage points below the U.S. average from 2005-2007, as shown in Figure 4.

There are two notable bright spots within durable goods manufacturing and, to some degree, this may take...