‘Spillover Effect’: How the COVID-19 pandemic has compounded Erie’s industrial decline

By: - April 10, 2020 6:30 am

The former Erie Forge and Steel Co. as seen from west side rail lines at Green Garden (Capital-Star photo by Hannah McDonald)

ERIE, Pa. — Erie’s manufacturing sector was in decline well before the COVID-19 pandemic. But the public health crisis could weaken it even further, one of the region’s top economists told the Capital-Star this week.

“It’s always risky to try to forecast the future,” Dr. Kenneth Louie, of the Economic Research Institute of Erie, said. “But perhaps it’s safe to say that yes, this short- term crisis with the coronavirus may serve to accelerate that long- term decline in manufacturing employment.”

Louie, a full-time faculty member at Penn State Behrend said the long-term downward trend of the region is more likely caused by technological advances than the COVID-19 pandemic. 

“The crunch of the medical crisis now may be speeding it up a little bit,” he told the Capital-Star. “But even without the medical crisis, the coronavirus, the long-term decline probably will continue for a while because of automation and artificial intelligence.”

In 1990, manufacturing accounted for nearly 30 percent of employment in the region, Louie told the Capital-Star. In the last 30 years, this has decreased by nearly 50 percent. 

The output of the manufacturing sector however remains relatively constant. The job loss is a reflection of the increase in automation in factories, not a decrease in production. 

Pa.’s 2020 budget could be up to $1.8 billion short because of COVID-19 business closings

In Erie County, the manufacturing sector accounts for nearly $2 billion annually in gross domestic product (GDP), or total value of goods produced. This is roughly 20 percent of the region’s total GDP, according to Louie. Erie County Director of Finance Jim Sparber confirmed this number as a reasonable assessment. 

According to the Erie Economics Guide published in 2019, “If Erie County was a country, it would rank 132 in GDP (out of 185 countries) according to the World Bank.” 

The region has an economy similar in size to countries like Malta, Mozambique, The Bahamas and Albania according to the U.S. Conference of Mayors and the Council on Metro Economies and the New American City.

Across the nation 18,000 manufacturing jobs were lost in March 2020, according to the U.S. Bureau of Labor Statistics. 

Industrial plant closures mean disruption of supply chains, David Taylor, the CEO of the Pennsylvania Manufacturers Association, an industry trade group, told the Capital-Star. 

“Manufacturing has the strongest multiplier effect on job creation because of all of those support activities from suppliers, distributors. A Lot of forklift jobs, a lot of trucking jobs are sustained by manufacturing. And if you lose that core manufacturing activity, all of the rest of that goes away,” Taylor explained.

Simply, the loss of manufacturing jobs affects job loss in other economic sectors. 

Across the board, 459,000 jobs were lost in March, the bureau reported in the April 7 TED: The Economics Daily report.

The food service and drinking places sector saw the largest decline; The loss of 417,000 jobs. This “nearly offset gains over the previous two years,” the bureau noted. 

“I think two of the sectors that are likely to be dramatically affected are the retail trade sector — and in our part of the commonwealth, because we do a lot of tourism — the leisure and hospitality industry,” Louie told the Capital-Star.

The “spillover effect” is often discussed in economics. It refers to factors in one, seemingly unrelated, economic sector contributing to the growth or decline in another. 

“Often they are spoken of in more positive terms. So if there’s extra spending that comes in, it will have a multiplier effect on the other parts of the economy, but unfortunately with the current situation, we may have multipliers in reverse,” Louie said. “So, as the retail sector shrinks and as the leisure and hospitality sector shrinks, then that demand or spending on local goods and services will contract and will affect other industries locally as well, like manufacturing, transportation, finance, real estate services and so on and so forth.”

In other words, even when the threat of the pandemic passes and businesses in all sectors are able to reopen, there are likely to be dramatic lasting effects on local and regional economies. 

As to how dramatic this will be, Louie can’t say. “Given the uncertainties, I think nobody can say at this point,” he said.

“A healthy business has about two months worth of reserves,” David Taylor, CEO of Pennsylvania Manufacturers’ Association, told the Capital-Star. “Which means — if you cut off a business from its income for many weeks, and you start getting towards that two month point — you will have exhausted that average business’s ability to pay its bills …  I don’t want to see this, but I fear that quite a number of businesses are going to go under.”

“The problem with the current disruption to the economy is that there is so much uncertainty — even in the medical science area — as to the likely outcome,” Louie said. “We don’t know how much more severe things will get. And we don’t know how long it will take before we can subside …  As a result, it’s very hard to gauge. You know, how many weeks, how many months it will take for these things to work out and calculate the quantity of the [impact on the] economy.”

Correspondent Hannah McDonald covers Erie and northwestern Pennsylvania for the Capital-Star. 

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