Community banks in states that rely heavily on manufacturing allocate a higher share of commercial loans than banks in other states, according to an FDIC quarterly report.
Indiana, Kentucky, Louisiana, Michigan and Wisconsin are the five states where manufacturing accounts for the highest share of state GDP, according to the report. The states with the highest share of manufacturing jobs relative to total employment include Indiana, Iowa, Kentucky, Michigan and Wisconsin.
The report noted that community bank net interest margins have exceeded other community banks on average in manufacturing-concentrated states due to the higher share of commercial loans to assets.
They also showed higher sensitivity to economic downturns, the report’s authors, economists Chester Polson and Stephen Kiser, wrote, although manufacturing has bounced back relatively quickly from pandemic impacts compared to previous recessions.
Manufacturing continues to be an important part of U.S. economic output, even as the economy has changed. The industry accounted for approximately 11 percent of GDP as of last year, according to the report. Though the share of commercial and industrial and commercial real estate loans in manufacturing-heavy states has fallen since 2000, total totals are still much higher than at community banks in other states.
Community banks in manufacturing-dependent states still face numerous challenges, Polson and Kiser wrote. Driven by a shift to advanced manufacturing led by the introduction of new technologies such as robotics, 3D printing and the digitization of information, U.S. manufacturing output grew from $1.8 trillion to $2.2 trillion per year from 2000-2020. However, the shift to advanced manufacturing led to the output of traditional sub-sectors to fall from $824 billion to $767 million over the same time. As companies have sought greater efficiency, employment in both traditional and advanced manufacturing has consistently declined since the turn of the century.
Those trends pose long-term risks to banks as manufacturers facing global pressures move their operations to more cost-friendly locations. To Polson and Kiser, ongoing supply chain challenges and order backlogs could create liquidity risks for some manufacturing firms, and production delays caused by a shortage of employees could increase the risks of nonpayment or default on bank loans.
“The demand boom for manufacturers presents risks to banks if banks without experience expand lending to manufacturing late in the business cycle,” the report states. “As demand normalizes from recent high levels, sales could decline and expose lenders to credit risk if borrowers are overextended.”