* From the State of Illinois Forecast Report prepared by Moody’s…

Illinois navigated the COVID-19 downturn about as well as the U.S., though a performance gap materialized over the course of the recovery. The labor market has recouped a smaller share of the jobs lost in the recession than nationally, though the disparity stems from the larger-than-average setback in late 2020. Employment growth gained momentum in 2021. Job growth from December 2020 to December 2021 matched the national pace and exceeded the regional pace. The decrease in joblessness has been typical for the U.S. but slightly slower than in the Midwest. Labor market conditions are about as tight as they are nationally judging by metrics such as the unemployment rate, the size of the labor force, the number of job openings, and wage growth.

Stronger-than-expected revenues and federal relief from the American Rescue Plan have put state finances on a firmer footing. The state promptly repayed a loan from the Federal Reserve, is reducing its backlog of unpaid bills, and has a budget surplus. These developments helped Illinois draw upgrades to its credit rating and outlook from multiple ratings agencies.

Though the past 12 months have been stronger than average, full recovery will come more slowly than in the region and the nation. Payrolls are poised to return to their previous peak in the middle of the decade, later than in the rest of the Midwest and U.S., and it will take longer for the unemployment rate to drop to pre-pandemic norms. Tailwinds to the manufacturing base are numerous, but easing of supply-chain bottlenecks is key to the near-term forecast. Prospects are solid for service-providing industries, especially professional/business services and logistics. Leisure/hospitality will also forge ahead as travel picks up, but a slow return of international visitors and less business travel and convention traffic are concerns.

Some existing headwinds will prove exceedingly difficult to overcome. Even as the pandemic loosens its grip on the job market and labor force, persistent out-migration will weigh on the strength of employment gains. Illinois was one of four states or territories that lost residents during the past decade, and additional losses are in store. Fiscal problems continue to plague the state, and Chicago faces the same challenges as many other large cities.

* Long-term outlook: Positive factors…

The state will continue to diversify into service-providing industries while nurturing its more efficient and smaller traditional manufacturing core. Chicago will continue to develop as the transportation and distribution center for the Midwest and will increasingly develop its tech industry. The explosion of tech-related hiring on the Near North and West sides and corporate relocations from the suburbs—such as those by Walgreens, Mondelez International, Peapod, Hillshire Brands, Kraft Heinz, and United Continental Holdings—suggest that this economic engine has reached critical mass, enabling its growth to become self-perpetuating.

Professional/business services. Professional/business services will be critical to the economy’s success. Most of the growth in well-paying industries such as professional, scientific and technical consulting will take place in northern Illinois. […]

Financial services. Financial services, which employ 6.9% of the state’s workforce and 7.7% of Chicago’s workforce, compared with 6% nationally, will remain among the state’s core industries. One reason for this is that the outlook for Chicago’s commodities exchanges is promising. They have successfully adapted to new technologies and, through mergers, have increased their market share in the global marketplace. They also hold virtual monopolies over their most important products, thereby benefiting from strong pricing power. Chicago is considered the world capital of futures trading since it is now home to by far the world’s largest derivatives exchange.

An outsize tech industry and legacy ties to financial services make financial technology a promising area of development, but stiff competition from existing fintech hubs limits upside. The insurance industry also has a large footprint on Illinois’ economy, especially in Bloomington, where it makes up 17% of employment, almost nine times the U.S. average. Insurance will remain a reliable source of jobs and income. […]

Tourism. Illinois’ tourism-dependent industries are expected to outperform other parts of the economy over the next decade, but they will be crawling out of an extremely deep hole. […]

* Long-term outlook: Negative factors…

Weak demographic trends and deep-rooted fiscal problems such as mounting pension obligations and a shrinking tax base represent the biggest hurdles to the longer-term outlook. The forecast anticipates that the state will grow a step behind the Midwest average and a few steps behind the nation over the extended forecast horizon. Over the next five years, employment in Illinois is forecast to increase 3.9%, below the 4.6% increase for the Midwest and 5.5% rise nationally.

The recovery will proceed much more quickly than the last one, which was hampered by damaged household and business balance sheets and a fragile financial system. However, the economy will emerge somewhat altered, because the pandemic has accelerated the shift toward e-commerce and the consolidation of higher education. The near-term outlook for Illinois closely resembles that for the U.S., but the state will underperform in the long term because of poor population trends and extraordinary pressure on state and local governments.

Manufacturing. Manufacturing will occupy a slightly greaterthan-average share of the Illinois economy, but the state will have to fight to hold on to its manufacturing base. The long-run decline of manufacturing will prevail despite the industry’s short-lived resurgence. Manufacturing is of greater importance in northern and central Illinois than it is in Chicago. While the share of employment in manufacturing in the state, at 9.5%, is only somewhat higher than the national average of 8.5%, the share outside Chicago is higher at 12.7%. Illinois’ largest manufacturing industries, in order of number of jobs in 2021, are food processing, fabricated metals, machinery, chemicals and transportation equipment. Together, these industries account for about 59% of all manufacturing jobs, compared with 53.2% nationally. […]

Higher education. Although higher education has typically been insulated from the whims of the business cycle—and sometimes even been the beneficiary of economic downturns—the COVID-19 pandemic is hitting the sector head-on and thrusting into the spotlight problems that have long been simmering in higher education. Academia faces a looming demand problem not only due to rising costs but also due to changing demographic patterns. Longer-term structural issues in combination with pandemic-related stress will leave some institutions at risk of failure. If and when school failures occur, they are likely to be dominated by those already in poor financial condition due to sagging enrollment, poor student retention, and an overreliance on public funding. […]

Business climate. Illinois, and Chicago in particular, is an ap pealing location to corporate headquarters and companies that need highly skilled workers and are willing to pay for top talent. Despite Illinois’ advantages, however, the state’s financial problems threaten to discourage firms from locating to or remaining in the state. The state’s outlook is tarnished primarily by its bud get woes and weak population trends, not its high costs relative to nearby states. Firms in Illinois tend to pay more in taxes compared with those in neighboring states and labor is on the expensive side, but overall business costs are no higher than the national average. Illinois is gradually increasing its minimum wage, but dozens of other states and local governments are raising their wage floors as well. […]

Unions. Unit labor costs in the state are above the national average, in part because of a still-high presence of unions. The state’s unit labor costs are significantly higher than those of neighboring Indiana but lower than in Michigan and Wisconsin, three states that have adopted right-to-work laws. Under right-to-work laws, employees in unionized workplaces cannot be forced to pay union fees or join unions. Michigan passed a law after a number of businesses, mostly in manufacturing, cited the law as a factor in their decision to locate in Indiana. Less clear are the effects that right-to-work laws have on economic growth. The lack of clarity is mainly due to the fact that union strength is just one factor businesses look at when deciding whether to set up shop or relocate. Energy and other costs also matter, as do a slew of other factors including talent, infrastructure, and access to customers and capital that make it extremely difficult to gauge the precise effects of right-to-work laws on job creation and a state’s economic prosperity.

* Income…

Personal income has been slower to rise in Illinois than na tionally, a trend that will extend through the new business cycle. Consumption depends mostly on the state’s income from labor, predominantly wages and salaries, which has lagged the U.S. and regional averages. Total personal income increased 3.6% per year on average over the course of the expansion that ended in 2019, less than the 3.7% regional average and 4.3% national average. Growth in the most important source of income, wages and salaries, averaged 3.3% per year over the 10-year period, versus 3.5% in the Midwest and 4.2% in the U.S.

* Population…

The end of the pandemic will not resolve Illinois’ demographic woes. Population decline over the next few years will be the one of the worst among the states, and the deterioration in the workingage population will remain more severe than in other parts of the country. Fewer young adults will make it harder to fill jobs and keep consumer and housing demand afloat. The shrinking tax base will also aggravate state and local fiscal strain. Even as pandemic-related barriers to labor force participation diminish, persistent outmigration and increased remote work will weigh on the strength of employment gains.

* Recent Performance…

Illinois navigated the COVID-19 downturn about as well as the U.S., though a performance gap materialized over the course of the recovery. The labor market has recouped a smaller share of the jobs lost in the recession than nationally, though the disparity stems from the larger-than-average setback in November and December of 2020. Employment growth gained momentum in 2021. Job growth from December 2020 to December 2021 was 4.7%, more than the regional pace of 3.7% and a bit higher than the national pace of 4.5%. At the end of the year, employment was 3.8% lower than in December 2019, versus 3.1% lower in the Midwest and 1.95% nationally.

The decrease in joblessness has been typical for the U.S. but slightly slower than in the Midwest. The unemployment rate at the end of the year was 5.3%, higher than the 4% regional average and 3.9% national average, but not as high as in many other large states. Jobless rates are generally lower outside of Chicago, but so is labor force growth. The state’s labor market conditions are about as tight as they are nationally judging by metrics such as the unemployment rate, the size of the labor force, the number of job openings, and wage growth.

Labor force participation has been volatile for the past two years, but it generally rose in 2021. The Illinois rate was 63.4% as of December, compared with the Midwest rate of 63.5% and the U.S. rate of 61.9%, and averaged 63% for the year, just slightly below the Midwest rate of 64% and above the U.S. rate of 61%. The labor force ended the year about 1.8% smaller than in the last month of 2019. That contraction was between the Midwest’s 2.2% gap and the nation’s 1.4% gap.

Inflation and wage pressures are in line with those at the U.S. level, though there is some variation across economies. Supplychain stresses are having the biggest impact in areas with a high concentration of manufacturing, exports or both, which helps explain why the consumer price index has risen more in factory centers such as Peoria than they have in the Chicago area. The Employment Cost Index for Chicago suggests that wages are rising at a pace similar to that nationally.

Most major industries are strengthening, and industries that started with strong recoveries such as transportation/warehousing have generally extended their leads. Green shoots are appearing in office-using industries such as professional/business services, which had been sluggish for most of the recovery. The leisure/hospitality industry has benefited meaningfully from the distribution and wide acceptance of the COVID-19 vaccines in 2021: Employment in this industry is coming off an extremely depressed base, but job creation has gained significant momentum. Employment in some other parts of the economy, including manufacturing and government, is moving in the right direction at a tepid pace.

* Bloomington…

Bloomington’s recovery will be tepid. The outlook is tightly tethered to sluggish state government and financial services employment. Weak enrollment trends at Illinois State University will weigh on tuition revenue and limit the need for more faculty and staff. Financial services will remain a stable yet sluggish source of relatively high wage jobs, but a meaningful increase in finance jobs will not materialize in the near term. Rivian’s EV factory offers a glimmer of hope to an otherwise lackluster outlook. The manufacturer recently went public with one of the largest IPOs in years. The surge in production and hiring at the plant will have positive effects on downstream industries such as transportation/warehousing and business/professional services, as well as consumer-dependent industries. Growth will rise above our baseline if Rivian’s success and international attention draw other large investment projects to Bloomington.

* Champaign area…

Strength at the University of Illinois’ flagship campus will be a major advantage for Urbana-Champaign’s economy. The Illinois Board of Higher Education approved a fiscal 2023 budget, which calls for a 7% funding increase for the state’s higher education system, including 4% more for the University of Illinois system. It still requires approval by the General Assembly and Governor J.B. Pritzker. One of UofI’s priorities is faculty hiring and retention to keep up with the growing student body. If the request for UofI is granted, the larger budget will lend upside to our forecast for a slowdown in state government employment gains.

* Springfield…

Springfield’s lack of dynamic drivers will keep it from picking up much momentum. The state government will have some breathing room over the next few years. However, this temporary cushion will not translate into hiring or solve Illinois’ deeper structural issues. Longer-term fiscal challenges such as massive unfunded pension liabilities will continue to put pressure on the budget and on job growth in Springfield. Healthcare will provide the best avenue for growth because of the continued graying of the population. Providers’ struggle to fill open positions as well as the contraction of the overall population will keep the industry a step behind the national average.

* Greg Hinz…

Overall business costs in the state are slightly lower than in the country as a whole, with energy costs a bright spot. The overall tax burden is relatively high, but not extraordinarily so, with Illinois getting an index rating of 104 with the nation as a whole 100.

At least one of the core problems facing Illinois is that with a declining population, the state has a smaller tax base to pay off old pension debt, the report says.

The bottom line of the report, prepared for the Illinois Commission on Government Forecasting & Accountability: “Illinois has what it takes to remain a top business center, so long as it can solve the fiscal problems that are eroding its edge in the competition for talent, jobs and capital.”