Bill Maness clearly remembers the July day in 2010 when he was called to a meeting at Haldex Brake Products in Iola, Kan.
Maness was mayor of Iola, a town with a population of 5,500 that is the county seat and largest city in Allen County in southeast Kansas.
The meeting, Maness learned, was called by company officials who were dutifully notifying him, as mayor, that Haldex was closing its doors in December.
“I found out that not only was the community losing a major, longtime employer but also—I was losing my job,” Maness said.
For more than 30 years, Haldex had been a cornerstone of the local economy, employing up to 500 during the 1990s. About 160 were on the payroll when it closed.
The closing of a business like Haldex is part of a natural progression: Established businesses go away, and new businesses come into a community. It’s called business turnover—new firms enter and existing firms leave the economy.
“Business turnover is a vital part of any economy,” said Jason P. Brown, assistant vice president and economist at the Federal Reserve Bank of Kansas City.
Vibrant economies, innovation and productivity are found where turnover rates are higher. Turnover spurs growth as new companies with new ideas create competition in the marketplace and replace older, less-efficient companies.
In 1977, business turnover in the United States was 28.1 percent, meaning 28 percent of businesses either entered or left the economy. In 2015, business turnover had dropped to 19 percent.
Brown investigated the turnover rate nationwide from 2000 to 2014 in 917 areas of the country. His research was published in the Kansas City Fed’s Economic Review, available on the bank’s website. He found that business turnover has declined throughout the United States, especially in the “micropolitan” areas—the least-populated communities.
“In smaller areas with fewer businesses, if one of the businesses goes away, the consequences are much higher,” Brown said.
Filling the holes
The consequences for Iola and its residents were more than the visible vacancy of a 150,000-square-foot building. Lives were disrupted.
“Factory closures hurt the mindset of a community,” said Maness, who now is economic development director for Thrive Allen County, a rural health advocacy organization.
Some Haldex employees went to work for yearbook publisher Herff Jones, which was next to the Haldex facility—only to see Herff Jones close in October 2015, displacing 60 employees.
Both operations closed because their companies relocated the plants.
What business turnover rates don’t measure directly are the powerful influences of a community’s resiliency and ingenuity. Iola, for example, bounced back.Through the cooperation of city and county governments and private investors, Iola now has a new 17,000-square-foot grocery store, an upscale apartment complex, a bicycle sales and repair store, 27 miles of bike and pedestrian trails and a regional hospital—all since Haldex closed.
And that large empty building? It’s occupied.
In 2013, Catalyst Artificial Lift, located eight miles south of Iola in Humboldt, moved into 8,000 square feet of the old Haldex facility. The rest of the building is leased as warehouse space to another Iola business.
By diversifying and bringing in new businesses, Allen County and Iola survived the loss of two longtime manufacturing plants.
Effects of the decline
Such losses in manufacturing exemplify the declining trend in business turnover in micropolitan and small metro areas. In these less populous communities, the average turnover from 1998 to 2014 for manufacturing firms declined 14 percent. Brown’s study of business turnover defines micropolitan areas by county populations of fewer than 220,000, such as the Warrensburg, Mo., area. “Large metropolitan” areas are those with more than 4 million people, such as Chicago. Using that definition, there are no large metropolitan areas in the Tenth District. “Small metropolitan” areas are those with fewer than 1 million but more than 220,000, such as the Omaha, Neb., and Topeka, Kan., areas. “Medium metropolitan” areas have populations from 1 million to fewer than 4 million, such as the Denver, Kansas City and Oklahoma City areas.
Of the four area sizes Brown studied, 734 were micropolitan areas. He found that the decline in business turnover differed significantly between micropolitan and small metro areas and the medium metro and large metro areas.
Such a decline has direct implications for the Tenth District, which is composed primarily of micropolitan and small metropolitan areas.
“Given their lower levels of business turnover, micropolitan and small urban areas may be at risk of becoming more static and less productive than larger urban areas,” Brown said.
To survive, the smaller areas need to “acknowledge and challenge” their declining business turnover rates, Brown said.
It’s a lesson Oklahoma City learned during the “oil bust” of the 1980s.
“We were so heavily dependent on the oil and gas industry,” said Erin E. Risley-Baird, executive director of the Oklahoma Office of Workforce Development. “We knew we could weather the next downturn better if we could diversify.”
The success of those efforts was seen in 2016 when the price for a barrel of oil dropped into the low $30s.
“We had large layoffs in manufacturing of oil and gas equipment and closures of some small manufacturers,” said Risley-Baird.
But because Oklahoma City had begun cultivating a diverse commercial landscape years before the bust, “we were able to find equitable employment for those who were laid off and keep them from leaving the state,” Risley-Baird said.
Brown also found that the decline in business turnover rates was “more due to a lack of new businesses entering” than the number of existing businesses leaving.
Patents issued for new inventions are an indication of an innovative economy. Brown found the number of patents increases as the size of an area increases, with the most patents typically in large metro areas.
In the Tenth District, “Denver has the most dynamic economy in patent activity,” said Patrick Woolley, patent attorney and chairman of the Intellectual Property Department at the Polsinelli law firm in Kansas City.
Patent activity also can be found to a modest degree in Omaha and Kansas City, Woolley said. But an area doesn’t necessarily need to be large to produce patents.
One example is Duncan, Okla. Duncan is a micropolitan of 22,484, the county seat of Stephens County with a population of 43,332 and home for nearly 100 years to Halliburton Manufacturing Center.
“Many patents have come from Duncan-area employees on the true edge of research and development at Halliburton to make better products and processes,” said Jeannie Bowden, business and industry specialist with the Duncan Area Economic Development Foundation.
Sometimes, however, inventing doesn’t necessarily involve patents.
Red Cloud, Neb., for example, with a population about 1,000, recently reinvented itself as a tourist destination with the 2017 opening of the National Willa Cather Center. The center, a 10-year project costing about $7 million, includes a museum, archives, exhibit space, bookstore and the works and belongings of Red Cloud’s most famous author.
Dave Garwood, former board member of the Willa Cather Foundation, estimates the center in Red Cloud attracts 10,000 to 15,000 visitors annually.
Such tourism represents the U.S. economy’s transition from producing goods to providing services, another trend that is tracked in the business turnover study.
Download Jason P. Brown’s Economic Review article about business turnover.