January 11, 2013
Introducing the Michigan Economy Blog
Followers of the Midwest Economy will be interested to learn that my co-workers at the Detroit Branch of the Chicago Fed have launched a blog that focuses on the Michigan Economy. This blog will serve as a portal for our numerous activities concerning Michigan, ranging from economic analysis to community development and economic education. Moreover, the Michigan Economy blog will report on the many meetings and conferences that are held at the Detroit Branch. And presentations by outside experts, as well as discussions about them, will be posted on the blog. Bookmark the blog to stay on top of Fed commentary on Michigan’s economy and to learn about our upcoming events at the Detroit Branch.
January 24, 2012
Automotive Outlook and the Regional Economy
by Paul Traub
On Thursday, January 19, 2012, the Detroit Association for Business Economics (DABE) held its annual Automotive and Economic Outlook luncheon. This event is held each January at the Detroit Branch of the Federal Reserve Bank of Chicago in memory of Robert Fish—a past president and founding member of the DABE. Meeting in the Detroit area since 1975, the DABE is a chapter of the National Association for Business Economics (NABE). The DABE meets six times between September and May, and members and guests have the opportunity to hear from experts on various sectors of the economy. As the DABE’s premier event, the annual January luncheon always coincides with the Detroit International Auto Show, and it featured two experts on the automotive sector.
The speakers at this year’s event were Kristin Dziczek, who is the director of the labor and industry group at the Center for Automotive Research (CAR), and George Magliano, who is the senior principal economist for IHS Automotive. Both speakers have more than 20 years of experience in researching the automotive industry and manufacturing. Dziczek’s presentation titled 2011 Detroit 3 – UAW Labor Contracts was an in-depth review of the results of the 2011 UAW (United Auto Workers) contracts and their impact on the labor costs and competitiveness of the Detroit Three automotive manufacturers (Chrysler, Ford, and General Motors). Magliano’s presentation titled US – Light Vehicle Outlook was just that—a concise analysis of what to expect in the coming years from the U.S. automobile industry, particularly in terms of sales of light vehicles (cars and light trucks).
Dziczek provided automotive employment forecasts for the United States and Michigan, as well as an overview of the 2007 UAW contracts and details on the final 2011 UAW contracts. Additionally, she provided insights into issues that the Detroit Three and the UAW will need to address through 2015. Dziczek said that the Detroit Three’s U.S. automotive employment numbers had started falling years before the 2008–09 recession; Detroit Three domestic employment appeared to bottom out in 2009, at about 170,000 employees. She explained that by 2009 the Detroit Three had shed almost 240,000 employees in the U.S., or 58% of their domestic work force, in just eight years. In Michigan, the Detroit Three had seen their employment fall by 112,000, or 52%, over the same period. The good news is that CAR projects total Detroit Three employment in the U.S. to increase by 18%, or 31,000 employees, over the period 2009–15, reaching a level of 201,000. Also, Detroit Three employment in Michigan is predicted to jump by 32%, or 33,000 employees, over the same period, totaling 135,000 by 2015. Based on these forecasts, we can see that CAR is expecting U.S. automotive jobs to reconcentrate in Michigan—at least to a certain degree.
In 2007, the Detroit Three and the UAW were able to agree on labor contracts that Dziczek considered “a game changer.” Important aspects of the contracts included the use of voluntary employee beneficiary associations (VEBAs); a two-tier wage structure that lowered the entry-level hourly wage to $14.00; and no pay increases. To compensate workers for no annual pay increases, the Detroit Three agreed upon a signing bonus of $3,000; lump-sum profit sharing distributions as a percent of an employee’s base pay of 3% in 2008, 3% in 2009, and 4% in 2010 (the last two were suspended in 2009); a cost-of-living adjustment, or COLA (also suspended in 2009); pension increases; and some product guarantees (some of which were never fulfilled). The most significant result of the new labor agreements was that the average hourly labor cost was reduced from $72–$78 per hour to about $50–$58 per hour. All of these changes set the stage for the 2011 labor contracts, which involved some additional changes to the previous contracts that Dziczek called “evolutionary, not revolutionary.” These changes included such cost containment strategies as the elimination of the jobs banks (which paid laid-off workers a high percentage of their salaries for an indefinite period); the continuation of the suspension of the COLA; and no pension increases at this time. Like the 2007 contracts, the 2011 contracts helped keep the Detroit Three’s costs competitive with those of other major automotive manufacturers. Dziczek pointed out that one important issue that bears watching in 2015 is how the two-tier wage structure is addressed. The initial agreement had a cap on the number of entry-level workers—more specifically, only a certain percentage of total employment could be made up of such workers. The UAW would like to see that cap kept in place, while the auto companies would like to see it either increased or removed altogether. Other critical issues include limiting pension liabilities; pushing to increase employees’ share of health care costs; and staying the course on variable compensation (profit sharing versus wage increases).
George Magliano provided a detailed and informative macroeconomic outlook, on which he based his light vehicle forecasts. Magliano explained that, of course, the major risk to his economic forecast is the European debt crisis. According to IHS and Magliano, even though Europe is in a recession, the U.S. economy is expected to continue to grow slowly over the forecast horizon. Magliano’s forecasts for 2012 are as follows: Real gross domestic product (GDP) will grow about 2.0%, employment will rise by 1.2 million, Consumer Price Index (CPI) inflation will remain at 1.5%, oil prices will settle at about $91 per barrel, and housing starts will remain weak (at around 730,000 units). Long-run real GDP growth is expected to settle at 2.5%–3.0%, and payroll employment is predicted to remain below its previous peak (in 2007) until 2015. The slow growth in employment will keep income growth down while households will continue to save more, keeping the long-term trend for consumption at around 2.0 percent.
Even with these somewhat conservative assumptions about the economy, all is not doom and gloom for the auto industry. Light vehicle sales are expected to continue to increase over the coming years, driven by the pent-up demand that has been created over the past few years. Another positive for the automakers is that retail vehicle sales, rather than fleet vehicle sales, remain the main driver of growth. This is an important part of the industry’s recovery in that margins on retail sales are greater than those on fleet sales. This factor—along with stronger used vehicle prices, lower vehicle incentives, and reduced cost-pressures on the manufacturers—should help to keep the automakers profitable, even in the face of a slow-paced economic recovery. Magliano said that IHS predicts light vehicles sales will be about 13.5 million in 2012 and 16.2 million in 2015. Going forward, the mix between car sales and light truck sales will move back in favor of car sales (54% car sales versus 46% light truck sales), as the manufacturers deal with impending higher fuel economy standards. With the recent UAW contract concession discussed above and other capacity restructuring, the auto industry has become more profitable, as evidenced by the fact that it is already making money at volumes well below the peaks reached back in the early 2000s. The bottom line is that the auto industry is in the best shape it has been in many years and is therefore well positioned to withstand economic adversity, claimed Magliano.
As evident in these two presentations, there is much to be optimistic about when it comes to the U.S. auto industry—even the prospects for the original domestic manufacturers look better. The domestic auto industry should come out of this latest recession a lot stronger than it was in 2007, as long as the industry’s stakeholders are willing to continue to work together to keep costs in line with those of foreign competitors.
A voluntary employee beneficiary association (VEBA) is a type of trust fund that can be used to provide employee benefits. The UAW agreed to a form of VEBA with the Detroit Three thus removing the liability for health care from the accounting books of the Detroit Three.(Return to text)
A product guarantee is a type of commitment that identifies where future vehicles or components will be produced.(Return to text)
August 23, 2011
Digging Out of a Hole – A View from Detroit
Digging out of a hole sounds like an oxymoron, but that seems to be what is happening with this particular economic recovery compared with recoveries from past recessions. Rather than the more rapid growth we would expect from the type of recession the U.S. just experienced, the economy is experiencing very tepid growth. The latest gross state product (GSP) data show just how slowly the recovery is proceeding for the Seventh District. 
Even though the District is leading the nation during the recovery in its manufacturing and agricultural sectors, as of the end of 2010 its total output is still lower than it was in 2005. The District is making some progress, but the direction of the recovery does look more like tunneling out of a hole than a vertical assent.
To get a sense of how different this recovery is, we can look at past rebounds from recession. For example, on average, three years after the start of the previous two recessions, the region had already experienced expansion of over 10.0%. By 2010, three years after the start of the 2007 recession, total GSP for the District is still 2.6% below its 2007 level. This hole is pretty deep.
It is important to note that the recession was not evenly distributed across all District states. The following chart shows the GSP for each state in the District indexed to calendar year 2000. It can be seen here that Michigan never really recovered from the 2001 recession. In fact, Michigan’s previous GSP peak was eight years earlier back in 2003.
While Wisconsin, Indiana, and Illinois seem to have tracked each other very closely over the past decade, Iowa has shown the strongest growth of all the states in the District. In fact, Iowa has experienced 21.3% growth since 2000. Its growth has been supported by a rise in agricultural commodity prices and the fact that it didn’t experience a housing price bubble, which has allowed the real estate sector to continue to show growth over the last decade. On the other hand, Michigan’s economy, which has been hurt significantly by declines in auto sales, has shown the weakest growth, its 2010 total GSP is still below where it was in 2000.
The next chart compares real state product growth in the District states from 2009 to 2010 with the nation as a whole.
The District grew at 2.8% in 2010, compared with 3.0% for the nation. Two of the five states grew at rates greater than the nation and four out of five states grew faster than more than half the states in the country. Michigan, which has been struggling for the past decade, actually did quite well growing at 2.9% and coming in at 16th place among all the states. Indiana, Iowa, Wisconsin and Illinois placed 3rd, 13th, 23rd, and 32nd, respectively.
In terms of job growth, the region’s economy may be performing slightly better than the nation overall in 2011. Through June 2011, the District had created jobs at a faster pace (0.9%) than the nation as a whole (0.7%), albeit from a much lower trough.
Michigan, which lost population in the last census, actually led the District in the first half of this year with job growth of 1.9%, it ranked 4th in the nation in growth of nonfarm payroll jobs. On the other hand, Indiana ranked last with employment down 0.4% in July 2011 on a year-to-date basis. Even though Indiana has seen a decline in total nonfarm July 2011 year-to-date, the state has experienced job gains in two sectors, mining and logging (1.5%) and manufacturing (1.2%).
Still, total nonfarm payroll employment in the District remains well below its previous peak. In fact, as can be seen in the following chart, nonfarm payroll employment for the District is still below where it was in 1996. In addition, the nation as a whole has also seen a sharp decline in nonfarm payroll jobs since the start of the latest recession -- nonfarm payroll employment for the country is currently about where it was in 2004.
If we take a closer look at manufacturing employment data for the nation and the District, we see an even more distressing picture. Since 1990, the nation and the District have lost about 35% of their manufacturing jobs. This is equivalent to over 6.0 million jobs nationally, of which the District accounts for about 1.1 million. At its peak in 2000, the District accounted for 19.1% of the nation’s manufacturing employment. By July 2011 its share had fallen to about 18.6%. Also at the peak in 2000, the region had 474,000 auto related jobs, which accounted for about 14.4% of the region’s manufacturing employment. As of July 2011, manufacturing employment in the region was 2.2 million jobs, of which 203,600 or 9.3% were in the auto industry.
Some of the employment declines have come about from labor-saving productivity improvements, but many are the result of declining U.S. auto sales together with declining market shares of the Michigan-based Detroit 3 auto makers and their suppliers.
In the past couple of months total light vehicle sales have been disappointing but, on the bright side, the traditional domestic manufacturers have been doing relatively well. In fact, on a year-over-year basis through June of this year, the Detroit 3 collectively saw sales increase by 15.5% versus an increase of just 7.6% for the industry as a whole. The Japanese manufacturers experienced a decline in sales on a year-over-year basis of 11.6%, largely due to supply disruptions as a result of devastating earthquake in Japan. In addition, some customers may be postponing purchases until the Japanese manufacturers can get their inventories replenished. Thus, absent the impact of the earthquake and related supply disruptions, auto sales overall would have been stronger in recent months.
It remains to be seen when auto sales will regain the positive momentum they had shown earlier in the year but despite recent setbacks, the August 2011 Blue Chip consensus for light vehicle sales for 2012 is 13.6 million units. This is a 30.1% increase from the 10.6 million units sold in 2009 and an increase of 1.4 million units from the July SAAR of 12.2 million units. In addition, Ward’s Automotive is projecting that by 2012, vehicle production in the District will be up by 2.3 million units from its low point in 2009. If these projections are correct we would expect to see some more positive gains in manufacturing employment for our region -- especially Michigan. Meanwhile, we just have to keep digging.
GSP is the equivalent of GDP at the national level – the sum total value of all goods and services.(Return to text)
State rankings include the District of Columbia. (Return to text)
September 29, 2009
Work Force Adjustment Conference in Detroit
The Midwest automotive belt faces an extraordinary challenge of work force transition; namely, profound structural change in the auto sector on top of the cyclical impact of a deep national recession. At an upcoming conference, the Federal Reserve Bank of Chicago will partner with the Brookings Institution’s Metropolitan Policy Program, the Federal Reserve Bank of Cleveland, and the Upjohn Institute for Employment Research to gauge the dimensions of the challenge, provide conceptual and evaluative foundations for work force and human capital policies, and discuss regional and federal initiatives for workers and their communities in the Midwest.
Given the dismal national unemployment picture, the state of worker dislocation in Michigan and other Midwest automotive communities may not be fully appreciated. But unemployment in these communities is significantly worse than national averages. While the national unemployment rate has just now reached 9.7%, Michigan’s unemployment rate is now at 15.2% and has exceeded 10 percent since December of last year. Payroll employment in Michigan has fallen (year over year) in every year of this decade. Coupled with the current national downturn, an industry shift of automotive production away from Michigan has meant the state has lost more jobs in automotive than those jobs that remain. If current expectations are met, national economic recovery will offer only limited help. So, although job recovery is expected to unfold nationally, albeit at a slow pace, throughout 2010, areas dependent on the auto sector will lag significantly. Unlike the recovery period following the deep 1980-82 recessionary period, North American automotive sales are not expected to bounce back smartly this time.
In view of this bleak outlook, redevelopment of both industry and work force in the Midwest will be needed. Michigan communities are working hard to develop and attract new industries to the state and to attract capital investments. Most notable among emerging industry sectors here are energy technology initiatives, medical-related technology companies, health care, and tourism.
For workers, the current environment poses some particular challenges. Among these are fewer prospects for re-employment in other regions due to relatively high unemployment in many parts of the country. Neither do today’s demographics in Michigan favor easy out-migration; on average, the state’s work force is older and less educated. So too, falling home prices mean that households cannot easily tap pools of home equity to use in re-locating to job markets in other regions.
With so much working against the state’s economy, and with so much at stake, it is important that the many work force adjustment and re-training programs underway are effective. Rebuilding Michigan’s economy will require effective training, job placement, and other support services.
The central idea of the October 8–9 conference event will be to hold up work force programs and initiatives against the realities of current conditions and the state of knowledge about what works and what doesn’t work. Accordingly, conference sessions will be grouped by general category of work force initiative. Sessions will address first-response initiatives in the job placement and retraining arena, followed by discussion of worker training targeted toward the expected emergence of specific industries, such as health care and energy technology. The conference will also address entrepreneurial programs that promote both self-employment and the subsequent development and support of new firms and industries.
July 27, 2009
Migration, Michigan, and Labor Market Adjustment
In part, American households have adjusted to local economic shocks by picking up and moving to regions where job and income opportunities are more abundant. Some of these movements have been broad and steady, such as the shift in population westward from the east over the past two centuries, and the north to south migration during the latter 20th century. Other migrations are more dramatic, such as the migration of African-Americans from agricultural parts of the middle South to northern manufacturing-oriented cities during the 20th century; or the Dust Bowl out-migration to California from parts of the Plains during the 1930s. Other dislocations have been more local, such as those resulting from contractions in coal mining, textile mill, and steel-producing towns in recent decades.
When such migrations take place in response to sharp negative economic shocks, they can be painful and costly both for the households who move and for the communities left behind. Those who migrate are often in desperate circumstances, and so there are high costs associated with loss of friends, family, and knowledge of local living pathways. Shrinking communities do not adjust easily. The least fortunate populations may be left behind to be supported by a tax base that has dwindled. And for those communities with shrinking population, the neighborhood housing and public infrastructures are not easily re-configured to serve smaller populations.
Nonetheless, due to its vast size, common laws, and common language, the United States is often considered to be a place where the ease of spatial mobility facilitates economic adjustments. This is true despite a few institutional impediments, such as non-portable state unemployment insurance systems as well as health insurance tied to workers’ local employers.
Home ownership may be another significant impediment that has grown over time. Since the 1940s, homeownership rates had expanded from 44 percent of households in 1940 to 69 percent by 2005. The sale of a large asset such as a home is typically accompanied by large transaction costs. And today, in the aftermath of the national freefall in home prices, many local housing markets are stagnant as would-be buyers await price stability. Moreover, price declines have left many homeowners “under water,” meaning that the likely sales price of their home would be less than the amount of the mortgage they must pay off at the time of sale. In some instances, homeowners cannot cover such losses from their savings or secure another loan to pay off the mortgage. Consequently, in situations where homeowners do not default and walk away from their obligation, or where households are uprooted due to foreclosure, the soft housing market is likely to slow migration in search of employment..
According to a recent report from the Census Bureau, the rate of interstate migration from 2007–08 was the lowest since 1948. Comparing migration in the year ending mid-year 2008 versus the previous year, 30 states experienced declining net domestic migration.
Other factors lie behind the falling trend rate of interstate migration. The U.S. population is aging, and older households tend not to move as readily. But the more recent falloff is likely tied to the aforementioned economic developments; migration rates have been found to respond to imbalances in regional economic conditions. Demographer William H. Frey notes that, during the middle years of this decade, the fast-growing metropolitan areas in Florida, Arizona, Nevada and California experienced enormous in-migration spurred by both the house price appreciation and the attendant jobs in construction and related economic sectors. Now, in-migration to such places has cooled and even reversed in some places, as home prices and jobs have declined.
More generally the national slowdown in economic activity may also be impeding inter-state migration. In investigating business cycles over the past 60 years, Raven E. Saks and Abigail Wozniak find that labor migration rates rise with cyclical upturns and fall with downturns, especially for younger working age people. These effects are independent of the degree of differences in inter-state economic conditions, and may reflect the shifting costs of job search and job matching that take place over the business cycle.
Despite such costs, migration remains attractive for some households whose local economies are particularly depressed. For example, in Michigan, the national recession has sharply deepened economic trends that have long been underway. Owing to unprecedented restructuring in its automotive sectors, the state’s labor markets have been weakening all decade long, with a cumulative decline of nonfarm payroll jobs of 17 percent. Its current unemployment rate of 15.2 percent leads all other states.
The chart below shows Michigan’s annual rate of net domestic outmigration (in red) juxtaposed against the difference between Michigan’s unemployment rate and the U.S. rate (in blue) . As Michigan’s labor market has weakened over the decade, the rate of outmigration has accelerated . At mid-year 2008, Census figures estimate that the state lost 92,600 in domestic population. Cumulatively, domestic outmigration amounts to an estimated 315,600 over the decade (table below).
Outmigration is one of several mechanisms by which Michigan workers will adjust to the shocks to their economy and job market, but not the preferred one in most situations because of the adverse impact on households and local communities. National and global economic recovery will help, too, by lifting demand for cars and other Michigan products and services. Other adjustments will involve re-training for emerging local jobs that may come about as new industries and investment opportunities develop in the state.
Note: Thanks to Vanessa Haleco-Meyer for assistance.
Population migration estimates are very uncertain. However, the general patterns and rankings cited and displayed here for Michigan are largely corroborated by alternative estimates that have been made by a state agency in Michigan, as well as by tallies of inward and outward bound shipments reported by residential moving companies. (Return to text)
April 27, 2009
“Roads to Renewal” Conference
In the current environment of automotive plant shutdowns, the pursuit of economic adaptation and revival has become urgent for many communities whose livelihoods largely depend on the automotive industry. On April 15, knowledge experts, policymakers, and community representatives gathered at a conference event in Chicago. Its purpose was to explore opportunities to sustain and build on automotive assets in such communities, attract foreign direct investment, support automotive and energy-related research and development (R&D), build advanced manufacturing facilities, and diversify into other related industries. One notable audience participant was Ed Montgomery, newly appointed (National) Director of Recovery for Auto Communities and Workers.
The conference’s morning sessions addressed the forces impacting the Midwest automotive region, along with lessons midwestern communities might draw from the South. Sean McAlinden of the Center for Automotive Research presented a graphic overview of the region’s auto-intensive counties, as well as the market position and outlook for the North American auto industry. Over the past ten years, payroll jobs in the automotive sector have been halved because of wrenching industry restructuring. Communities in Michigan have experienced an outsized share of these declines. Moveover, McAlinden’s long-term analysis and forecast of automotive sales suggests that U.S. light vehicle sales are currently in the early stages of a deep cyclical trough.
The afternoon program asked how communities are responding and adapting to the loss of automotive activity. At one of the afternoon sessions, four economists offered their observations and advice to those communities that are transitioning to a post-automotive economic base. George Fulton, research professor at the Institute for Research on Labor, Employment, and the Economy at the University of Michigan, highlighted the sharp dependence of Michigan’s economy on the Detroit Three automakers (Chrysler, Ford, and General Motors). By his measure, economic concentration in the Detroit Three is 16 times greater in Michigan than the remainder of the United States. In that light, it is perhaps not surprising that Michigan’s overall employment growth has closely tracked Detroit Three domestic automotive sales since 1991, up to and including the recent plunge in sales. For Michigan, Fulton predicts that the sales plunge will be accompanied by a loss of 239,000 jobs from the end of 2008 to the end of 2009—the largest job loss since at least 1956. By the end of 2010, Michigan’s automotive industry will employ barely one-half of its 2007 work force.
In assessing Michigan’s longer-term prospects, Fulton offered a detailed industrial analysis that showed that a fair number of industries have been growing recently. Despite the fact that 641 industry sectors experienced falling job levels in Michigan from 2002–07, 298 industries not only had net hiring outcomes but actually outperformed their counterparts in the overall United States. However, a downside to his findings are that average wages in declining industries outweighed average wages in growing industries by $14,000 per year. In searching for Michigan’s industries of the future, Fulton recommended not only those offering high wage jobs but those having a strong export component, long-term growth potential, and regional advantage (or assets) in providing products or services. In Fulton’s opinion, the automotive industry fulfills these criteria except for its long-term growth potential in Michigan. Instead, Fulton grouped Michigan’s promising industries into three categories: knowledge-based industries (including auto engineering and R&D), tourist-oriented industries, and those sectors supporting higher-income retirees.
Another helpful perspective was presented by George Erickcek, of the W. E. Upjohn Institute for Employment Research. For Michigan and many other Midwest communities, what has been happening in the Detroit-Three-related automotive industry is too big to ignore; in particular, the recent negative experience is much more magnified in intensity, and what that portends for the long term weighs heavily on them. Car and light truck sales reached 16.1 million units in 2007, but are now forecast to go as low as 11 million units in 2009. In responding to plunging sales, Detroit Three producers have curbed year-over-year production by over 60 percent, and the top Three Asian-domiciled producers (Honda, Nissan, and Toyota) have done so by over 50 percent. The long-term outlook for the Midwest reflects structural decline rather than a swift return to activity. As recently as 2001, the Detroit Three controlled 74 percent of U.S. auto sales. By 2008, the share had fallen to 48 percent.
The employment size of the domestic auto supplier industry exceeds that of auto assembly by a factor of three. Domestic auto parts suppliers have been especially impacted by falling orders from the Detroit Three, and they widely report that long-term relations with the Detroit Three have soured in disputes over pricing and delivery terms. In seeking survival strategies, many domestic auto parts makers have attempted to diversify away from the Detroit Three to Asian- and European-domiciled assembly companies with production facilities in North America. More generally, Erickcek referenced the recent Klier and Rubenstein book which outlines three survival strategies available to parts suppliers: They must survive as 1) producers who integrate automotive systems of other suppliers and deliver them to assembly plants, 2) high-tech module developers, or 3) low-cost parts makers.
Given the recent upheaval in the automotive industry, Erickcek noted, displaced workers face strong headwinds in terms of expected earnings losses upon re-employment, slow expected recovery in job openings in the coming years, and age discrimination for older workers as they seek re-employment. Still, even in these difficult times, job opportunities exist because new products are being introduced, new markets are being serviced, and aggressive companies are taking market share from their competitors. To illustrate, Erickcek noted that over the current decade, net job creation in Grand Rapids, Michigan, has typically been negative but that new job openings have tended to exceed net job loss by wide margins.
How can the communities that have been affected by the downturn in the automotive industry help match their recently displaced workers with the new jobs? First, Erickcek recommended that they base their initiatives on a firm understanding of the local labor market and on the particular skills and abilities of displaced workers. Local efforts to identify a newly emerging industry sector and to subsidize its growth in the community is an extremely risky strategy. Instead, communities should determine their community investments in infrastructure and work force training by identifying interactions (and the intersection) of three key elements: the effects of the regional economic structure, global factors, and technological factors on the community and its economic base. In closing, Erickcek cautioned communities from jumping on the bandwagon in trying to attract the “next best thing,” such as life sciences, without a strong foundation for success. Competition is fierce for such prospects, and these industry sectors are often strongly anchored to existing clusters. Importantly, many of such industries are top- heavy with highly educated professionals so that “job chains” may not reach the community’s unemployed and underemployed work force.
Ned Hill, Professor and Distinguished Scholar of Economic Development at Cleveland State University, offered his considered assessment of the realities facing communities with strong ties to the automotive industry. Hill reported trends in automotive production from North America showing that much automotive work will continue to be done in the U.S and North America in the coming years. While world automotive production has grown rapidly since 1999, North American production remains sizable, with modest shrinkage and import penetration.
For companies and plants, Hill emphasized that the keys to survival have changed little from recent years. Successful plants and companies are those that operate with flexible work force policies and that employ workers who labor with flexible work force rules. In the current environment, low debt levels and ready access to capital are important factors in survival. On the national and global stage, Hill argued that the long-term value of the dollar also influences the health of assembly plants. According to Hill, the pending “card check” of the proposed Employee Free Choice Act (EFCA) that is under consideration in the U.S. Congress may exert a pernicious effect on automotive investment in the Midwest, north of Interstate 70. If passed, Hill contended that new plants will gravitate as far as possible from those communities that tend to support labor union representation.
In advising Midwest communities that are being impacted by automotive plant closings, Hill noted that a lot has been learned from the region’s steel plant closings in the 1980s and from defense plant closings. One lesson, said Hill, is that legacy costs—such as overly generous pension benefits and health care—must be shed if new companies are to survive and invest. Hill also cautioned towns and states and the federal government to avoid “lemon socialism.” That is to say, governments are especially inept at knowing which plants and companies that can survive; heavy subsidization of chosen “winners” is usually wasteful and prolongs the agony of readjustment.
In looking to assist new industries, plants, and investments, there is no silver bullet. Yet, communities must mobilize quickly and move toward new realities and opportunities. In doing so, communities must pay attention to market trends and forces, and reinvigorate the assets of their people (their skills) and their infrastructure. In identifying assets to protect when a plant has closed, Hill emphasized that land is the critical asset. Communities would do well to bring land back to the market for redevelopment through brownfield cleanup and land banking. In contrast, towns should be skeptical of fads. Who isn’t targeting wind, bio, solar?
Even with good practices, said Hill, we still have much to learn about community revitalization. The experiences involving mass worker layoffs in the 1980s were not kind. Approximately, one-third of workers retired, one-third successfully adapted, and one-third fell into poverty. Redevelopment has not always been successful. And when it has been, revitalization has often taken a long time—up to 20 years.
In my concluding presentation, I observed that each community has somewhat unique opportunities, assets, and challenges. For this reason, a “one size fits all” revitalization strategy will surely fail. All communities must start with a sound factual assessment of its own situation. In charting its policy course of action, a community must draw on credible information concerning the many demographic and economic trends that are at play. In choosing among policy actions, a community must be cognizant of the successes and failures of similar choices that have been made by others.
March 12, 2009
Midwest in Recession: Then and Now
By Bill Testa and Vanessa Haleco-Meyer
Longtime Midwest residents may be befuddled by ongoing comparisons of the current national recession with those of 1974-75 and 1981-82. While the headlines suggest this recession compares, so far, with the deepest recessions of the past 50 years, we in the Midwest have a somewhat different perspective. For us, the recessions of 1974-75 and 1981-82 were far worse, at least so far. An exception may be made here for Michigan, which has been experiencing a recession of sorts all decade long.
Statistical comparisons of regional recessions with the nation are difficult for a number of reasons. Arguably, the best basis of comparison can be made using payroll employment data which are available monthly from the Bureau of Labor Statistics. In the charts that follow, we index job levels in states, the Seventh District (Illinois, Iowa, Indiana, Michigan, and Wisconsin), and the U.S. to a beginning value of 1.0. We begin the time series at the quarter in which employment levels peaked in the state, region, or nation. Since employment peaks may differ between a state or region and the U.S., we sometimes begin comparative series at slightly different dates. For example, employment in the Seventh District last peaked in the second quarter of 2007, but the U.S. peaked in the fourth quarter of 2007. (On the charts, the indexed lines will appear to begin in the same quarter). We use seasonal adjustment to iron out variations in employment that typically occur every year.
The chart below compares payroll job growth for the Seventh District versus the U.S. during the 1974-75 downturn, the 1980s downturn(s), and the 2008 downturn. The U.S. economy officially recorded two back-to-back recessionary periods in the early 1980s. Since the episodes took place so close together, and since the Midwest experienced virtually no pause between downturns, we index jobs beginning from the previous peak (1980-Q1 for the U.S. and 1979-Q2 for the Seventh District) through to the final trough.
In examining payroll job performance during these recessionary periods, the first thing to note is that payroll employment dropped more rapidly in the 1974-75 recession (blue lines) than in subsequent recessions. Seventh District payroll job levels fell by 4% in the four quarters following their peak in the third quarter of 1974 (before turning upwards). In comparison, and despite the dramatic declines over the past few months, the current recession has experienced a shallower and slower decline from the previous employment peak (green lines).
Click to enlarge.
Recent job declines have also been shallower so far than the fairly dramatic declines the Midwest experienced in the 1980s (red lines). After reaching a peak in 1979, payroll jobs in the District fell for four years, reaching bottom in the first quarter of 1983 at 10% below the peak. The U.S. experience of that time was quite different. Following a slight decline in 1980, national employment growth resumed briefly before falling 3% during the 1981-82 recession. Over the entire length of both recessions, the pace of job decline in the Seventh District was more than five times that of the nation.
The dismal experience of having no post-recession recovery is one that the state of Michigan is now experiencing. The chart below indexes payroll job decline and growth circa the 2001 recessionary period. From its second quarter peak in year 2000, Michigan’s employment has fallen by over 10% (green line). The remaining states of the Seventh District—Indiana, Illinois, Wisconsin, and Iowa—have fared somewhat better, but in the aggregate the four-state region only recently regained its previous peak. In contrast, national employment had regained its previous peak by the end of 2004.
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The final charts (below) display the employment experiences of each Seventh District state for the three aforementioned periods. In each state, the 1980s look worse than the current recession. This is even true for Michigan, which underwent a 15% job decline from its peak in the second quarter of 1979 to the fourth quarter of 1982. However, Michigan and its troubled automotive industry enjoyed a big bounce in 1982 when U.S. consumers returned to auto showrooms and began to buy cars at a rapid pace as gasoline prices eased. This time around, Michigan and much of the surrounding Midwest automotive belt hope for a repeat performance. However, Michigan’s current automotive challenges are surely more structural and deeply rooted. It will take more than an upturn in national automotive sales to pull along the state’s employment and income.
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The nation also experienced less serious downturns, during 1969-70, 1990-91, and 2001. See http://www.nber.org/cycles.html. (Return to text)
Payroll employment numbers are subject to revision in March of every year. See http://www.bls.gov/sae/790over.htm#employ. (Return to text)
July 2, 2008
Michigan—Brakes and Shocks
Few outside the state of Michigan are fully aware of its economic woes. Nationally, the U.S. economic slowdown, housing market decline, and rising gasoline prices have captured the headlines. Even within the Midwest, spring and early summer flooding have dominated our news. Somewhat lost in the shuffle, Michigan payroll jobs are down more than 10% from their peak in June, 2000, representing over 486,000 jobs. Recent developments are no more encouraging. The state's (preliminary) unemployment rate rose by 1.6 percentage points in May, to a seasonally adjusted 8.5% percent—topping the U.S. rate of 5.5% by 3 full percentage points. Preliminary statistics estimate that payroll jobs in Michigan fell by 68,000 over the month (seasonally adjusted). Minus Michigan, reported U.S. employment would have grown by 19,000.
Michigan’s economy currently suffers from unfortunate industry composition, with an added dose of structural shocks to several of its prominent lines of business. In particular, the automotive, tourism, and office furniture sectors are highly sensitive to national swings in economic activity. As the U.S. economy slows, such industries tend to decline even more. Moreover, in the case of automotive and tourism, structural changes are tending to further dampen economic production and hiring in Michigan.
Michigan’s economy remains far and away the nation’s most concentrated in motor vehicle manufacturing. Its overall employment concentration lies 8.5 times the national average in combined automotive parts and assembly, with many attendant jobs in manufacturing, distribution, and professional service companies that are customers or vendors to automotive producers.
While U.S. automotive sales remained robust until recently, the former Big Three automakers (now more appropriately called the Detroit Three) and their suppliers have been steadily losing market share to imports and to foreign nameplate producers located elsewhere in the U.S. As of May 2008, market share of the Detroit Three automakers had fallen from 67.8% in 2000 to 47.2%. Prominent parts supply companies, including Delphi, Dana, Tower, and Collins & Aikman, have folded, merged, or are currently trying to emerge from bankruptcy.
With the recent economic slowdown, automotive sales are resuming their cyclical pattern of retrenchment. To some degree, the historical behavior of sales declines was allayed in the aftermath of September 11, 2001, when automakers offered generous sales and financing incentives to prospective buyers. However, today’s slowing economy appears to be leading consumers to avoid the purchase of new autos. As discussed recently at our annual Automotive Outlook Symposium, rising gasoline prices are curbing driving behavior while draining household income.
The recent run-up in gasoline prices has magnified loss of market share and erosion of profitability of the Detroit Three automakers and their suppliers. Over the past year, the Detroit 3 share of domestic sales has fallen by 7.1 percentage points. To some degree, this repeats the pattern of the 1970s when U.S. consumers turned to (imported) foreign-domiciled automakers who offered vehicles with greater fuel efficiency. Domestic automakers are more reliant on trucks than on cars, and they tend to lag foreign manufacturers on fuel efficiency.
Not only the automotive sector has been impacted by rising energy prices. Michigan’s tourism, recreation, and hospitality industry has taken on added importance in the wake of the state’s waning automotive industry presence. Many parts of western and northern Michigan feature attractive scenic and semi-rural locales for retirement, recreational living, and seasonal tourism. In addition to its many inland lakes, the state is endowed with 3,126 miles of Great Lakes shoreline, which is attractive for boating, fishing, and other recreational activities like hiking, cycling, and golf. In particular, the state registers nearly as many boats as Florida or California. Such activities in Michigan are especially related to vacation and seasonal homes. As of the last Census, 5.6 percent of homes in Michigan were of this variety versus a national average of 3.1 percent.
The map below shows recreational counties as designated by demographers Calvin Beale and Kenneth Johnson. The northern tier counties of Michigan and Wisconsin have long been recreational destinations, especially for Michiganders and residents of the greater Midwest region.
Recreational spending is highly discretionary on the part of consumers. As household income falls, recreational spending can be easily curtailed by households in an effort to maintain spending on necessities.
Recent declines in Michigan recreational spending are reflected in data collected by the State of Michigan on sales tax collections imposed on overnight lodging. These accord with declining lodging occupancy rates collected by the industry. Both are down so far in 2008 on a year over year basis. A broader index of Michigan’s tourism activity is displaying a modest uptick for the first quarter of 2008 versus one year ago. However, with rising gasoline prices, the index (and activity) is expected to trend lower in coming months.
Two additional factors may be restraining recreation sector growth in Michigan. Michigan’s recreational counties are characterized by ownership of second homes. The run-up in housing prices and the subsequent rash of foreclosures and price declines have been especially severe in recreational/seasonal home locales. Seasonal home residents who have experienced asset price losses on their second homes may be especially aggressive in re-building their household balance sheets by restraining current spending in the second-home locales.
The second, more obvious, factor affecting recreation this year is rising gasoline prices which raise both travel costs to vacation locales and, in Michigan's case, the cost of boating. However, some domestic vacation locales may benefit from a backwash effect as households choose nearby attractions rather than long distance adventures. Nonetheless, in most instances, the overall effect tends to be a dampening. For these reasons, tourism industry analysts in Michigan are forecasting declines in tourism activity for 2008.
In addition to automotive and recreation sectors, Michigan has a strong presence in the furniture sector. Indeed, Western Michigan hosts the nation’s largest concentration of makers of office furniture. This industry took shape in the late nineteenth century during rapid industrial growth, which was accompanied by rapid growth in office employment. Taking advantage of the region’s abundant hardwoods and skilled immigrant craftsmen, most furniture companies in the area had developed as manufacturers of high-end traditional style home furnishings. However, the labor-intensive wood furniture industry declined in Grand Rapids and other northern centers by the mid-1900s due to competition from Southern producers. In response, the Grand Rapids industry shifted its focus from household to office furniture, led by companies that would become industry giants: Steelcase, Haworth, and Herman Miller.
The U.S. Census reports that the state is the nation’s leading producer of office furniture and fixtures, with 17,000 direct employees in 2005. Broadly defined, the state’s industry share accounts for 24% of the nation’s shipments. (Michigan’s share is larger according to the way that the industry trade association defines the industry).
Michigan’s office furniture companies have been affected by competition from China and other low-cost locales. Despite competitive pressures, the companies have successfully responded in two ways. To some extent, producers have moved or offshored production of select product lines to low-cost locales while maintaining high value added and custom design services domestically. More importantly, these companies are characterized by great innovation in product and processes. They have succeeded and grown by offering custom and advanced products and services.
However, office furniture sales and production have been highly cyclical. The industry experienced sagging sales in the late 1980s and early 1990s when U.S. businesses downsized middle management positions and as the U.S. economy sagged. So too, the “technology bust” years that began the current decade saw a falloff in demand for office systems and furniture, especially in the IT sector.
So far in the current environment, industry production has been holding up well. However, if industry observers are correct, office furniture may be “one more shoe about to drop” in Michigan. An opinion poll of office furniture executives has been flashing negative for the near term outlook, and the industry association has recently lowered its forecast of 2008 production.
If such expectations develop, this would further dampen economic activity and the labor market in Michigan. Cyclicality of certain businesses can be planned for and absorbed by states such as Michigan and its neighbors. However, cyclical episodes in the economy can be exceptionally severe when shocks such as rising energy prices are in play and when longer term structural changes are taking place, as they are in Michigan’s automotive sector.
Thanks to Graham McKee and Vanessa Haleco-Meyer for assistance.
April 10, 2008
Michigan Economic Adjustment: What Role Migration?
What role does migration play in helping regions such as Southeast Michigan adjust to profound economic shocks? For the most part, out-migration is not usually the favored choice of families who have strong social and economic ties to their communities and region. Regions under duress first look to rebuild and reinvent their local economy. But Americans are also a nomadic people. And so, households also adjust to negative economic shocks by picking up and moving to where opportunities for employment and income are more favorable. During the last century, for example, southerners migrated northward in search of the high-paying factory jobs located here, while the population from the Northeast and Midwest continued to flow westward as economies developed in California and other parts of the West. It is not surprising then to find that some Michigan residents may migrate elsewhere unless (or until) economic conditions turn around.
Unlike most U.S. states, Michigan’s economy has not enjoyed any net growth during the entire decade. Decline in the state’s automotive industry has kept its economy reeling. In some ways, this experience is reminiscent of conditions from two decades ago. At that time, the domestic automotive industry struggled with energy and gasoline price spikes that had begun during the mid-1970s. Much as today, the automotive fleets of Chrysler, General Motors, and Ford—known then as the Big Three—had been designed on the larger side, which was better suited to a bygone era of cheap gasoline. Accordingly, auto sales by domestic producers were sharply impacted by OPEC (Organization of the Petroleum Exporting Countries) gas price spikes, by a federal gasoline rationing program, and by imports of small, fuel-efficient vehicles from (then mostly Japanese) competitors.
Even so, by the beginning of the 1980s, Detroit was making a comeback with its own small cars; back then, the tail winds from a strong U.S. economy was lifting overall automotive sales. Alas, a second global energy price spike, along with two U.S. recessions during the early 1980s, exerted a horrific effect on Michigan and on the Midwest manufacturing belt. Foreign markets were of little help during this era of a rapidly rising dollar, and the region’s agricultural sector experienced profound declines in prices and land values.
The chart below overlays the payroll job trends of that era with that of the past seven years. Following a peak in Michigan job levels in 1979, jobs declined at a pace of over 2% per year for the next four years before bottoming out at the beginning of 1983. In comparison, the recent payroll job decreases in Michigan have been less dramatic, with a cumulative decline of 5 percent from 2001 to date. Similarly, the average state unemployment for all of Michigan had reached 16 percent by 1983, over double what it is today (see chart below).
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However, it should be noted that Michigan’s economic decline in the current decade has gone on much longer than its decline of the early 1980s. By 1983, Michigan’s payroll employment had begun to climb once again as U.S. consumer purchases of autos rose and as excess inventories of autos were sold off. While recent declines have been less precipitous, the cumulative effect has been no less profound. Annual employment in Michigan has not climbed over the past 7 years, and now stands at over 6% below its level at the beginning of 2001.
How did Michigan households adjust to diminished job and income opportunities in Michigan during the 1980s? In part, Michigan workers and their families left the state in search of opportunities in other regions. Households decide to migrate based on more than local conditions. That is, they also base their decisions on labor market conditions in alternative regions of the country. Although the overall U.S. economy was experiencing recessionary conditions during the early 1980s, Midwest labor markets were far and away more affected. For instance, rising energy prices were spurring economic investment (and jobs) in energy-producing regions, such as Texas–Louisiana and in the western coal fields. Meanwhile, the first surge in high-tech computing production was underway in New England and California, and strong economies were emerging in regions where post-1970s defense spending was growing. The chart below illustrates the difference in unemployment rates between Michigan and the overall U.S. at that time. Michigan’s unemployment rate was 5–6 percentage points above the nation’s from 1980–83.
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As the chart below suggests, more households had been moving out of Michigan than moving in throughout the 1970s, with a net out-migration exceeding 50,000 per year by 1974–75. However, this number tripled by 1981–82, exceeding 150,000 per year. Economic recovery eventually unfolded in Michigan, but it did not pull along net migration into Michigan until the early 1990s.
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Today, labor market conditions in Michigan, while the worst in the U.S., look mild compared with that of the 1970s and 1980s. Still, the pattern of continual payroll job losses since 2001 gives the impression of long-term structural decline rather than a short-term episode. So far, the pace of out-migration from Michigan has reported to be milder as well, averaging -20,000 per year from 2001 to 2006. A contributing factor for restrained out-migration may be the difference in the age demographics of the population between then and now. Historically, those aged 20–39 have been much more likely to pull up stakes and move out of state. Michigan’s population has aged, with only 37% of the adult population of prime (moving) age today versus 48% in 1980.
Still, out-migration from Michigan may yet increase somewhat. Out-migration from the state has been picking up lately as the decade wears on and employment continues to decline. United Van Lines (UVL) has been tracking data on in-movements versus out-movements of its residential moves by state for many years, and these data tend to accord fairly well with government statistical trends on net migration of population. Recent UVL data for 2007 suggest that out-migration of households exceeded in-migration by a 2 to 1 ratio, while the level of net out-migration of moving trucks is approaching the previous trough experienced in 1981.
Many policy leaders and local communities in Michigan are determined not to let the state’s growth fall further into negative territory. There are concerted initiatives to diversify the region’s economy toward technology industries, services, and recreation-tourism. For example, three of Michigan's universities—the University of Michigan, Michigan State, and Wayne State—are teaming up to fashion a research corridor that will further stimulate innovation in the state. The research synergies of the three hope to improve technology transfer, share resources, and attract jobs to the state.
Such efforts may well turn around the state’s fortunes over the long term. But following a long and difficult decade for many of the state’s residents, the road ahead does not look any easier—at least for the immediate future. As the U.S. economy slows during the first half of 2008, domestic automotive sales (and production) are also expected to soften.
July 18, 2007
Automotive wages in flux
As the “Detroit 3” automotive companies have experienced shrinking profits and market share, many midwestern communities have experienced falling jobs, income, tax revenues and public services—to say nothing of the households and families working in the industry. This summer, automotive workers and communities are watching closely as the terms of automotive employment—especially wages—are being renegotiated. On July 20, for example, the UAW labor union opens contract negotiations with Ford and Chrysler (July 23 for General Motors) for contracts that will run for 4 years. And earlier this month, auto parts maker Delphi announced settlement terms with its workers as it undergoes operational restructuring. Only four Delphi production plants will remain in operation in the U.S. as its customers will source parts from its overseas operations or from alternative suppliers. Remaining Delphi production workers will be on the receiving end of cuts to health care benefits, employment security, retirement and wages. Wages for production workers will be reduced from $27 per hour to a maximum of $18, $14 for new hires.
How should we view the wage settlements as they are announced in coming months? One perspective is to compare them to average wages for production workers in U.S. manufacturing. Production workers are typically those who have few or no supervisory roles in manufacturing plants; in other words, most assembly line workers would fall into this category. The chart below displays average wages for production workers back to 1967. These wages represent the average in compensation for overtime and regular time. The wages are expressed in current dollars, adjusted over time for changing prices by the Consumer Price Index.
The bottom line shows that, across all manufacturing industries, average wages have remained largely flat since 1967, ranging between $17 and $20 per hour. Wages were rising until 1980. With several deviations, the average wage settled at $ 18.59 in 2005, which is the latest available data from this particular source.
In the same graph, we can see that that production workers in motor vehicle parts industries (blue line) have fared somewhat better over time, but that their wages have been converging with the remainder of manufacturing workers since the 1980s.
Workers in the automotive assembly industry (green line) are smaller in number than those in parts production. In the U.S., there are approximately three workers in parts production for every worker in an assembly plant. Unlike their brethren in parts production, assembly workers’ wages have been generally rising since 1967. By 2005, the U.S. Census Bureau reported an average production wage of $35.84.
The second graph below plots the premiums in wages for automotive workers. This premium is expressed as the percent by which wages exceed the average of all U.S. production workers across all industries. As of year 2005, the average wages of automotive assembly workers topped their counterparts by 50 percent. For motor vehicle parts workers, the wage premium has fallen below 20 percent from a peak of 31 percent in 1980. Approximately one-third of workers in the parts industry are represented by labor unions versus three-fourths of domestic assembly workers.
Declining employment has accompanied softening wages in many instances. From a geographic perspective, declining automotive jobs is nothing new for many midwestern states and communities. The industry was highly concentrated in the Midwest throughout the first half of the twentieth century but afterward began to disperse—first to other U.S. states and later around the globe. Considering domestic employment in automotive parts and assembly combined, the next graph shows that the states of Ohio, Michigan and Indiana accounted for over three-fourths of automotive employment through World War II. By 2005, their employment share had fallen under one-half.
During the current decade, the automotive job decline has been precipitous. The final graphic (below) indicates that the three-state decline in automotive jobs has fallen by almost one-third since year 2000, from 576,000 to 383,000 over the first half of 2007.
The reasons for these employment declines are several.
As always, productivity gains are reducing the labor content in automotive production. Labor hours per vehicle assembled by the “Detroit 3” car makers, for example, declined from 24–28 hours in 2002 to 22–23 hours in 2006. Beyond assembly, estimates by Martin Baily of the McKinsey Institute and the Institute for International Economics report that labor hours to produce an auto in North America, including parts, are decreasing at an annual average of 1.7 percent annually since 1987, and are now approaching 100 hours total.
Globalization of production has resulted in both off-shore operations and competitive pressures on domestic producers. Since 1996, the import share of light vehicle sales has increased from 12 percent of sales to 20 percent, year to date. Approximately one-quarter of domestically used automotive parts are now sourced abroad.
Despite some periods of re-concentration over the past 2 decades and the siting of many new plants in various Midwest communities in recent decades, the overall industry continues to disperse to other states, especially in the South.
Note: Thomas Klier contributed to this entry.
February 5, 2007
Michigan Labor Market--Still Awaiting Recovery
Following the 2001 national recession, the labor market remained somewhat slack and slow-growing until mid-2003. Subsequently, the national economy accelerated, pulling along labor demand and employment growth. The year 2006 marks the third consecutive year of strong year-over-year employment growth (and falling unemployment) nationally.
Meanwhile, the Seventh District, which includes the state of Iowa and most of Michigan, Indiana, Illinois, and Wisconsin, also experienced an employment recovery. However, the pace of job growth in the Seventh District has fallen somewhat short of the nation over most of the post-recession period. From the fourth quarter of 2001 until the fourth quarter of 2006, payroll job growth is currently reported to have risen by 3.9 percent in the nation, versus 0.7 in the Seventh District states overall.
Much of the Seventh District weakness is confined to Michigan, and recent indications show little sign that the Michigan labor market performance is turning around. As illustrated below by a 3-month moving average of monthly unemployment rates, the U.S. and the rest of the Seventh District states (excluding Michigan) have reported a falling rate of unemployment over much of the past 3 years. Currently, the region’s unemployment rate lies very close to the nation at around 4.5 percent. In contrast, Michigan’s current unemployment rate, after improving in 2005, is now back where it was in 2004.
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Unemployment rates are not fool-proof indicators of labor market performance because they are conducted by household surveys which are subject to sampling bias. However, other independent indicators tend to corroborate these survey indicators. Among the other indicators, the survey of payroll employment at business establishments is reported for states by the Bureau of Labor Statistics. It too is based on a survey, and it is revised later as more information becomes available.
Below, year-over-year growth in payroll employment is shown for Michigan versus the District and the U.S. The payroll survey suggests that Seventh District job growth, though slower than the U.S., has shown steady growth over the past three years. Michigan’s year-over-year job growth has continued to decline—at an accelerating pace.
So too, reported information on initial claims for unemployment insurance by laid off (or otherwise severed) workers exhibits the same pattern: deterioration at an accelerated pace over the past three years in Michigan, and improvement outside the state.
In past decades, weak automotive-related performance in Michigan has sometimes been appraised as temporary or cyclical. However, this time around, as indicated by labor market performance in surrounding states, weak economic performance in Michigan appears to reflect structural problems for auto makers and automotive supply companies. Since early 2004, Michigan has lost 17.6 thousand net jobs at auto assembly establishments (a 24 percent decline) and 27.5 thousand jobs in motor vehicle parts production (a 15.8 percent decline).
Overall domestic automotive production is being eroded by imports and by enhanced production and sales of transplant automotive companies who largely produce outside the state of Michigan. Recent employee buyout programs at Ford, General Motors, and Delphi will result in a head count reduction of nearly 100,000 across the U.S. Approximately one-third of those jobs are situated in Michigan.
At least for the near future, the Michigan labor market situations does not yet look to be improving. The Michigan-domiciled auto assembly companies foresee or have announced continued employment reductions and facilities closings in both production and in administrative/R&D employees. Longer term, the Michigan economy's sharp automotive concentration means that the labor market will continued to be driven by developments in the industry.
October 5, 2006
Each autumn, I have traveled down to the Indianapolis area to deliver a local perspective on the economy to the Indiana Economic Development Forum. This autumn, the Forum addresses the theme of “work force training and education.” As I survey Indiana’s economic performance over the past 15 years, it strikes me that Indiana is on the right track with its strategic focus on boosting work force training and education. So too, where feasible, an emphasis on technology transfer, firm growth, and entrepreneurial activity may be needed to create matching job opportunities for the more highly skilled Hoosiers.
Indiana and its neighboring Midwestern states rank near the top in manufacturing concentration. Even so, as the figure below shows, the deep recessions of the early 1980s sharply shifted the region’s share of manufacturing jobs elsewhere (right axis, green line). As the steel and auto industries waned here, the computer and military equipment industries grew elsewhere.
The figure also reveals the period’s depressing effects on the region’s per capita income as a result of manufacturing job loss and slow recovery (left axis, blue line). Since then, per capita income, as compared to the national average, has not fully recovered in the Great Lakes region, nor in Indiana, for that matter.
However, Indiana’s job growth and share of manufacturing jobs have recently out-performed the surrounding region (bottom chart). Indeed, even though the level of jobs has declined, Indiana has exceeded its 1980s share of the nation’s manufacturing jobs. Consequently, while the relative per capita income in the Great Lakes region has taken a dive over the last few years, Indiana’s income has remained about the same in relation to the national average.
Something is going right in Indiana, or at least it is going a little better than in surrounding Midwestern states. But given the notably stronger performance gains in Indiana’s share of the nation’s manufacturing jobs, shouldn’t its per capita income be rising a bit, rather than being stuck in place?
The answer again likely lies in today’s broad economic trends. Indiana’s manufacturing wages lie below its Midwestern neighbors. This can be seen in the figure below, which illustrates the higher hourly earnings of production workers in Michigan versus Indiana. Perhaps the state’s favorable wage environment for employers, along with other business climate attractions, partly explain its job share gains in manufacturing, even as per capita income gains are not quite so robust.
Another reason for less robust progress in Indiana’s per capita income can be found in service sector versus manufacturing wage trends. While average wage levels in manufacturing tend to exceed average service sector wage rates in the nation, service sector wage growth has been catching up to manufacturing.
How can Indiana improve its living standards? In our market-oriented economy, higher wages and earnings are currently being paid to those with higher skills and education. For this reason, investment in education and work force training are one important part in achieving higher income for Hoosiers.
In addition to higher skills, there must be job opportunities available for those enhanced skills and training. Sometimes, such local job opportunities do emerge as new firms and capital investment migrate into states in search of favorable work force skills and education. However, in other instances, skilled workers move out of state in search of greater opportunity. To forestall this loss of skilled workers, Indiana and other states are pursuing not only work force training and education, but also local technology transfer from technical universities along with the encouragement of entrepreneurial ventures.
September 28, 2006
Michigan automotive and white collar jobs
Loss of market share from the traditional Big Three automakers to global competitors has impacted Michigan’s economy, leading to some deep concerns about its future. To date, most attention to this issue has focussed on job loss related to automotive production activity. Auto assembly and parts production continues at a strong (though eroding) clip in the United States, but it is rapidly shifting away from Michigan. So far, the “new domestic” carmakers have avoided siting new production plants in Michigan, preferring to site them in the South, as well as in Ohio and Indiana, such as Honda’s recent announcement to build a plant in Greensburg, Indiana. However, another important employment component for Michigan also relates to the health and sales market share of the Big Three—that is, the nonproduction activities of these auto assembly companies. These activities include research and development (R&D), sales, finance, and management operations, which form an outsized economic engine for the state. In what ways does the survival (and growth) of Big Three companies go hand in hand with the nonproduction jobs located in Michigan?
Nonproduction employment of auto assembly companies typically amounts to a surprising 35%–45% of total employment and an even larger share of payroll. While Michigan is highly concentrated in automotive production—with 15 auto assembly plants—it is also the domicile of the Big Three's headquarters along with significant company R&D and other operations. For this reason, it is not surprising in Michigan to find that nonproduction automotive employment is more concentrated than elsewhere. In counting Big Three nonproduction employment at their production plants, headquarters, R&D centers, and other auxiliary facilities in Michigan, nonproduction employment likely outnumbers production employment, making up a minimum of 55%–60% of total Big Three jobs in the state.
Moreover, additional Michigan personal income and jobs are generated from local services purchased by headquarters-type operations. As Chicago Fed economist Yukako Ono has found in recent studies, headquarters operations often purchase key services for the entire company network. These purchases may include financial services, R&D, information technology (IT) products and services, strategic management consulting, and many more. From the regional economy’s standpoint, these purchases are often sourced locally to a large extent. In fact, Ono discusses the possibility that the choice of location by headquarters may be influenced by the cost and availability of such business services.
Similar behavior of automotive headquarters makes Detroit and its surrounding environs much more than just a factory economy. Specifically, much of the value of Big Three automobiles derives from product development and design, and most of that R&D activity is conducted in Michigan. As derived demand from the domestic automotive industry, key business services are largely produced in Detroit. My blog entry from August 16 shows that the Detroit metropolitan area far and away tops other midwestern metropolitan areas in its concentration of professional and technical services employment. Among Detroit’s top sectors are engineering services (employment at 51,594 jobs in 2002) and scientific research and development (18,126 jobs in 2002).
Nationally, much R&D is funded and performed by automotive companies and their affiliates. According to the most recent survey of industry funds for research and development, which is conducted by the National Science Foundation, the automotive industry accounts for $14–$15 billion in annual R&D funding in the U.S. To be sure, in recent years, as auto assemblers have increasingly relied on their first-tier suppliers for entire components and automotive modules, some significant R&D responsibilities have been shifting away from assembly companies and toward automotive parts companies. Still, today, the lion’s share of this R&D is performed in-house, that is, largely by auto assembly companies themselves.
These practices have kept Ford, General Motors (GM), and Daimler-Chrysler among the largest R&D performers in the U.S., with Michigan at the hub of such activity. For this reason, Michigan ranks second only to California in funds for industrial R&D. And for 2003 as the figure below shows, the motor vehicle assembly and parts industries in Michigan accounted for $10.7 billion of the $15.2 billion industry-performed R&D in the state. The ties between these expenditures and local employment is apparent. According to a parallel survey by the National Science Foundation, the Detroit metropolitan area employed 102,500 research scientists and engineers in 2003—a concentration of 5.2% of the work force as compared to 3.9% nationally.
Would Michigan retain this important function in the event that Big Three sales shares continued to decline? On the positive side, there are some indications that the Detroit area’s role in automotive research is in the process of growing beyond its historic roots. For example, the “new domestic” automakers have all sited research, development, and design facilities in the Detroit region, such as Toyota’s recently announced $150 million R&D center investment in Ann Arbor. Others, such as Hyundai and Nissan, have also recently expanded their facilities or announced plans for similar expansions.
So, too, Detroit’s attractiveness to automotive company headquarters operations displays some sparks of growth. Major automotive parts producer Borg Warner moved its headquarters from Chicago to the Detroit area last year. More generally, Chicago Fed economist Thomas Klier has documented an upswing in auto parts company headquarters moving to Michigan. The presence and growth of automotive parts headquarters in Michigan probably bodes well for company-sponsored R&D activity as well.
Still, competitive challenges are at play both here and abroad. Domestically, figures from the U.S. Bureau of Economic Analysis show that the annual R&D funding in the U.S. by Asia-domiciled automotive companies, at $125 million, makes up a very small share of automotive R&D in the U.S., amounting to less than 2 percent. And while the Detroit metropolitan area has so far attracted many of these transplant R&D activities, historically, it is not uncommon to find that attendant service activities eventually follow production in manufacturing. In this direction, the movement of U.S. automotive production from the Midwest toward the South is drawing the attention of those seeking R&D activities as well. For example, Clemson University in South Carolina has launched a research program and industrial park to foster technology development and transfer in cooperation with companies such as BMW and others.
And so, Michigan has several important economic activities at stake amidst the current upheaval among automotive companies.
September 13, 2006
Where is automotive employment in the Seventh District?
Perhaps the most notable economic development taking place in the Seventh District is the market shift away from the traditional "Big 3" domestic auto makers--General Motors, Ford, and (Daimler)-Chrysler--and their parts suppliers. Lost sales are shifting toward the "new domestics" such as Toyota and Nissan and their parts suppliers. The sales gainers tend to be located outside of the Midwest to a greater degree than the Big 3. This shift is documented and analyzed in a recent Economic Perspectives article by Thomas Klier and Dan McMillen. This market upheaval is tending to idle and displace workers in many Midwest communities. Per Klier and McMillen, Michigan automotive employment is down almost one-third since 1979 while southern states such as Kentucky, Tennessee, Alabama, and the Carolinas have experienced a tripling of jobs.
But despite these shifts, Detroit and much of the Midwest continues to be the center of the production. Which particular communities remain most sensitive to future swings in automotive fortunes? The data below attribute automotive employment to particular metropolitan areas in the Seventh District. Those metropolitan areas with green shading had an employment concentration in automotive that exceeded the nation; those shaded in red had a lesser concentration. Looking across metropolitan areas in the entire Seventh District region, an east-west split in auto employment concentration becomes very apparent. The Michigan-Indiana corridor contains most of the metropolitan areas having an above-average concentration. Darkly-shaded metropolitan areas in southeast Michigan are exceptionally concentrated in automotive. So too, an east-west band of metropolitan areas across north central Indiana is steeped in automotive employment.
A numerical listing of automotive employment below shows just how concentrated some communities can be. Metropolitan areas including Detroit/Livonia/Deaborn, Flint, Holland, Saginaw, Battle Creek, and Lansing/East Lansing in Michigan all reported concentrations over 5 times the national average, as did the Kokomo and Lafayette metro areas in Indiana.
The final table below further illustrates the sharp geographic rift in employment fortunes over the 1990-2005 period. As a whole, the state of Michigan lost over 64,000 jobs in automotive, on net accounting for all job losses nationally. Largely due to the Michigan experience, the Seventh District states experienced an 18 percent decline in automotive jobs since 1990 while the remainder of the U.S. experienced a 3 percent gain in similar employment.
July 25, 2006
Mid-year jobs report
Looking west from Ohio to Iowa and Minnesota, there is a distinct falloff in economic growth, at least according to recent reports on payroll employoment. With only a three-week lag, the Bureau of Labor Statistics reports their estimates of payroll employment monthly for individual states. The reported monthly figures for June 2006, now complete the second quarter of this year.
The table below displays year-over-year payroll job growth in the seven Midwest states and the U.S. Note that job growth in all states except Iowa and Minnesota fell short of the U.S. growth of 1.4 percent.
One reason that explains lagging job growth in many Midwest states is their heavy concentration in manufacturing industries. As the Chicago Fed’s Midwest Manufacturing Index suggests, real output growth in manufacturing has been growing strongly now for 3 years in both the nation and in the Midwest. In general, U.S. manufacturing growth has been buoyed by strong domestic demand for capital investment goods and by growth in U.S. exports. Some notable (and growing) Midwest capital goods sectors are mining and construction machinery, farm machinery and equipment, heavy trucks, and electrical equipment. However, strong output growth in manufacturing does not typically propel much payroll job growth because real output gains are generally being achieved through higher productivity rather than through more labor input.
With respect to total payroll employment, the three easternmost states of Ohio, Indiana, and Michigan show the weakest year-over-year growth. Further to the west, job growth in Illinois and Wisconsin have been stronger, with still stronger growth for Iowa and Minnesota.
For some states, such as Illinois, recent payroll job growth is especially encouraging since growth had been lagging since the last recession. Along with Indiana, Michigan, and Ohio, Illinois employment has not yet re-attained its previous peak which occurred in the year 2000.
Illinois' job gains are being led by growth in professional and business service industries even while manufacturing employment has been declining. The Chicago-area economy, which comprises the bulk of Illinois, has been shifting into business and financial services while moving away from manufacturing. Chicago’s business and financial services depend on customers in surrounding manufacturing-intensive states but they also serve some global and national markets.
At the other end of the spectrum, Michigan’s recent job performance remains very much in a league of its own, even when compared to other Midwest states. The chart below indexes total payroll jobs to the first quarter of 2001. While the rest of the region has almost re-attained its former employment peak, Michigan employment remains 6 percent to 7 percent below its previous peak.
The troubles of domestic automakers Ford and GM, and their automotive parts suppliers, have been weighing down growth in Michigan. Since the year 2000, their combined share of U.S. light vehicle sales has declined from 51.1 percent to an average 41.3 percent year-to-date in 2006.
These companies are highly concentrated in Michigan. In addition to their global headquarters and many research facilities and part suppliers, for example, Ford and General Motors together maintain 12 of their 34 U.S. assembly plants (35%) in Michigan. For this reason, Michigan residents are closely following the strategic plans of these companies as they attempt to restore growth and profitability.
October 4, 2005
Michigan Auto Woes
Michigan’s traditional heavy reliance on the domestic auto industry has been troubling its economy over the past five years. While GM and the other domestic auto makers have “kept America rolling” with continued auto sales and sales/finance incentives, the state of Michigan has shown the worst performance among the states. Michigan’s unemployment is the second highest at 6.7 %; and it holds the bottom spot for year-over-year payroll job performance with a 1.1 percent loss as of August. It is the only state to have lost jobs over this period. What are policy makers to do? The state’s heavy reliance on the automotive sector makes efforts to diversify a long-term and risky proposition at best. In the short term, hopes ride on a turnaround for the domestic auto makers and their upstream auto parts manufacturers, while long-term bets are being placed on new industries.
Light vehicle production in the U.S. has continued to average around 12 million vehicles since 2000. However, as discussed by Thomas Klier (Chicago Fed Letter) earlier this year, it is the geographic shift of production from Michigan and other parts of the upper Midwest southward that is adversely affecting Michigan’s economy. A shift southward has accompanied the slippage in sales share of the domestic nameplate automakers—GM, Ford and Chrysler, which has fallen from a 65% share of domestic sales in 2000 to 58% in August, 2005. Rising imports into the U.S. have contributed to this slippage, with the import share rising from 17% to 20% percent of domestic sales. And so-called “transplants,” which are foreign nameplate companies producing vehicles in the U.S., have captured the rest of the rising share from Big 3 auto makers. Transplant production largely takes place in the South. Michigan hosts only a single transplant(Mazda), which is partly owned by Ford, whereas it hosts 17 domestic assembly plants. Ohio is also laden with domestic assembly and parts makers, but it has two Honda plants as an offset. Indiana is the third state in the Midwest auto troika, and it hosts an Isuzu plant in Lafayette and a recent Toyota plant in Princeton in the southwest part of the state.
As a result, from 2000 through July, 2005 year-to-date, Michigan lost 42% of its auto assembly jobs versus a 14% loss in the U.S. located outside of the three Midwest auto-intensive states. Ohio assembly jobs are down 25% over the same period, while Indiana is actually up one-third.
Auto parts are a larger part of the story, since there are four times as many jobs in parts as assembly operations. Parts makers tend to be located near the assembly plants for historical reasons, and more recently because “just-in-time” production requires proximity for many parts such as seats and sub-assemblies. Michigan’s parts employment is down 34 percent since year 2000, versus 19 percent in the rest of the U.S.
These job losses are felt more keenly in Michigan since, even among the Midwest troika of auto states, Michigan is by far the most dependent on automotive. Michigan’s job base is 7 times more concentrated than the nation in automotive parts, versus 5 and 3 for Indiana and Ohio.
Policy makers in Michigan have long recognized the state’s heavy reliance on this cyclical and competitively-challenged industry. In response, state government is weighing large expenditures to fund life sciences research and is also promoting new company formation in advanced manufacturing and homeland security. Local communities such as Kalamazoo and Grand Rapids are also trying hard to move life sciences activities along. But such efforts to encourage diversification through public support are not without risk, and even if successful, the results often take a very long time. At times like these, many possible avenues of growth and adjustments to public policy will be considered in Michigan. Meanwhile, any signs of a Big 3 turn-around will be enthusiastically cheered.