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.
Posted by Testa at 1:25 PM | Comments (0)
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.
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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.
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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.
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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.
Posted by Testa at 9:16 AM | Comments (0)
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.
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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.
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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.
Posted by Testa at 9:14 AM | Comments (2)
October 5, 2006
Indiana observations
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.
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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.
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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.
Posted by Testa at 2:47 PM | Comments (0)
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.
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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.
Posted by Testa at 1:00 PM | Comments (0)
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.
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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.
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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.
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Posted by Testa at 10:05 AM | Comments (0)
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.
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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.
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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.
Posted by Testa at 7:26 AM | Comments (0)
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.
Posted by Testa at 9:10 PM | Comments (0)