Economic Thoughts and Trends for Hillsdale County

1. Economic Thoughts and Trends for Hillsdale County George A. Erickcek W.E. Upjohn Institute for Employment Research October 6, 2006

2. Outline • Brief review of global and national trends • What is the goal of economic development in an evolving world? • The state situation: A one-horse town with a sick horse • Hillsdale’s relative performance • Some thoughts on Hillsdale County’s economy

3. National Situation • Outlook is still positive, but warning signs are multiplying: • A slowdown in the nation’s residential housing market is threatening consumer spending. • Many households are facing severe financial conditions. • Bankruptcies and foreclosures are up. • Still, the stock market is advancing, and gas prices are dropping

4. Gross Domestic ProductThe expansion is three years old and is still going strong in terms of output. Productivity and normal employment growth will allow a 3.3% increase in GDP with inflation. Seasonally Adjusted Annual Rate The slowdown was widespread. Source: BEA.

5. National employment continues to grow; however… Thousands of jobs National employment increased by 164,000 in August. Source: BLS.

6. …manufacturing employment conditions remain soft. Thousands of jobs Manufacturers eliminated 11,000 more workers in August. Source: BLS.

7. Production Index and U.S. Manufacturing Employment – Manufacturing is doing great!

8. The Changing Manufacturing Environment • Outstanding productivity gains have limited employment growth in manufacturing. • Michigan is losing its dominance as the production center for the auto industry. The Big Three’s share of the North American market has dropped to 57 percent. In July, Toyota grabbed the number two spot from Ford. • The world’s high-growth regions are outside the U.S. Often it makes more sense to produce the goods where they are being sold. • Clearly, other nations can assemble goods more cheaply. In China, the cost of factory labor is $0.57/hr. including benefits.

9. The 24/7 World Economy • Global computer communications allowing for worldwide, real-time information access • Growing human capacity worldwide, especially in China and India • A paradigm shift when "one conceptual world view is replaced by another" – Thomas Kuhn • The sad story of Edward Morley

10. Thoughts on the 24/7 world economy • The age of human capital • Our state’s success has been in attracting physical capital with humans in tow. • Now, human capital attracts machines—not humans, but human capital. • Moving from manufacturing will not be easy. • Workforce concerns • Quality of life—consumer areas vs. productive areas

11. Yesterday DC are high-skilled. UDC are low-skilled. Services are provided locally. Control centers in DCs Delay in communication and ideas UDC politically unstable Quality of life matters. Tomorrow Both have high-skilled and low-skilled workers. Services are provided globally. Global control centers Instantaneous communications UDC and DC politically stable Quality of life matters. Paradigm Shift

12. Developing countries are not supposed to have skilled workers. Source: UBS

13. The very essence of long-run growth is, in fact, the transition …from one export base to another as the area matures in what it can do, and as rising per capita income and technological progress change what the world economy wants done.W.R.Thompson (1965)

14. Michigan: Economic Conditions and Outlook(It is ok to close your eyes.)

15. Michigan lost 330,000 jobs from August, 2000 to August, 2006. We have never been here before. Source: BLS.

16. Compared to the U.S., employment conditions in Michigan have not recovered. United States Michigan

17. Michigan’s manufacturing losses have followed and exceeded national trends. United States Michigan

18. U.S. auto sales are nothing if not stable. However, there appears to be a modest softening in August and September. Source: BEA.

19. The Auto Sector Still, when does a stable market become a stagnant market? Stability can mean a lack of growth. A lack of growth means a fight for market share and even more pressure on auto suppliers. Are you going to bet against Toyota? Are you truly surprised by Ford?

20. The Auto Industry Swings a Big Bat

21. What does this mean for the state’s future? • Manufacturing will remain the foundation of the state’s economy, but growth will occur elsewhere. • Picking winners is highly tempting but seldom successful. Growth will come from many different sectors, and some will likely surprise us all. • To attract knowledge-based workers, education, vibrant cities, and quality public services will become increasingly important.

22. Non-manufacturing employment is fueling growth nationally—but not in Michigan. United States Michigan

23. So what about Hillsdale County?

24. Hillsdale

25. Thoughts and Trends for Hillsdale County • Local employment has fared worse than other areas. • Area population growth is flat. • A recent jump in professional & technical service employment is a bright spot. • Income and education levels are typical of a rural area. • Farming still holds above-average importance in the county.

26. Since 2000, employment has fallen across Michigan. Source: MDLEG, ES-202 data.

27. Michigan’s manufacturing sector has been battered, resulting in substantial job losses. Source: MDLEG, ES-202 data.

28. Hillsdale is extremely dependent on manufacturing—even compared to other parts of Michigan. Source: MDLEG, ES-202 data. Based on 3rd Quarter data.

29. Michigan service-providing industries have done better, especially in Hillsdale. Hillsdale County added just over 300 non-manufacturing jobs since 2000—a nice gain, but not nearly enough to offset manufacturing sector losses. Source: MDLEG, ES-202 data.

30. In 2005 Hillsdale County lost about 112 jobs, with changes spread across multiple industry sectors. Source: MDLEG, ES-202 data.

31. Importance of Manufacturing • Average-wage work in a demanding environment • But it beats the alternative for high school grads and older workers without college or who did not complete high school. • Brings new money into the region (economic development focus) • For many households in the state, it is a way of life and an expectation of the future. • Provides income support for area farms.

32. Basic Economic Model Non-export activity Indirect & Induced Export activity Manufacturing goods Tourism Hospitals Regional shopping malls Social Security Small convenience retail Outpatient medical Personal services Copy shops

33. New developments are positive. • Alphi Manufacturing - $4.2 million investment and 120 new jobs • SKD Automotive Group - $8.2 million investment and up to 400 new jobs.

34. From 2000 to 2005, the local population grew at an average annual rate of 0.2 percent—adding just over 500 residents. The population has actually declined by nearly 200 persons since it’s peak in 2003. Source: U.S. Census Bureau, population estimates.

35. On net, Hillsdale County is losing population to out-migration. Source: U.S. Census Bureau, population estimates.

36. Hillsdale County’s college-educated population is typical of rural areas in Michigan. Source: 2000 Census.

37. Hillsdale County’s per capita income is similar to other rural areas, but it is growing at a much slower rate. Urban counties generate the most wealth by far: on average $7k-$10k more per resident than rural and Micropolitan counties Source: BEA-REIS.

38. So, what does this mean about tomorrow? We should revisit the product life cycle model of economic development.

39. Regional Aspects of a Product Life Cycle Stage 1: Birth—An environment of entrepreneurship Stage 2: Product development and wealth creation—An encouraging environment for success Stage 3: Product standardization—Low cost, competitive environment Stage 4: Death—An environment of abandonment

40. Challenges for Many Regions • Too many of their base industries have matured to Stage 3 (or worse yet, Stage 4). This is the usual result of standard economic development policies. • Stage 1 firms are often locally-grown, but have high death rates and offer few employment opportunities. • Stage 2 firms are preferred; however, it is impossible to pick the Stage 1 firms that will survive to enjoy Stage 2.

41. Challenges for Many Regions • The real bad news: • Evidence suggests that an economic development area that is dominated by stage 3 and 4 firms may not offer a fertile environment for Stage 1 or 2. • A hard-working but not necessarily an innovative environment • Aging workforce because of world competition hindering employment growth • Finally, the unfair advantage of consumer cities in the age of human capital

42. Closing Random Thoughts • Michigan and Hillsdale County are in a very tough spot. • Tax incentives and cuts cannot do it alone. • There is not a clear road map showing how the state can move from a physical capital approach to a human capital approach in economic development. • Education spending and enhanced amenities must be part of the answer. • There are no guarantees.

43. Closing Random Thoughts • Commuters - The lack of “thick” labor markets require rural areas to depend upon the job base of neighboring areas. • Non-farm income opportunities for farmers - Vital downtowns and a strong manufacturing sector are the best means to support an area’s farms. • Branch plants are still a viable option. Manufacturing jobs are a good fit to the area’s workforce, offer better-than-average wages, and rural areas are still low-cost areas.

44. What should “smart” communities do? • Walk the neighborhoods–What is working; what is not? • Work together– Who needs to be in the room? • Embrace schools– Because of the schools…. • Choose and understand your role in the region– Where does your support come from? • Build on strengths and history. • Keep what is valuable– Character once lost is hard to retrieve.

45. Economic Thoughts and Trends for Hillsdale County George A. Erickcek W.E. Upjohn Institute for Employment Research October 6, 2006