New Year Will Be Nothing to Write Home About

June 4, 2002
| By Katy Rent |
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GRAND RAPIDS — George Erickcek, senior regional analyst for the W.E. Upjohn Institute says there are three ways to win at poker: cheating, dumb luck and playing your hand well.

He says the same goes for the economic status of Grand Rapids, and it seems the area is going to need a little dumb luck, followed by playing its hand well in the years to come.

Erickcek delivered his economic forecast at a meeting sponsored by The Right Place Program and The Employers’ Association on Dec. 13th, to a full room at the Amway Grand Plaza.

Erickcek began by taking a look at the past, present and future national economic status, and what he said he has discovered is that consumer spending is off and confidence and employment growth are down, while international markets are flat and the dollar remains strong.

“The Beatles had it right when they said ‘You can use a little help from your friends,’ and we aren’t getting it,” Erickcek said. He said he discerns strong fears of a global recession out there.

Erickcek also finds that, on a national level, capital spending is negative and profits are down.

“This is an investment-led slowdown,” he said. “Credit markets have tightened and the demand for commercial and industrial loans are half of what they were a year ago. However, the Fed is acting aggressively and lowering interest rates 11 times to what is now 1.75 percent, and I actually see that going down one more time to 1.5 percent. We haven’t seen this kind of reduction since Kennedy in ’61.”

He said that while drastically lower interest rates should help business, you can only lead the horse to water, but you can’t make him drink. If businesses don’t see the value of low rates or don’t want to use them, he said, there is nothing anyone can do about it.

And while the National Bureau of Economic Research tagged the beginning of the recession back in March, Erickcek said it looks as if we may pull out of it starting as early as the second quarter of 2002.

“The first quarter will be questionable, but I think that recovery will take place during the second, third and fourth quarters,” he said. “There are not many strong economies left. Every industry is feeling this hit and unemployment is at a rate of 5.7 percent nationally and locally at 4.9 percent. We are a manufacturing community here, we make things, and last year employers eliminated 1.2 million jobs in manufacturing.”

One aspect Erickcek noted in the perception of Michigan’s swift downfall stems from the fact that the ’90s were simply so good. “These are the years we are going to be telling our children about. However, we thought that the growth from the ’90s was going to spill over into the 2000 and the 2001s and when it didn’t we were left with all of this excess capacity,” he said.

“We built to capacity because we just knew we would need it, and we didn’t. Another problem was the Y2K scare. Everyone over-bought and was surprised when the store wouldn’t take back that generator.

“Now consumers are left with all of this unused product and manufacturers are left with product as well because their over-stocked customers already have enough. And we are seeing this in every industry.”

Consumer confidence has also played a large role in why shoppers are not making as many trips to the malls. According to the Conference Board study, in the fourth quarter of 2000, consumer confidence was up to just over 140 percent. In the fourth quarter of 2001, it is down to just below 85 percent.

“I think with confidence being as low as it is — and this is as low as it has been since 1997 — there will also be a change in purchases. People will go for the necessities and cut back on frivolous items,” Erickcek said.

Specifically looking at the auto industry Erickcek looked at what he believed to be the main problem: too much capacity in a slowing market. In 2000, 17.2 million cars and light trucks were produced. In 2001 the number dropped to 16.9 million and is expected to drop again in 2002 to 15.8 million, and in 2003 to 15.6 million. However, Erickcek said, this still puts the numbers close to the trend of 16 million units.

Another factor contributing to the downturn in the auto industry is the aggressive incentives, such as zero percent financing, which are cutting into profits. “They have now gone farther to extend these deals into January and therefore are sucking up sales of 2002,” Erickcek added.

He said Ford is also taking the pessimistic side and saying it expects to produce only 15 million units in the upcoming year, while Toyota says it expects to produce 15.8 million units.

“Overall we have seen tremendous sales in this year, with 21.3 million in October and a projected 17.5 million in November, so that even if December is a bad month — although we expect 16.9 (million units) — we will still average out above the trend,” Erickcek said.

“However, we projected 2002 to bring 15.6 million units, which means excess capacity and more pressure on buyers.”

Erickcek said the COO of Ford summed it up when he said: “It will be a very interesting year.”

On the other side of the state, Erickcek said the furniture industry forecast doesn’t seem to be much different.

Local employment trends are down, and according to BIFMA, shipments declined by 21 percent during the third quarter. For 2001, sales are forecasted to fall by 17.8 percent and for 2002, to decline by another 8.8 percent.

“There are three factors that drive the market and affect the furniture industry, corporate profits, white collar employees and office construction,” said Erickcek. “When those factors are suffering in their own right or are down due to outside factors, that hurts the furniture industry, and that is what is happening right now.”

Erickcek said the good news is there is still a market in office furniture systems.

“While office furniture will continue to last for a long time, office furniture systems continue to change because of growth and movement in an office. So there are these systems out there that need to be upgraded and that will keep us busy.”

The remaining question, he said, is, “But how will we do in comparison with other similar markets?”

Erickcek said he bases his comparison on three factors: long-term trends to show the strength of the community, the industrial mix; and seaworthiness of short-term trends.

“We know there has been a downturn in manufacturing but how are we doing in all of that, and competitiveness in regard to wages? How does our area compete in terms of skilled employees?”

Erickcek said he compared West Michigan with other cities that had a high focus on manufacturing, but weren’t necessarily comparable in size. In data collected from 1990-1999 on long-term employment growth, he found Grand Rapids No.1 with a 2.5 percent annual growth rate. And in manufacturing employment growth, he said, Grand Rapids was on top again with a 2.2 percent annual growth rate.

“In order to produce numbers like this you must be one of the most productive manufacturing areas in the world,” Erickcek said.

He said that even in long-term trends for wage and salary earnings, Grand Rapids is second, just behind Minneapolis-St. Paul, with just over 70 percent annual earnings rate. “However, when we look at short-term trends, the story changes,” he added.

He said that in employment growth from October 2000 to October 2001, Grand Rapids reports a positive number yet is lost in the pack with less than one percent.

In manufacturing employment growth for the same period, he said Grand Rapids is in the red with a negative 5.4 percent. “Because our businesses are in these industries that are not doing well, we are lost in the group,” Erickcek added. Equally negative, he explained, is Grand Rapids’ unemployment rate, which was among the highest of the competing cities with 4.9 percent.

“What we should take from both sets of numbers, long-term and short-term, is that we have an extremely solid base,” said Erickcek. “By following what we did in the 90s and taking that as our base, we can successfully pull ourselves out of this.”

Wages based on skill have been a challenge to look at, said Erickcek, but Grand Rapids comes out above the average, but lower than other comparable cities, with the mean standing at about $19 for precision craft workers and just under $15 for machine operators.

He spoke of pessimists who say Grand Rapids’ economy remains strong simply because the community was dealt a lucky hand in its mix of industries.

But Erickcek says that dumb luck had little to do with the success of this area, and a lot to do with playing the cards right. “We just played with what we were dealt and played it well,” he said.

To look at how well Grand Rapids played its hand, Erickcek compared it with 49 other manufacturing-focused cities in the U.S. After making adjustments for the mix of industries in each city and performance issues, and after looking at earnings and employment, Grand Rapids ranked as the top manufacturer-focused MSA.

And there are numbers to prove it, he said. Although our local unemployment rate has been growing at a faster rate than the national rate and now stands at 4.9 percent, the area has also outperformed the nation in terms of total employment growth from December 1999 to June 2001.

“What we found was that if we looked at how the national rate was growing and how we were actually growing, we actually had 24,000 more jobs, growing at our own pace, rather than at the national one,” Erickcek said.

“And in the manufacturing industry from February 1999 to September 2001, we have 5,670 more jobs than if we grew at the national average.”

What’s to come in 2002 and 2003? Nothing to write home about, Erickcek said.

He predicts that with an aggressive Fed, business investment will return due to low interest rates and exhausted inventory. “What happened in 2001 was that Bush gave us all some $300 back in tax money. What we were supposed to do was go out and spend, spend, spend,” Erickcek said.

“Instead what we did was save it and put it away for junior’s college or for a rainy day. Historically Americans have always overspent and now they are really cutting back.”

He also noted that the area is still doing very well in productivity; however he also sees capacity problems. While he noted that full capacity was only measured at 85 percent, we still have excess capacity, which in turn will lead to closing factories

In response to a request to take a look back at the predictions for this year, Erickcek replied, “Do we have to?”

And rightly so: Most of what happened in 2001 was not in Erickcek’s sights when he presented his projection last year and began his forecast with, “When it’s not right, always blame the other guy.”

Erickcek said his major errors stood in growth. He predicted the local economy would grow at 3.4 percent and it actually grew at 1.1 percent.

In manufacturing, goods producing were forecast to be close to 1.2 percent but actually finished at a minus 1.7 percent; that, in turn, pulled the total down to 1.1 percent from a projected 2.2 percent.

However, the one silver lining was the projection of service producing. “We nailed it,” Erickcek said, noting a forecasted 2.7 percent was right on target.

“No one saw the business investment dry-up that occurred,” Erickcek said. “Now we see the reasons but we don’t see the solutions.” And while Erickcek sees 2002 doing quite poorly, especially in manufacturing, he does not see it doing as badly as 2001.

“The first half of 2002 should be better than what we have seen,” he said. “It will be a year of growth, but nothing special.”

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