Right Place Overview Sees Transition

May 3, 2005
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GRAND RAPIDS — What's wrong with Michigan? That was the predominant question addressed in The Right Place Inc.'s April 2005 West Michigan Economic Overview released late last week, centered on Michigan's recent standing in the state unemployment rate rankings — dead last with 7.6 percent, behind Alaska's 7.4 percent.

To explain the situation, the report focused on trends gleaned from a pair of Chicago Fed Letter 2005 articles, "Caution Ahead — Challenges to the Midwest's Role in the Auto Industry," and "Challenges and Prospects for Midwest Manufacturing."

Above all else, Chicago Fed traces the downturn in the Midwest to the auto industry, where Michigan, Indiana and Ohio were until the end of 1996 home to the majority of the industry's jobs.

"From 1996 until the second half of 2002, auto industry employment was pretty evenly divided between the three core auto states and the rest of the country," the Chicago Fed Letter reported.

After that point, the auto industry employment in Michigan, Indiana, Ohio, Illinois, and Wisconsin was hit hard. Even though light vehicle production remained stable, the three core states felt a steep decline.

Michigan would be hit the hardest.

Here, 36 percent of manufacturing employment is in automotive, compared to 15 percent and 16 percent in Indiana and Ohio, respectively.

"Within 400 miles of Detroit (one day's drive), 58 percent of the nation's assembly plants can be found, along with 84 percent of those major supplier plants owned by auto assembly companies, and two-thirds of the major non-captive Tier 1 supplier plants," said the Chicago Fed Letter.

But most of this cluster is directly related to the Big Three OEMs.

With innovative car designs and features, perceived higher quality and lower prices, foreign transplant auto firms like Toyota, Nissan, Honda and Hyundai have boosted their market share to 29 percent over the past 15 years. Meanwhile, the Big Three's market share has slid from 73.2 percent to 58.7 percent.

The foreign plants have for the most part steered clear of Michigan. The first facilities were built at the southern end of the Rust Belt in Kentucky and Tennessee. Others have settled farther south.

Auto parts suppliers followed their customers south and today the southern states represent an estimated 33 percent of major auto parts plants.

With the majority of auto job growth likely to come from the foreign transplants; coupled with the effect of productivity gains, outsourcing non-core competencies, and globalization on U.S. manufacturing employment as a whole; Michigan has a distinct disadvantage toward improving its employment picture.

Worse yet, manufacturers are now filling additional labor needs with temporary employees instead of permanent hires. The percentage of temporary workers has doubled since 1990.

The outlook for West Michigan is looking a little rosier after a strong March. Automotive suppliers and capital equipment firms saw a modest increase in activity, the Right Place report said, while the furniture industry saw a sharp increase due to lower vacancy rates and pent-up demand.

Other positive signs, according to the National Association of Purchasing Management index, were a +19 in sales, well above February's +8 and better than the 13-year average of +16; a new order index of +37, up from +19; production rose to +36 from +8; and purchases rose from 0 to +31.

The Right Place report warns against overdue optimism, however, as the positive signs for auto suppliers may be negated by further erosion of Big Three market share, and rising prices in raw materials will affect segments.

According to the Michigan Department of Labor and Economic Growth, unemployment rates in the greater Grand Rapids area dropped to 7.1 from 7.9, well below the 8.4 of a year ago. The only metro area county below the state average a year ago, Ottawa County, inched closer to the national average of 5.4, dropping from 6.3 in February to 5.8 in March.

The most significant gain was in Allegan County, which dropped from 8.0 in February to 7.2. Outside of the metropolitan area, Ionia County saw a 14-point drop to 8.0.

It should be noted that Allegan and Ionia counties are the only counties in the region that did not add jobs over the previous 11 months. No county in the region lost jobs in the month of March.    

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