Michigan Hanging In There

GRAND RAPIDS — Michigan's economy is treading water because it's weighed down by state budget woes and recessions in both the auto industry and real estate market.

West Michigan will likely muddle through for the next couple of years, though it does have pockets of strength in the office furniture and tourism sectors, said Mitch Stapley, chief fixed income officer for Fifth Third Asset Management. 

"But by no means would I call this vibrant. We're just hanging in there," Stapley remarked.

Michigan's budget problems continue to pile up at what seems an almost exponential rate. The state's budget situation is serious and really reflects long-term technical imbalances that need to be addressed, Stapley said.

From a revenue standpoint, the state has relied for a long time on the manufacturing sector. In 2000, some 7 percent of all the jobs in Michigan were tied to automobile assembly and parts manufacturing, and today about 4.5 percent are tied to the industry, Stapley told participants of Fifth Third Bank's economic luncheon Thursday at FrederikMeijerGardens & SculpturePark. The state has lost about 250,000 manufacturing jobs, which translates into $3 billion in lost revenue to the state, he pointed out.

Michigan has to achieve some level of revenue increases to offset that. Too, the $1.9 billion small business tax hasn't been replaced. If a business owner was looking to relocate and open up a facility in Michigan, one of the first things he would ask the state tax office is how much he's going to have to pay in taxes.

"Forty-nine other states can tell you what you're going to pay, and we can't. That is not promoting job creation in Michigan," Stapley remarked. "Expect to see some taxes go up. Per student revenue is going to get cut, Medicaid is going to get cut, and I don't think there are many ways around that. There's going to be a problem for another couple of years."

In the first quarter, Toyota surpassed GM to become the largest auto manufacturer in the world. The labor contract negotiations with the Big Three automakers this fall have "enormous implications" for the future of this state, Stapley stressed. It will all boil down to the decisions made on wages, productivity enhancements and health care benefit issues that put U.S. auto manufacturers at a $1,500 per vehicle cost disadvantage to the Toyota and Nissan transplants.

Two weeks ago, private equity company Cerberus Capital Management purchased DaimlerChrysler AF's Chrysler Group, shelling out $7.4 billion for an 80.1 percent stake in the company. Now, Stapley noted, Chrysler is going to have to deal with people that are used to coming in, slashing head count, maximizing free cash flow, doing whatever they can to tightening the company up and sell it off in three to five years.

"Chrysler is going to have to invest $3 (billion) to $5 billion in research and development vehicle design just to keep its pipeline going," he said. "What will they do about Chrysler's $19 billion pension health care liability? This is going to be a total 180-degree change from business as usual in Detroit."

In the residential real estate market, the data show that most of the loan delinquencies and home foreclosures have occurred either in the Midwest, Louisiana, Mississippi and parts of Texas, although they're beginning to pick up in Florida and California, too. Stapley said the main areas where delinquencies and foreclosures have been up are those areas that have the weakest economies because they're tied into the manufacturing sector.

There's a large supply of homes on the market, which will prolong the downturn, he said. The Michigan home market is going to be soft, with prices flat or maybe down 5 percent. However, Michigan is a very affordable housing market relative to the rest of the country.

The national economy is in a kind of a classical mid-cycle slow down in growth of 1.3 percent. The national unemployment rate needs to get to about 4.7 percent, Stapley said. The overall economy, while slowing, is not in that bad of a shape, and he doesn't foresee a recession in sight.

There is a "rational exuberance" over the comeback of the stock markets — essentially in the case of the Dow, the S&P, and the Russell 1, 2 and 3 indices — and the recovery of the losses investors suffered in the tech bubble crash.