Michigan: A Smaller, Poorer Economy?

December 2, 2005
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ANN ARBOR — University of Michigan economists predict 2006 will mark the sixth consecutive year of job losses in Michigan, a streak that hasn’t been duplicated since the World War II era.

U-M economists George Fulton, Joan Crary and Saul Hymans of the university’s Institute of Labor and Industrial Relations anticipate Michigan’s economy will lose 9,600 jobs next year, and project the state’s manufacturing work force will lose 28,600 more jobs over the next two years.

Crary pointed to the manufacturing sector as “the chief culprit” in the state’s stagnant economic profile.

The U-M analysis reveals that Michigan has experienced five consecutive years of falling wage and salary employment. Michigan’s unemployment rate — already 2 percentage points above the national average — will likely increase from its current 6.1 percent to 7.1 percent in a year and to 7.6 percent by late 2007, according to the report. Conversely, the national unemployment rate will be less than 5 percent over the next couple of years, the economists predicted when presenting their findings at U-M’s 53rd annual economic conference in Ann Arbor last month. 

On the flip side, the private non-manufacturing sector, which shed 5,400 jobs this year, is expected to be bolstered with 4,400 new jobs in 2006 and 24,100 new jobs in 2007. The U-M forecast foresees the trade, transportation and utilities sectors turning around by mid-2006. The economists expect positive employment growth throughout next year in the service sector, which has been the only “bright spot” in the state’s labor market.

“The service sector is projected to be the only source of net job growth during 2006, and accounts for 70 percent of the non-manufacturing job gains during 2007,” Crary observed. The loss of about 2,400 jobs in the public sector last year and this year, collectively, will likely be followed by another 1,600 job losses in 2006, according to the U-M report. However, it’s anticipated that about 2,800 public sector jobs will come back on line in 2007.

The economists noted that there have been several times over the past few years when it looked like Michigan was poised to turn a corner and return to positive job growth mode, but that hasn’t materialized.

Since 2000, the Big Three’s share of sales has declined each year by an average of nearly 1.8 percentage points. How big a role does the Big Three’s light vehicle sales play in the overall health of the state’s economy? A big one, because despite attempts in the 1990s to diversify Michigan’s economy, this state is still heavily dependent on the health of the Big Three automakers, the economists point out. Though sales of light vehicles surged with the employee discount program the Big Three offered during the summer months, it appears the year will close with weak sales.

The events of the past month or two in the domestic automotive industry have made it apparent that new restructuring plans are in the works, Fulton said. The nation’s largest automotive supplier, Delphi, filed for bankruptcy Oct. 8, and both General Motors and Ford have indicated they intend to reorganize and downsize, he pointed out. The restructuring plans being formulated by those companies could lead to further retrenchment of the domestic auto industry, the U-M economists suggest.

They further suggest that the continuing restructuring, including Delphi’s reformulation, could have enough “dampening effect” on the state’s economy to postpone the return to overall job growth by another year.

Operating under the assumption that Delphi’s labor-management conflicts are resolved and there is no disruption in the flow of goods and services, the economists predict that 5,000 Delphi workers in Michigan over the next year — and another 14,000 workers statewide in 2007 — will be affected by plant closures, wage cuts and program eliminations.

They anticipate wage cuts of $11 per hour for the Delphi production workers left behind, but no wage cuts for salaried workers. They also expect Delphi will move to reduce payroll costs by eliminating its protected status program, which basically provides workers with full pay and benefits while laid off and protects their jobs by placing them in a jobs bank. Elimination of the program would mean that Delphi could immediately lay off all employees with protected status.

Factoring in the loss of non-automotive manufacturing jobs affected by the auto industry, such as retail trade, transportation and utilities jobs, the U-M analysis implies a loss to the state of $836 million in personal income for 2007. A recent analysis by Lansing-based Anderson Economic Group, however, indicated that if Delphi takes the “optimistic” direction — only one major plant closure, drastically reduced wages and more job cuts — the loss in state taxes would be $390 million in 2007.

“Many details remain to be worked out by all of the major industry players, and the implications for Michigan are yet to be seen,” Fulton said. “The important longer-term question is whether the actions of the past few years and the next few years lead to something better, or does Michigan ultimately become a smaller and poorer economy? The answer at this point is not obvious.”    

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