States Economic Outlook Fair

November 21, 2006
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GRAND RAPIDS — In real gross state product, Michigan was second to last in the country in terms of performance in 2005, with the economy up only one-tenth of a percentage point from the year before. This year, the state's economy is about the same or negative.

"We continue to struggle a lot here in the Midwest with the slowdown in manufacturing, specifically in the auto industry," said Mitch Stapley, chief fixed income officer for Fifth Third Asset Management. "Everybody can recite pretty much verbatim how many manufacturing jobs we've lost and how bad stuff is in Michigan."

But there have been some positive developments, which Stapley outlined in the economic outlook address he delivered at a Fifth Third Bank luncheon held at MeijerGardens Thursday.

Internet search engine giant Google announced in July that Ann Arbor would be the location of its new AdWords division and that 1,200 new jobs would be created to support the endeavor. That's the knowledge-based economy kind of growth that we really need to see in Michigan, Stapley said. Google chose Ann Arbor, he noted, because the city afforded access to a high-quality, highly educated work force, affordable housing and favorable quality of life.

"This is really important for us because Michigan leads the nation in terms of the out-migration of 21- to 34-year-old baccalaureate degree holders and higher," he explained. "We've got a tremendous educational system, but the problem is we're not generating jobs to keep those newly minted college graduates in our state. Hopefully, Google's presence in Ann Arbor will attract other firms to come in and grow up around Google."

Google has been around only since 1998, yet it has a market cap of about $147 billion. In just eight years, Google has become eight times bigger than Ford, which has a market cap of about $15.7 billion, and six times bigger than GM, which has a market cap of about $20 billion, Stapley pointed out. Manufacturing output is going up, but the number of jobs in manufacturing continues to decline. It's the knowledge-based service sector that continues to grow jobs, he noted.

"It's good news that we landed Google," Stapley remarked. "It doesn't change things overnight, but in the intermediate and longer-term view, it's great for us."

Also on the bright side, stock market performance tends to be very strong in the 12 months following mid-term elections. Another positive development is the recent drop in retail gas prices in the nation, which Stapley said is good news for consumer spending because the decline in gas prices seen so far this year will free up about $93 billion of discretionary spending.

The gas price decline is good news for the auto industry, too, specifically for large truck and SUV sales that are very profitable for the Big Three. On the downside, Toyota continues to gain market share over Ford and GM; the company will likely surpass Ford in market share by the end of this year and surpass GM in market share sometime next year, Stapley predicted.

There's another year of uncertainty ahead for the auto industry. A concern in Michigan is the fact that the UAW and the Big Three have been in contract negotiations for more than a year but haven't signed a master contract. The automakers have to rein in their health care costs in order to be competitive. Another drawback is productivity levels.

"It takes Toyota 29.4 hours to assemble a car, and it takes Ford 35.8 hours," Stapley pointed out. "The UAW has been fairly responsive on this, but they're going to have to really push it to become more productive."

In Stapley's opinion, between the Single Business Tax and, potentially, some property tax reform, Michigan has an opportunity to create a better climate for business startups. As he sees it, getting rid of the SBT is probably a good first step in making the state more competitive with other states in the Midwest.

Another thing Michigan has going for it is an affordable housing market. With the housing recession, home sales in the state are down about 15 percent and prices are kind of flat, Stapley observed. What he has heard from area realtors is this: "We've had four years of really strong real estate, so if we're off 15 percent this year from last year, we're still doing relatively OK."    

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