Michigan Needs 'New Engine'

December 15, 2006
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GRAND RAPIDS — Sluggish to very modest growth is forecast for the nation’s economy in the year ahead. Michigan’s economy, however, is another story because the state is a “one-horse town with a sick pony.”

So said George Erickcek, senior regional analyst for the W.E. Upjohn Institute on Employment Research, at Thursday’s 2007 Economic Outlook breakfast sponsored by The Right Place Inc.

“The state of Michigan has not taken off. It’s grounded and needs a new engine,” Erickcek remarked. “We need to find new industries to replace and augment the auto industry.”

The Big Three’s market share is forecast to drop from 55 percent in 2006 to 49 percent in 2011. Ward’s Automotive predicts production capacity in Michigan will decline by 2.9 percent from 2006 to 2010, with Ontario becoming the top producer. As the Big Three shrink in production capacity, West Michigan suppliers suffer even more, Erickcek observed.

Home sales are declining here but not as fast as the national trend. Although there’s a lot of volatility in the housing data for Grand Rapids, the trend is more stable for 2007, Erickcek noted. A concern is that when consumers pull back from the housing market, they also tend to pull back from purchasing furniture, appliances and other things for the home, so consumer spending slows down, too. Furthermore, the nation as a whole is in negative savings mode; during the third quarter, Americans collectively spent $121.3 billion more than they made.

“The personal savings rate is awful. We have not seen this since the 1930s,” Erickcek pointed out. “It makes you a little bit worried whether consumers will stay with us and keep spending,” he said.

He said that in terms of employment levels, Michigan is unique in that it’s struggling more than other Great Lakes states. There have been good employment gains in the state. With the exception of manufacturing, the Grand Rapids-Wyoming MSA has done “fairly well” during the past year, with the most notable employment gains in the health care sector. Compared with 11 large Midwest metropolitan areas, Grand Rapids employment grew at about the same pace as the comparison group.

According to The Employers’ Association, of the West Michigan companies seeking to hire, 29.4 percent of the jobs available are in manufacturing and the skilled trades, and 9.2 percent are in engineering.

As the state moves to a knowledge-based economy, it’s not going to have the job-multiplier effect that it has enjoyed with the auto industry, where a single job produces 3.3 jobs indirectly in the support services sectors, Erickcek said. He said knowledge-based activities can have significant displacement impacts; they can cause pain and suffering in competing firms that may not be as good as the new ones are. But he said the Van Andel Institute and the MSU West Michigan Medical School are exceptions to that rule. New professional, technical service, IT and data processing jobs will present only modest job gains compared to what the state is accustomed to, he said. But knowledge-based activities that give birth to new products and services that are then commercialized will have a multiplier effect, he said. New jobs can also be created in the health care/hospital arena with new services and treatments that aren’t duplicated elsewhere in the community or region.

“As long as we are expanding the services and procedures available in the area, indirect job creation will be positive,” Erickcek said.

On the upside, the furniture industry’s fundamentals are strong, and the industry is forecast to grow. A recovering commercial construction market, as well as the national recovery in white-collar employment, should help it along, Erickcek said.

Also good news is the fact that Grand Rapids ranks fourth out of 118 metropolitan areas as “a dynamic place for business.” The bad news is that the education achievement level of its work force is below average. This metropolitan area trails behind the comparison group in terms of having a young professional work force. In the Grand Rapids area the percent of persons ages 25 to 34 with a bachelor’s degree or higher is 28.1 percent. The group average is 33 percent. What worries Erickcek even more is the fact that Grand Rapids has a slightly higher-than-average share of local teenagers that fail to complete high school. That doesn’t bode well for a community striving to grow a knowledge-based economy.

“One thing about these kids is that they tend not to move; they tend to be our neighbors for life,” Erickcek noted.

He said there are several factors that drive growth in metropolitan areas, including a skilled work force, an environment of openness and diversity, racial inclusion, the area’s legacy, income equality, area amenities, business dynamics and urbanization. And a skilled work force, in fact, ranks “strong” in the growth rate of per capita income, productivity and output.

Increasingly, the area’s growth will hinge on its ability to attract and retain knowledge-based workers. Where skilled workers line up, Erickcek said, capital will follow.     

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