Battle Creek MSA 2006 and 2007 Economic Forecast January 13, 2006 W.E. Upjohn Institute George A. Erickcek & Brad R. Watts

A special thanks to  Battle Creek Community Foundation  Battle Creek Unlimited  Consumers Energy  SEMCO Energy

Outline  Strong economic outlook but with growing uncertainty.  The impact of productivity gains on employment.  The state’s economy is still struggling.  Local numbers: Still sluggish except for manufacturing.  Forecast – But how did you do last year?  The challenge facing Calhoun County

Gross Domestic Product The expansion is three years old and is still going strong in terms of output. Source: BEA. Seasonally Adjusted Annual Rate Productivity and normal employment growth will allow a 3.3% increase in GDP with inflation.

There is clearly a turnaround in national employment growth; however… Thousands of jobs Source: BLS. National employment increased by 108,000 in December, slightly below expectations.

…manufacturing employment conditions are much softer. Thousands of jobs Source: BLS.

Productivity gains and globalization have taken their toll on the ability of manufacturers to create jobs. Thousands of jobs In December: Manufacturers employed 14.3 million. Source: BLS.

Production Index and U.S. Manufacturing Employment – Manufacturing is doing great!

Jobs, what new jobs?  DaimlerChrysler AG’s Chrysler Group announced that it plans to increase its annual production capacity by 43 percent without any new plants or new workers.  As reported in Business Review West Michigan, the last time the Herman Miller was at its current quarterly sales volume, it had 3,000 more employees on the payroll.

The Changing Manufacturing Environment  Outstanding productivity gains have limited employment growth in manufacturing.  Michigan is losing its dominance as the production center for the auto industry. The Big Three’s share of the North American market has dropped to 57 percent.  The world’s high-growth regions are outside the U.S. Often it makes more sense to produce the goods where they are sold.  Clearly, other nations can assemble goods more cheaply. In China, the cost of factory labor is $1.00/hr. including benefits. (Note: that hourly wage buys nearly $3.50 worth of goods and services in China.)

Forecasters agree that the national economy is likely to continue growing, though the pace may slow. Source: Philadelphia Fed Q Forecast; U of M RSQE, U.S. Economic Outlook

What I worry about:  You and  what a trusted friend is saying.

We are not saving very much, which is fine if nothing bad happens. Source: BEA

Consumer debt as a percent of income is slowly rising. Total debt including rent, auto leases, property taxes, and house insurance. Credit cards & mortgage payments

Consumers keep hanging on, but their confidence is flat. Source: The Conference Board, Business Cycle Indicators.

Percent difference between 10-year T-bonds and 90-day T-notes. Interest rate spread - This indicator has not given a false positive in more than 50 years. But there is always the first time. Source: Federal Reserve Board.

What’s going on?  Could be the result of an increasing global glut of dollars due to our ongoing trade deficit – Our payments for goods have to be going somewhere.  It is a worldwide event.  Inflation expectations are surprisingly flat due to the Fed’s money tightening policies —despite energy prices.  OR… we are in trouble.

Auto Sector

Let’s look at the highly cyclical auto industry. Sales of Cars and Light Trucks Source: BEA SAAR U of M forecasts sales of cars and light trucks to reach 17.0 million units in 2006 and 17.1 million in 2007

Concerns about the Auto Sector  Delphi – a tip of an iceberg? Legacy costs will not go away. GM & UAW reaching a tentative agreement on health care costs is a major breakthrough.  The Big Three still lag in productivity.  According to industry analysts, the increase in gas prices will not impact car sales nor the type of cars being sold.  Major concerns: The industry continues to move south. Suppliers continue to be squeezed. Ford and GM continue to lose market share.

Auto employment declines reflect a loss of production and not an improvement in productivity.

Michigan Economic Conditions and Outlook

From 2000 to 2005, Michigan lost over 300,000 jobs. Source: BLS Thousands of jobs

Unemployment has declined in 2005 but is still relatively high. Source: BLS.

Michigan has suffered greater employment losses than any other Great Lakes state. Source: BLS.

Michigan’s employment environment is weaker than other parts of the U.S. Source: W.E. Upjohn Institute.

Michigan manufacturing employment has underperformed a very weak sector. Source: W.E. Upjohn Institute.

The private service-providing sector has maintained flat employment in Michigan over the last few years. Source: W.E. Upjohn Institute.

Any way you look at it, Michigan incomes have declined since Source: U.S. Census Bureau, ACS estimates.

Michigan’s population is growing slowly— about 0.4% annually. Source: U.S. Census Bureau, ACS estimates.

Unfortunately, no quick turnaround to growth is expected for Michigan. Source: University of Michigan, RSQE, Michigan Forecast Highlights, 11/18/05.

Battle Creek MSA (Calhoun County)

Only the manufacturing and leisure sectors gained employment during the past year. Source: MDLEG

A surprising group of manufacturers may be driving the sector’s growth. Source: MDLEG, ES-202 series.

Local unemployment rate has declined, but remains higher than the nation’s. Source: BLS

Calhoun County was outperforming the U.S., but slipped in Source: W.E. Upjohn Institute. A welcomed difference from the state’s trend, however.

Local manufacturing has remained relatively stable despite a downward trend nationally. Source: W.E. Upjohn Institute. This is downright impressive.

Calhoun County’s private service-providing sector employment did better than expected over most of the past five years. Source: W.E. Upjohn Institute.

How can the Battle Creek MSA’s unemployment rate be slipping below the nation’s when its goods-producing sector is outperforming the nation’s and its private service-providing sector is doing as well as the nation’s. Source: W.E. Upjohn Institute, seasonally adjusted data based on BLS employment. Battle Creek MSA U.S.

Calhoun County is growing very slowly—on average, by less than 250 residents per year, or about 0.2%. Source: U.S. Census Bureau, July population estimates.

Forecast

Last year, we came pretty close with our 2005 forecast for the Kalamazoo–Battle Creek area! Source: W.E. Upjohn Institute. Year-to-date 2005 estimate based on Jan-Nov period BLS data.

However, Calhoun County employment growth did not meet expectations. Source: W.E. Upjohn Institute. Year-to-date 2005 estimate based on Jan-Nov period BLS data.

Looking Ahead: The factors behind the forecast.  Local manufacturers are optimistic. Hopefully a strong auto sector will balance out bad news from Eaton, Lotte USA.  Private services turned down in 2005 and have not developed a “life of their own” in Battle Creek.  A small state budget surplus probably won’t do much to stop the bleeding in local government employment, though we expect the Federal Center to be stable.

Combined Area Kalamazoo MSA and Battle Creek MSA Forecast

Calhoun County Employment Forecast 2006–2007

Now, what am I worried about?  Diversifying the county’s economic base.  Attractiveness  Stickiness

The economic impact of manufacturing activity on the county cannot be overly emphasized

However, not all jobs bring in new dollars.

The very essence of long-run growth is, in fact, the transition …from one export base to another as the area matures in what it can do, and as rising per capita income and technological progress change what the world economy wants done. W.R.Thompson (1965) Challenges Facing Battle Creek

Globalization and Neighborhoods  Obtaining stickiness in a slippery world.  Knowledge-based workers can pick their locations. Key factors: Thick labor markets:  Opportunities for two-career households  Opportunities for advancement Large metro areas have a major advantage.  Neighborhoods, downtowns, schools and a sense of place will matter more and more.

Movers are younger than stayers.

Movers are better educated than stayers.

Conclusions  Do everything you can to keep your manufacturing base. Toyota would make a nice addition. But then  Think about how your area can attract and keep the best and brightest.

Battle Creek MSA 2006 and 2007 Economic Forecast January 13, 2006 W.E. Upjohn Institute George A. Erickcek & Brad R. Watts