The Economy in 2010: Reserved Optimism

If there was a “bottom line” on the national front in 2009, it appears to have been drawn by Federal Reserve Chairman Ben Bernanke in September when he said, “From a technical perspective, the recession is likely over.”

At the time of this writing, the government had spent $3 trillion to pull the economy back from free fall. The Dow passed 10,000 in mid-October. As expected, the domestic share of the auto market returned to pre-Cash for Clunkers levels in September.

If we can accept the premise that Michigan has had more experience being in a recession than any state, its capacity for survival should be at an all-time high. But nagging questions persist:

Causes of the meltdown removed?
Dana Johnson, chief economist at Comerica Bank, said in a Sept. 22 brief that the disruptions of the past year have helped us re-learn two old lessons: credit is the lifeblood of an economy; and market economies are inherently volatile.

“The new lessons,” says Johnson, “are that the Fed shouldn’t ignore bubbles in asset prices as it did with housing, that systemically important financial institutions are too complex to analyze and that financial markets cannot be relied upon to regulate themselves.”

Locally, Timothy Bartik, senior economist at the Upjohn Institute, says, “Since 2000, what’s happened here can be explained by Ford, GM and Chrysler. The linkage of jobs and wages to retail sales, construction and housing is very strong. If Michigan is to see recovery, the domestic autos need to see recovery.”

Tax structure?
Bartik advises broadening the base, reducing the tax rate and taxing the services segment, which grows faster. States that have a graduated income tax-”which polls well in Michigan-”have addressed both the rate and the question of whether or not their business tax structure encourages investment.

Bartik sees what he calls a structural problem in Michigan with which leadership hasn’t been able to deal. “Put the national and regional economy aside and you still have a tax structure that produces revenue slower than the increase in the rate of personal income, while our spending structure grows faster.”

In September, Rick Waclawek, director of the state’s Bureau of Labor Market Information, noted that after showing large monthly jumps in the first half of 2009, Michigan’s unemployment rate remained steady during the summer months.

Christina Bristow, regional operations manager for the Adecco Employment Services temporary help firm, said, “August was the best month for many of our offices during 2009, but we’re still behind August 2008. But orders for temps in production and related areas like logistics, indicate reserved optimism.”

Christina Bristow, regional operations manager for the Adecco Employment Services temporary help firm says there’s reason for “reserved optimism.”

Even if the national economy recovers according to what forecasters are saying, the view is it will take at least two years before Michigan sees the kind of job growth it needs to get back to where we were 24 months ago.

Even so, in his September newsletter, Michigan Economic Development Corp. (MEDC) CEO Greg Main wrote, “We’ve announced eight more job-creating projects expected to create and retain 3,000 plus jobs. They include a chemical company near Lansing, focused on manufacturing bio-based materials, and a start-up health care manufacturer in Kalamazoo. Since January 2009, more than 70,818 new and retained jobs have been announced.”

“Credit spreads have narrowed, financial and other corporations are able to issue new equity and bonds, equity markets have rebounded and many small businesses and people with good credit can borrow again,” says Comerica’s Johnson.

Even so, with a steady job, a good credit score and cash, many banks are requiring 20 percent down. And before the meltdown, nine out of 10 clients got a mortgage. Now one out of every two is denied as banks are trying to avoid a repeat of loose lending practices. In 2008, 32 percent of mortgages approved were considered risky or subprime; this year it’s less than 1 percent.

The credit squeeze also put the brakes on autos. In the first quarter of 2008, 5 million loans were made; that dropped to just 3.5 million this year. Still, Chrysler said in late September that it would start leasing again on all of its 2010 models. The resumption of leasing through GMAC financial services came a few weeks after General Motors resumed its own leasing programs.

Maintaining business while stimulus packages help?
Daniel Luria, research director of the Michigan Manufacturing Technology Center, says one of the keys is to “reorient” manufacturing. “There isn’t yet a replacement for what was lost in the autos. But just as we always have, we have to provide Michigan-made components to manufacturers that serve a national market. Those manufacturers are no longer across the street or nearby. They’re in Kentucky, Tennessee, Texas and California. And they’re not just making cars; they’re making wind turbines, solar products, and medical devices.”

Daniel Luria of the Michigan Manufacturing Technology Center says one key to recovery is being able to “reorient” manufacturing.

On Sept. 1, BAE Systems Land & Armaments, with 55 locations in seven countries, announced that the producer of military vehicles will be setting up shop in Sterling Heights at the former 80-acre site of a TRW Automotive plant. The move brings a $58 million investment to the city and more than 600 high-tech jobs.

BAE Systems will build a 150,000-square-foot engineering building and a 50,000-square-foot research and development center. The company chose the site because its location is close to one of its main customers, TACOM in Warren, said Linda Hudson, president of BAE Systems.

Energy technology: THE answer or part of it?
“Technology is part of the diversification that began in 2000 but it’s hard to offset all of what’s been lost with a single, smaller industry,” says economist Bartik.

Yet at the time of this story, two out-of-state renewable energy firms had selected Ford’s shuttered Wixom plant for a $725 million redevelopment project, creating what may be the nation’s largest renewable energy park. Xtreme Power of Austin, Texas, and Clairvoyant Energy of Santa Barbara, Calif., plan to retool the factory to manufacture solar panels and utility-scale batteries. Overall, the project could create more than 4,000 new jobs, with production starting in 2011.

In June, an MEDC news release covered 15 job-creating projects that may generate more than 11,125 jobs, retain 846 and bring more than $247 million in new investments across the state.

Topping the list are Alma Products I and Farmers Group Insurance. Alma I is a manufacturer of air conditioning compressors, torque converters, clutch and disc assemblies and transmissions. Farmers Group Inc. plans to invest $84.4 million to expand operations in Caledonia, which includes a print and distribution center, call center and a training facility. The project is expected to create 2,727 new jobs, including 1,600 directly by the company. Estimates project an additional 1,127 indirect jobs.

“We’ve see the years when putting all our eggs in one basket made us the poster child of success-¦and for the last 10 years, the poster child of decline,” says Charles Ballard, professor in Michigan State University’s Department of Economics, who has served as a consultant with several Federal departments. Ballard, whose books include “Michigan’s Economic Future,” is cautiously optimistic about a future that includes manufacturing, tourism, health care, information technology, agriculture and ultra-tech projects like the superconducting linear accelerator.

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Richard Blanchard
Rick is the Managing Editor of Corp! magazine. He has worked in reporting and editing roles at the Port Huron Times Herald, Lansing State Journal and The Detroit News, where he was most recently assistant business editor. A native of Michigan, Richard also worked in Washington state as a reporter, photographer and editor at the Anacortes American. He received a bachelor of arts from the University of Michigan and a master’s in accountancy from the University of Phoenix.