Happy New Year ???

It’s a new year and Michigan is in the early January spotlight. The Michigan Primary was held January 15th and the candidates that visited Michigan commented on the state’s great potential for achieving a thriving economic environment. The domestic auto industry is completing its restructuring and streamlining transition period and is positioned to be more competitive. The publicity surrounding the “2008 Detroit Auto Show” boasts of the “green technology” innovations the auto industry is poised to introduce. Michigan ranks high among states in private research and development investment and favorably in the proportion of scientists and engineers to total employment. Aren’t these among the pieces needed for a more vibrant and innovative state economy?

Perhaps, but the realities of 2007 offer little optimism. For the second consecutive year, Michigan’s unemployment rate led the nation. The state’s jobless rate of just over 7% was well above the 4.6% national average. Once again the state lost a significant number of industry jobs (60,000+) while the nation posted moderate gains. A particularly worrisome development is that the state is now showing net annual job losses in the private service producing sector. This occurred in both 2006 and 2007. Previously, overall employment declines were largely a result of cutbacks in manufacturing, particularly auto and related jobs. Now, however, the secondary effects of a shrinking goods producing sector are of sufficient strength to result in a net negative impact on service consumption. Job losses in real estate; retail trade; and professional and business services are of significant size and overshadow the strong growth trends in areas such as health services. Surprisingly, although Michigan is considered a “high wage” state, per capita personal income of $33,784 is below the national average of $36,629 and ranks 25th among states.

Okay, Michigan’s troubled economy has been exhaustively documented. Many in state government and academia articulate that further pessimism serves no purpose. They propose that Michigan policies to attract business which include job creation tax credits, tax-free renaissance zones, and the “21st Century Job Fund” are working and the state is diversifying its economy by targeting industries such as life sciences, alternative energy, advanced manufacturing, homeland security, and defense. However, based on Michigan’s performance in 2007, results from these initiatives are not apparent. The state’s economy continues to rank among the least diversified in the country.

Business Facilities magazine, which assists companies in evaluating business locations sites and selecting corporate expansion destinations, published in July 2007 an extensive series of state ranking reports. First released, the “U.S. State Biotechnology Rankings” listed the top ten states in overall biotechnology employment and number of establishments with individual rankings in the fields of agricultural, feed, and chemicals; drugs and pharmaceuticals; medical devices and equipment; and research, testing, and medical laboratories. Michigan failed to make the list in each of these categories. In the “Education and Quality of Life” rankings, Michigan was not mentioned in the top 20 states for education climate, most educated workforce, or quality of life. The third set of rankings for which Michigan did not make the top 20 included measures of pro-business climate and favorable cost of labor. The final set of rankings which did not list Michigan evaluated states with respect to manufacturing momentum. The rankings were based on quantitative measures rather than survey results and appeared credible.

Also in 2007, the nonprofit Corporation for Enterprise Development (CFED) released its 20th “Development Report Card for the States”. The study incorporated 67 measures to assess how the economy is performing for citizens and businesses and how well a state is situated for the future. Basically, the state received average grades with a “C” for Performance (the performance of the economy for its citizens), “C” for Business Vitality (business competitiveness and entrepreneurial energy), and “C” for Development Capacity (the positioning of the state for future economic growth). In the Performance category, Michigan received an average grade mainly because favorable rankings for average annual pay and employer-provided health insurance somewhat offset the negative indicators for employment, annual pay growth, net migration, and income distribution. For Business Vitality, high marks for “strength of traded sector” and job creation by start-up businesses were countered by low marks for industrial diversity and change in new companies. In assessing Development Capacity, the state ranked relatively high in innovation measures such as private research and development, royalties and licenses, and patents issued. However, negative rankings were given for infrastructure indicators (highway performance, bridge deficiency, and urban mass transit), federal research and development, and business created via university R&D.

The commonalities evident in the Michigan report card substantiate the continuing powerful impact of the auto industry. Basically the overall “C” grade for Michigan was achieved because the state was able to rank favorably in average annual pay, employer-provided health insurance, strength of the traded sector, and private research and development. These factors are skewed upward mainly because of the wages paid, benefits provided, export revenue, and research and development provided by the motor vehicle industry. If only infrastructure, business climate, industrial diversity, and employment impact of university R&D were considered, Michigan would fail miserably.

A Happy and Prosperous New Year?
The University of Michigan Institute of Labor and Industrial Relations forecasts additional job losses in excess of 50,000 for 2008 and very weak growth in personal income. Manufacturing jobs are expected to continue to decline and GM announced on January 17th, 2008 plans for further cutbacks and possible plant closings.

There are no quick solutions and it’s true that pessimism entrenches negative perceptions regarding the Michigan economy…but aren’t we already there, failing in objective measures published by national media. It appears that the denial is within the state. Our current policies and initiatives for economic growth and diversity don’t seem to be working. Perhaps, continuing to draw attention to the realities of the Michigan economy will lead to a comprehensive evaluation of our current strategies and a realization that the state is facing a crisis that demands full attention.

Notes:

“2007 Business Facilities Ranking Report available at http://www.businessfacilities.com.

“2007 Development Report Card for States available at http://www.cfed.org/go/drc.