Some Insights to Economic Development Programs in Michigan and Observations

of the Michigan Economy

Presented to

By:Steven Miller

August 13, 2008

Rural Economic Development

Why is Rural Economic Development Important?

• Nearly 80% of Michigan is rural and hosts nearly 20% of its population

• Decreasing share of rural income earned on the farm

• Rural income lags urban income

• High rate of income earned off-farm

• High rates of unemployment

• Farm and rural population is increasingly depending on non-farm economy

Challenges and Opportunities for Rural Economic Development

• Access to venture capital

• Low education attainment and skills gaps

• Consolidation of Community Reinvestment Act (CRA) funds

• Decreasing share of total population

• “In-sourcing” and “Rural sourcing”

• High gasoline prices will likely increase retail demand in non-central regions

What is Economic Development?

• Economic development is a local phenomenon

• Economic development is not economic growth– Economic Development entails qualitative

changes that impact the quality of life– Economic Growth entails quantitative changes

measured in dollars

Local and Regional Development is a Two-Part Equation

• Development = c · rc = capacity

economic, social, technological, and political capacity – the level of functioning of social, political, and organizational structures and leadership

r = resources natural resources, location, labor, capital investment,

entrepreneurial climate, transportation, communications, industrial composition, technology, size and linkages to export markets

Landscape of ED Approaches

• Business attraction “Smokestack Chasing”• Strategic planning• Promoting the development of new

products and services - Entrepreneurship• Business retention• Workforce development• Support services and technical assistance• Quality of life investments

Entrepreneurship as an Economic Development Strategy

• “Smokestack Chasing” has lost favor as an ED approach especially in rural communities.

• Rural emphasis is on developing the economy from within through business facilitation– Locally owned businesses are more likely to purchase

from local suppliers– Locally owned businesses tend to share community

values– Multitude of smaller employers provides more job

stability than a single large employer– Contributes to the quality of life of residents

Quality of Life as an Economic Development Strategy

• It is well documented that quality of life measures impact regional economic development– Wildlife– Recreation– Historic tourism– Creative economy– Agricultural tourism– Retirement destinations

Conclusions

• Economic development is about increasing the quality of life measures within a community.

• Business attraction models of ED are no longer favored and greater focus is on developing growth from within.

• Much focus has been directed at increasing the quality of life and supporting local entrepreneurs.

Scan of the Michigan Economy

Employment By Industry Breakout2007*

Industry MI USNatural Resources and Mining 0% 1%Construction 4% 5%Manufacturing 14% 10%Trade, Transportation, and Utilities 19% 19%Information 2% 2%Financial Activities 5% 6%Professional & Business Services 14% 13%Education & Health Services 14% 14%Leisure & Hospitality 10% 10%Other Services 4% 4%Government 15% 16%

Michigan U.S.

*Source: Bureau of Labor Statistics

U.S. and Michigan Unemployment Rates and GDP Growth

2.3%

1.5%

0.7%-0.3%0.9%

1.3%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Illin

ois

Indi

ana

Mic

higa

n

Ohi

o

Wis

cons

in

Uni

ted

Sta

tes

Average Annual Growth in Real GDP: 2000-2007

2

4

6

8

10

12

14

16

18

1980 1985 1990 1995 2000 2005

Michigan U.S.

U.S. and Michigan Unemployment Rates

Source: Bureau of Labor Statistics

Source: Bureau of Economic Analysis

Michigan’s Employment Situation Appears Bleak

-5

0

5

10

15

20

25

30

90 92 94 96 98 00 02 04 06 08 10

U.S. Employment Total GrowthMichigan Employment Total Growth

Employment Growth Since 1990

Source: Bureau of Labor Statistics

Per

cent

Gro

wth

Michigan’s Tax Base Remains Flat

$-

$5,000

$10,000

$15,000

$20,000

$25,000

Mil

lio

ns

2001 2002 2003 2004 2005 2006

MI State Tax Collections*Nominal Dollars

Other Taxes and Fees

Sales and Use Tax

Net Single Business Tax

Net Individual Income Tax

Sources: 2005-2006 and 2000-2001 Annual Reports of the State Treasurer

*Excludes property Taxes$-

$5,000

$10,000

$15,000

$20,000

$25,000

Mil

lio

ns

2001 2002 2003 2004 2005 2006

MI State Tax Collections*Real 1997-Valued Dollars

Other Taxes and Fees

Sales and Use Tax

Net Single Business Tax

Net Individual Income Tax

Sources: 2005-2006 and 2000-2001 Annual Reports of the State Treasurer

*Excludes property Taxes

Population Growth Rates2000 - 2007

-11.8% - -5.0%

-4.9% - 0.0%

0.1% - 5.0%

5.1% - 10.0%

10.1% - 20.0%

20.1% - 77.5%

Source: U.S. Bureau of the Census

Population Growth Rates

Is a Recession on the Horizon?

0

4

8

12

16

20

1980 1985 1990 1995 2000 2005

30-Year Treasuries1-Year Treasuries

Inverted Yield Curves Have HistoricallyIndicated an Imminent Recession

Source: Federal Reserve Board

Energy Concerns

• High energy costs,– Reduce consumer discretionary spending– Absorb government budgets– Decrease local margins at the pump– Reduce tourism– Impact rural areas with longer travel distances

to destinations– Require industries to retool toward less

energy intensive production methods

How Important is Energy to the Economy?

5

6

7

8

9

10

11

12

13

14

1970 1975 1980 1985 1990 1995 2000 2005

Energy Expenditures as Share of GDP (Percent)

0

500

1000

1500

2000

2500

3000

3500

1970 1975 1980 1985 1990 1995 2000 2005

Energy Expenditures per Person (Nominal Dollars)

While expenditures on energy continue to rise, energy expenditure’s share of total GDP is much lower than late 1970’s and early 1980’s

Source: Energy Information Administration

CPI versus Energy Prices

0

40

80

120

160

200

240

1970 1975 1980 1985 1990 1995 2000 2005

CPI ENERGY GASOLINE

Price Indices

Source: Bureau of Labor Statistics and Energy Information Administration

0

40

80

120

160

200

240

1970 1975 1980 1985 1990 1995 2000 2005

CPIUnleaded GasolineRefiner Acquisition of Crude

Price Indices

Source: Bureau of Labor Statistics and Energy Information Administration

Rural Highways

2.40

2.60

2.80

3.00

3.20

Janu

ary

Febr

uary

Mar

chApr

ilM

ayJu

ne July

Augus

t

Septe

mbe

r

Octob

er

Novem

ber

Decem

ber

Travel Month

Av

era

ge

Da

ily V

eh

icle

-Dis

tan

ce

Tra

ve

led

(B

illio

n M

iles

)

2006

2007

2008

source:Office of Highway P olicy Information, Federal Highway Administration

Rural Tourism Destinations Will Need Re-tooling

The Exchange Rate Impacts the Price at the Pump

Trade Weighted Exchange Index: Broad: Index January 1997=100

8090

100110120130140

2000

:01

2001

:01

2002

:01

2003

:01

2004

:01

2005

:01

2006

:01

2007

:01

2008

:01

Source: Federal Reserve Board

Manufacturing Jobs

• Manufacturing makes up a sizeable portion of a region’s economic base

• One lost manufacturing job is likely to lead to more than one lost job in the region

• The largest manufacturing sectors in distress is the auto and auto-related sectors

Manufacturing Job Growth

-50

-40

-30

-20

-10

0

10

20

30

1970 1975 1980 1985 1990 1995 2000 2005

Midwest: Metropolitan*Midwest: Nonmetropolitan*US: MetropolitanUS: Nonmetropolitan

Metropolitan-Nonmetropolitan Manufacturing EmploymentPercent Change from 1970

Source: Bureau of Economic Analysis

Pe

rce

nt C

an

ge

fro

m 1

97

0

* Includes Indiana, Illinois, Michigan, Ohio, and Wisconsion

Manufacturing Continues to Shrink, but…

Proportion of Manufacturing EmploymentIn Non-Metropolitan Areas

0%

5%

10%

15%

20%

25%

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

US

MI

Proportion of Total Wage and SalaryEmployment In Manufacturing

0%

10%

20%

30%

40%

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

US

MI

Source: Bureau of Economic Analysis

Relative Manufacturing Employment Concentrations

MSA County

No Data Available

Less Manufacturing Intensive

More Manufacturing Intensive

Source: U.S. Department of Commerce, Bureau of Economic Analysis based on Wage and Salary Employment Employment concentrations are relative to non-metro proportion of total W&S employment in manufacturing

Distribution of Rural Manufacturing Centers

Michigan Unemployment Rates

• Between 2000 and 2006– Population 18 to 65 has increased by 234,196– Labor force has declined by 70,833– Essentially, 305,029 nearly 5%, of working age

residents have left the labor force in Michigan since 2000

• It is expected that young Michigan workers are most impacted– Michigan lost 22,515 people aged 18-24 between

2000 and 2005

Sources: Census and Bureau of Labor Statistics

Michigan Unemployment Rates Continue to Exceed the Nation’s

U.S. and Michigan Unemployment Rates

0

1

2

3

4

5

6

7

8

9

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Per

cen

t MI-NonMetro

MI-Metro

U.S.

Source: Bureau of Labor Statistics

Unemployment Rates2007 Annual Average

2.9 - 5.0

5.1 - 6.7

6.8 - 9.1

9.2 - 13.0

Source: Bureau of Labor Statistics: Local Area Unemployment Statistics

Unemployment Rates by County

Housing

• Housing is a store of wealth

• The current mortgage crises has so far been isolated to the subprime market, but there are signs that it is creeping into the prime mortgage markets

• Michigan is less exposed to subprime risk than many states but delinquency rates and foreclosure remain high

Housing Price Indices

Index of Housing Prices

90.0

110.0

130.0

150.0

170.0

190.0

210.0

1995

:1

1996

:1

1997

:1

1998

:1

1999

:1

2000

:1

2001

:1

2002

:1

2003

:1

2004

:1

2005

:1

2006

:1

2007

:1

2008

:1

IL

IN

MI

OH

WI

Source: Office of Federal Housing Enterprise Oversight

Relative Nonmetro to Metro Housing Price Index

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.019

95:1

1996

:1

1997

:1

1998

:1

1999

:1

2000

:1

2001

:1

2002

:1

2003

:1

2004

:1

2005

:1

2006

:1

2007

:1

2008

:1

IL

IN

MI

OH

WI

Source: Office of Federal Housing Enterprise Oversight

Mortgage Stressed States

Source: Wall Street Journal

Rural Health Care and the Elderly

• Rural seniors tend to have lower financial resources than their urban peers.

• Rural seniors self-report lower health quality than urban peers.

• Retiree attraction has been pushed as an economic development strategy.

Percent of Population Over65 Years of Age: 2000

7.1% - 11.0%

11.1% - 14.0%

14.1% - 16.0%

16.1% - 20.0%

20.1% - 25.0%

Source: U.S. Bureau of the Census, Decennial Census

Distribution of Population Over 65-Years of Age

Retirement Destination 15% Growth

Retirement Destination 20% Growth

Metropolitan County

Nonmetropolitan Counties with 15 or 20% or more growth in population

aged 65 or older 1990 – 2000

U.S. average rate is 12 percent growth

Nonmetropolitan Retirement-Destination Counties 2000

Source: Woods and Poole using Census Data

Not a Retirement Destination

Source: EMSI: 2005 Estimates

Number of Healthcare Employees per 1,000 Residents Over 65

0 - 161

161 - 277

277 - 452

452 +

Urban County

Healthcare Providers versus Needs of Elder-Care

Conclusions

• Evidence points to a forthcoming national recession.• Michigan remains steeped in an industrial sector that has

a clear negative growth bias.• Recent statistics indicate that Michigan’s economic

growth tails the nation.• Michigan’s employment sector has experienced declines

since 2001 failing to benefit from the post-2001 national expansion.

• Michigan is loosing a substantial portion of its young population.

Conclusions Cont’d

• Decline of the dollar makes US produced goods more attractive in overseas markets. It also makes the US a more attractive tourist destination for foreign tourists.

• Michigan may be partially shielded against the forthcoming ARM resets, but the state of the economy threatens the economic health of Michigan’s home owners.

• Michigan provides the amenities sought by retirees. However, fully capitalizing on this strength calls for investment in rural healthcare.

•