Battle Creek MSA 2006 and 2007 Economic Forecast

January 13, 2006W.E. Upjohn InstituteGeorge 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 ProductThe expansion is three years old and is still going strong in terms of output.

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2001 2002 2003 2004 2005

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 There is clearly a turnaround in national employment growth; however…growth; however…

-1,000

-800

-600

-400

-200

0

200

400

600

800

2001 2002 2003 2004 2005

Tho

usan

ds o

f job

s

Source: BLS.

National employment increased by 108,000 in December, slightly below expectations.

……manufacturing employment conditions are manufacturing employment conditions are much softer.much softer.

-450

-400

-350

-300

-250

-200

-150

-100

-50

0

50

100

2001 2002 2003 2004 2005

Tho

usan

ds o

f job

s

Source: BLS.

Productivity gains and globalization have taken their toll on the ability of manufacturers to create jobs.

13,000

14,000

15,000

16,000

17,000

18,000

19,000

20,000

50 53 56 59 62 65 68 71 74 77 80 83 86 89 92 95 98 '01 '04 '07

Tho

usan

ds o

f job

s

In December: Manufacturers employed 14.3 million.

Source: BLS.

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

60

70

80

90

100

110

120

130

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Year

Pro

du

ctio

n In

de

x 2

00

2=

10

0

8,000

10,000

12,000

14,000

16,000

18,000

20,000

U.S

. Mfg

Em

plo

yme

nt (

00

0)

Federal Reserve Board Production Index (Manufacturing) U.S. Manufacturing Employment

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.

Philadelphia Fed GDP Forecast

3.73.4

0.0

1.0

2.0

3.0

4.0

5.0

2005 2006

% G

DP

Gro

wth

U of M RSQE GDP Forecast

3.73.4

2.8

0.0

1.0

2.0

3.0

4.0

5.0

2005 2006 2007

% G

DP

Gro

wth

Source: Philadelphia Fed Q3 2005 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.

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2002 2003 2004 2005

Personal savings as a percentage of disposable personal income

Source: BEA

Consumer debt as a percent of income is slowly rising.

10

11

12

13

14

15

16

17

18

19

20

95q2

95q4

96q2

96q4

97q2

97q4

98q2

98q4

99q2

99q4

00q2

00q4

01q2

01q4

02q2

02q4

03q2

03q4

04q2

04q4

05q2

% o

f Pe

rson

al I

ncom

e

Total debt including rent, auto leases, property taxes, and house insurance.

Credit cards & mortgage payments

Consumers keep hanging on, but their confidence is flat.

U.S. Consumer Confidence

020406080

100120140160

2000 2001 2002 2003 2004 2005

Inde

x 10

0 =

198

5

Source: The Conference Board, Business Cycle Indicators.

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1997 1998 1999 2000 2001 2002 2003 2004 2005

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

0

5

10

15

20

25

'98 Jan '99 Jan '00 Jan '01 Jan '02 Jan '03 Jan '04 Jan '05 Jan

Mill

ions o

f U

nits

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 Motor Vehicle Production

0

20

40

60

80

100

120

140

160

180

200

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Veh

icle

s (1

000)

0

20

40

60

80

100

120

Pro

du

ctio

n w

ork

ers

(000

)

Vehicles Employment

Michigan Economic Conditions and Outlook

From 2000 to 2005, Michigan lost over 300,000 jobs.

Total Michigan Employment

4,100

4,200

4,300

4,400

4,500

4,600

4,700

4,800

2000 2001 2002 2003 2004 2005

Source: BLS

Thousa

nds

of

jobs

Unemployment has declined in 2005 but is still relatively high.

Unemployment Rate Trends

0.0

2.0

4.0

6.0

8.0

2000 2001 2002 2003 2004 2005 11-month Avg.

Michigan U.S.

Source: BLS.

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

2000 to 2004 Employment Losses

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

Illinois Indiana Michigan Ohio Wisconsin

Source: BLS.

Michigan’s employment environment is weaker than other parts of the U.S.

I ndex of Total Employment (100 = 2000 average)

90

95

100

105

110

2000 2001 2002 2003 2004 2005

Michigan U.S.

Source: W.E. Upjohn Institute.

Michigan manufacturing employment has underperformed a very weak sector.

I ndex of Manufacturing Employment (100 = 2000 average)

707580859095

100105

2000 2001 2002 2003 2004 2005

Michigan U.S.

Source: W.E. Upjohn Institute.

The private service-providing sector has maintained flat employment in Michigan over the last few years.

I ndex of Private Service Employment(100 = 2000 average)

90

95

100

105

110

2000 2001 2002 2003 2004 2005

Michigan U.S.

Source: W.E. Upjohn Institute.

Any way you look at it, Michigan incomes have declined since 2000.

Michigan Income Trends(Real 2004 $)

$20,000

$30,000

$40,000

$50,000

$60,000

2000 2001 2002 2003 2004

Median household income Median family income

Source: U.S. Census Bureau, ACS estimates.

Michigan’s population is growing slowly—about 0.4% annually.

Michigan Population Trends

9,000,000

9,200,000

9,400,000

9,600,000

9,800,000

10,000,000

2000 2001 2002 2003 2004

Source: U.S. Census Bureau, ACS estimates.

Unfortunately, no quick turnaround to growth is expected for Michigan.

U of M's RSQE Forecast for Michigan

-1.0%

0.0%

1.0%

2.0%

3.0%

Real disposable income Employment

2005 2006 2007

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.

Employment Change Calhoun CountyJan-Nov 2004 to J an-Nov 2005

-600 -400 -200 0 200 400

GovernmentOther

Leisure & HospitalityPrivate Education & Health

Professional & BusinessFinancial Activities

Transport & WarehouseRetail

WholesaleManufacturingTotal Nonfarm

Source: MDLEG

A surprising group of manufacturers may be driving the sector’s growth.

Detailed Sector Employment Change Calhoun County, Q1 2004 to Q1 2005

-400 -300 -200 -100 0 100 200 300 400

Other

Automotive

Machinery

Fabricated Metals

Primary Metals

Printing

Paper

Food

Total Manufacturing

Source: MDLEG, ES-202 series.

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

Percent Unemployment Rate

0.01.02.03.04.05.06.07.08.0

2000 2001 2002 2003 2004 2005 Q3

Calhoun County U.S.

Source: BLS

Calhoun County was outperforming the U.S., but slipped in 2005.

I ndex of Total Employment (100=2000 average)

949698

100102104106

2000 2001 2002 2003 2004 2005

Calhoun County U.S.

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.

Manufacturing Employment I ndex (100=2000 average)

80

90

100

110

120

2000 2001 2002 2003 2004 2005

Calhoun County U.S.

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.

I ndex of Private Service-Providing Employment (100=2000 average)

90

95

100

105

110

2000 2001 2002 2003 2004 2005

Calhoun County U.S.

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.

0%

5%

10%

15%

20%

25%

2001 2002 2003 2004 2005

Battle Creek MSA

U.S.

Calhoun County is growing very slowly—on average, by less than 250 residents per year, or about 0.2%.

Calhoun County Population Trends

135,000

135,500

136,000

136,500

137,000

137,500

138,000

138,500

139,000

139,500

2000 2001 2002 2003 2004

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!

Old 2005 Forecast Comparison

0.4%

0.0%

0.8%

-0.3%

0.1%0.0%

0.2%

-0.3%-0.5%

0.0%

0.5%

1.0%

1.5%

Total Goods-producing

Private service-providing

Government

Last Year's KZ-BC Forecast KZ-BC MSA 2005 Est.

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.

Old 2005 Forecast Comparison

0.3%0.0%

0.6%

-0.3%-0.6%

1.2%

-1.4%-1.9%

-2.0%-1.5%-1.0%-0.5%0.0%0.5%1.0%1.5%2.0%

Total Goods-producing Private service-providing

Government

Last Year's 2005 Calhoun Co. Forecast Calhoun Co. 2005 Est.

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

0.9%

-0.2%

1.5%

-0.1%

1.0%

-0.1%

1.5%

0.1%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

Total Goods-producing

Private service-providing

Government

2006 2007

Calhoun County Employment Forecast 2006–2007

0.7%

1.0% 1.0%

-0.7%

0.3%

1.2%

-0.1%

0.8%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

Total Goods-producing

Private service-providing

Government

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

Automotive Manufacturing Hospitals

Professional& Technical

Direct Employment 100 100 100

Indirect Employment 122 39 57Goods-producing Construction 7 3 3 Manufacturing 11 1 1Services Wholesale Trade 5 0 0 Retail Trade 32 8 12 Finance, Insurance 4 1 1 Profess, Tech Services 9 2 4 Admin, Waste Services 8 9 11 Health Care, Social Asst 6 2 4 Accom, Food Services 12 5 8Government 2 1 2Total Impact 222 139 157Employment multiplier 2.2 1.4 1.6

Employment Impact of 100 new Base Jobs on Calhoun County

However, not all jobs bring in new dollars.

Automotive Manufacturing Hospitals

Professional& Technical

Direct Employment 100 100 100

Indirect Employment 120 -47 10Goods Producing Construction 7 1 2 Manufacturing 10 0 1Services Wholesale Trade 5 0 0 Retail Trade 32 3 9 Finance, Insurance 4 0 1 Profess, Tech Services 9 1 -27 Admin, Waste Services 8 3 8 Health Care, Social Asst 6 -61 3 Accom, Food Services 12 2 6Government 2 0 1Total Impact 220 53 110Employment multiplier 2.2 0.5 1.1

Employment Impact of 100 new "jobs" in Calhoun County

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.

Age CategoryNonmovers and In-state Movers

Migrants from other U.S. States

5 to 18 21.8% 23.1%18 to 24 10.1% 14.6%25 to 34 13.3% 23.6%35 to 44 17.2% 18.5%45 to 54 14.8% 10.4%55 to 64 9.3% 4.1%65 and older 13.5% 5.7%Source: 2000 PUMSAllegan, Barry, Berrien, Calhoun, Kalamazoo, Kent, Muskegon, Ottawa, Van Buren

Age Profile of Southwest Michigan Residents by Migration Status

Movers are better educated than stayers.

Nonmovers and In-state Movers

Migrants from other U.S. States

Dropouts 11.7% 11.5%H.S. Graduates 30.0% 19.8%Some College, No Degree 26.3% 26.9%Associate Degree 9.5% 7.0%Bachelor's Degree 18.6% 26.0%Graduate Degree 4.0% 8.8%Source: 2000 PUMSAllegan, Barry, Berrien, Calhoun, Kalamazoo, Kent, Muskegon, Ottawa, Van Buren

Educational Attainment of Southwest Michigan Adults Age 25 to 34

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, 2006W.E. Upjohn InstituteGeorge A. Erickcek & Brad R. Watts