The 3 Rs: Recession, Resources, and Recovery

Edward (Ned) HillDean, Levin College of Urban AffairsCleveland State University

Ohio Economic Development AssociationOctober 14, 2009

Quarterly Real GDP and 12-month percent change in Quarterly Real GDP from 1979(1) to 2009(2)

Edward (Ned) HillSource: US Bureau of Economic Analysis, National Income and Product Accounts, Retrieved Oct 14, 2009 from FRED, St Louis Federal Reserve Bank. Released Sept 30,2009. Recessions are shaded.

Real G

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Real GDP in Billions of $2005

12-month percent change in Real GDP

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Quarterly data, last data point second quarter of 2009 2

Number of people employed in the economy and the Unemployment Rate, monthly 1979 to 2009

Edward (Ned) HillSource: US Bureau of Labor Statistics, Current Population Survey, retrieved from FRED, St Louis Federal Reserve Bank, Oct 14, 2009. Recessions are shaded

Number of JobsUnemployment Rate

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Since the recession started:7.2 million jobs lost (-5.2% of total)Unemployment rate: 4.9% to 9.8%

Recession over? 6 month percent change in GDPForecast data from July 2009 on

Edward (Ned) Hill 4Source: HIS Global Insight and USA Today retrieved September 25,2009

Forecast data

Forecast 2.8%

1/07 1/08 1/09

US

GD

P

forecast of annual percent change in GDP; improving over time

Edward (Ned) Hill 5Source: The Economist, electronic edition, retrieved October 12, 2009 from http://www.economist.com/markets/indicators/displaystory.cfm?story_id=14365843

Glo

bal G

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Edward (Ned) Hill 6Source: Wall Street Journal Sept 25, 2009

Glo

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The 4-week moving average of new unemployment insurance claims usually trends down at the end of recessions—this is encouraging

Edward (Ned) Hill 7

4 w

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Source: Bureau of Labor Statistics, Unemployment Insurance Weekly Claims Retrieved Oct 12, 2009 from FRED, St Louis Federal Reserve Bank .

Weekly data Jan 1968 to Oct 3, 2009

20011990-91

2007-09

1980-821973-751969-70

Lab

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A more localized look at the 4 week moving average of new unemployment insurance claims

Edward (Ned) Hill 8

Peak: April 4, 2009

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Source: Bureau of Labor Statistics, Unemployment Insurance Weekly Claims Retrieved Oct 12, 2009 from FRED, St Louis Federal Reserve Bank .

Weekly data, January 2005 to October 3, 2009

November 2007

Oct 3, 2009

Employment growth will lag

Edward (Ned) Hill 9

1990 recession 9 months long: employment recovered in 32 months

2001 recession 9 months long: employment recovered in 48 months

We are in month 23 of the 2007 recession & will it will last for last 22-24 months. When will employment be fully recovered? A guess is 5 years or 60 months from December 2007—this means 2013.

Lab

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Consumer confidence: Weak recovery beginsDropping since January 2004; Increase March to August

Edward (Ned) HillSource: St. Louis Federal Reserve Bank, FRED, from University of Michigan, http://research.stlouisfed.org/fred2/series/UMCSENT/downloaddata?cid=98retrieved Oct 12, 2009

1966(1)=100Monthly data 01/90 to 08/09

Recessions are shaded10

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CFO economic confidenceFeeling better in May. Time for the next quarter’s data

Edward (Ned) HillSource: The Economist, June 3, 2009 http://www.economist.com/markets/rankings/displaystory.cfm?story_id=13781864

The latest quarterly poll of over 1,000 CFOs, conducted in late May by Duke University in America, Tilburg University in the Netherlands and CFO, a sister publication to The Economist.

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Trade weighed value of the dollar reflects its role as a reserve currency—but gravity is reasserting itself due to trade

Edward (Ned) Hill

Peak Feb 2002129.5

Bottom July 2008 95.4

Feb 2009 111.8V

alu

e o

f th

e d

ollar

Source: St Louis Federal Reserve Bank, FRED, retrieved Oct 3, 2009 12

Credit markets freeze

Sept 15 2007China floats Yuan

Dollar increases as a reserve currency against major industrial currencies; Gains moderate in 2009

Edward (Ned) Hill 13

$ increases in value

$ decreases

in value

Monthly data Jan 1999 to June 2009; Indexed to relative values in January 199 when Euro was floated

Source: St Louis Federal Reserve Bank, FRED, retrieved Oct 14, 2009

Valu

e o

f th

e d

ollar

China floats Yuan

Credit markets freeze

€:$

CA$:US$

£:$

¥:$

Dollar in managed decline against YuanDrops in value against currencies of industrializing nations

Edward (Ned) Hill 14Monthly data Jan 1999 to Sept 2009; Indexed to relative values in January 1999 when Euro was floated

Source: St Louis Federal Reserve Bank, FRED, retrieved Oct 14, 2009

$ increases in value

$ decreases

in value

China floats Yuan

Credit markets freeze

Valu

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ollar

Brazil:$

India:$ Mexico:$

Korea: $

China: $

Auto & light truck sales walked off a cliff with a cash-for-clunkers reboundDecline starts in January 2006; accelerates September 2007; falls apart September 15, 2008; cash for clunkers worked; Annualized monthly auto and light truck sales

Edward (Ned) Hill 15Source: St. Louis Federal Reserve Bank, FRED, from US Bureau of Economic Analysis , retrieved October 12, 2009

Aug 09

Feb 09

Aug 07

June 05

Jan 06

Au

tos

Cars and trucks will be made in the United StatesNorth America remains a big marketUS & Canadian production numbers drop; Mexico climbs

Edward (Ned) Hill 16Source: International Organization of Automobile Manufactures (OICA) http://oica.net/category/production-statistics/2007-statistics/ retried July 1, 2009

In 2008 UAW and CAW membership produced 6.5 million vehicles in North America (52%); Nonunion assembly plants produced 5.9 million (48%) units

Edward (Ned) Hill 17Source: International Organization of Automobile Manufactures (OICA) http://oica.net/category/production-statistics/2007-statistics/ retried July 1, 2009

It is likely that less than 50% of North American production will come from plants organized by the UAW and CAW in 2009 and going forward.

A tale of 4 clusters: Auto assembly in North AmericaOld domestic heartland; New Domestic center I-70 – I-75 crosshair; Southeast Corridor

Edward (Ned) HillSource: Ohio Department of Development, Office of Strategic Research

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Ohio’s economic performanceEcon

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Oh

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Edward (Ned) Hill 20

The economic challenge for the region and Ohio was in late 1990s until the end of the 2001 recession

-10.0

10.0

30.0

50.0

70.0

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110.0

130.0

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1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Year

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Source: Economy.com

Edward (Ned) Hill 21

Why will job growth be slow? The big 5 forces

1. Tyranny of the product cycleo Unbalanced product portfolio weighted toward older

productso Changing competitive advantage of firms

2. Creative destruction —fewer recalls, job growth comes from job creation not revitalization. In the US & Ohio capital investment may be the job creation driver.

3. Productivity Growth —better, faster, smarter, fewer, cheaper; a combination of technology, management and global supply chain integration

4. Legacy work practices and cost uncertaintyo Work ruleso Cost uncertainty—health care, torts, mandates, & energy o Benefits wedge

5. Failed business strategies of three key employers

Econ

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Edward (Ned) Hill 22

Four facts explain the performance of this market areaChanging economic

advantageLow rates of innovation

& entrepreneurship

Failed corporate strategies and old products

Place-based legacy costs

Econ

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:Fou

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Threats and challenges to Ohio

o Low to declining population growtho Does this make economic sense? Is cause and

effect backwards?o Role for targeted talent recruitment—remember the

labor agents of the early 20th Centuryo The threat of becoming an increasingly

commodity-driven economy, dominated by global competitors (China and possibly India)o Why the China model for industrial production is

beginning to break downo How this can fit into Ohio’s revival

o A legacy of outdated labor practices: work rules, legacy costs, and the Industrial Commissiono The antidote is new firms; new industries; new

business cultureo An overall perception of the region as dominated

by industries under stress or in decline (“rust belt” image)o The response has to be opportunity

Econ

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Sit

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pro

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Edward (Ned) Hill 24

Lessons learned

o No “silver bullet” that will turn a slow-moving traditional-based economy into a vibrant, high performance one

o A skilled workforce and strong business dynamics are most highly correlated with regional economic growth

o The pursuit of societal goals, such as racial inclusion and income equality, can enhance growth

o While positively related to growth, locational amenities are not as important as other factors

o A region must overcome “legacy of place” costs

Source: W.E. Upjohn Institute, NEO Dashboard Indicators

Con

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Fro

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Edward (Ned) Hill 25

The competitive advantage of Ohio

o Required areas of product improvemento Education & workforce (incumbent workers)o Entrepreneurial managemento Workplace flexibility

o Areas of demonstrated competitive competenceo Portfolio of productso Portfolio of technologieso Portfolio of regions

Com

peti

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dvan

tag

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Man

ag

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port

folios,

not

bett

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silver

bu

llets

What’s next:Realities

Edward (Ned) Hill

Keys to survival for companies and plantso Flexible workforce and flexible work rules

o Company & supply chain culture will continue to be important

o No debt—leverage is now the company killer

o Long term value of the dollar will influence the health of assembly clusters

Edward (Ned) Hill 26

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The region’s economic health depends on corporate strategies and the portfolio age of the region’s products. Five categories of companies:o Product innovators — Grow the top line of their

income statement without blowing up their cost structure. Can manage continuous product innovation and own intellectual property or have proprietary knowledge.

o Process innovators and global competitors — Manage the middle of their cash statements and ride their product catalogs. Have deployed IT to tighten supply and customer chains. Developing global supply chain.

o Lifestyle firms — Goal is not growth but owner’s control and earning target income. Are not profit maximizers. Frequently have no intellectual property or proprietary competitive advantage.

o One trick ponies — Commodity business dependent on a single business or production relationship.

o Dead and dying companies — Job shops in auction markets.

Con

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Wh

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is y

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r fi

rm?

What’s nextReading the dust storm on the horizon

“Hard to tell from here. Could be buzzards. Could be economic development consultants. Most likely the

chase for stimulus cash”

Edward (Ned) Hill 29