New Generation–Creating 20/20 Vision–what can a near-sighted economist contribute? George A. Erickcek W.E. Upjohn Institute for Employment Research July 17, 2014

Outline • Short-term situation: – The economy truly stalled during the first quarter and no one cares – The employment situation is improving – Consumer and business confidence is improving – Michigan’s employment trends are very strange, but its love affair with autos continues

• Long-term thoughts – Demographics, innovation and support 1

GDP fell by nearly 3 percent in the first quarter—what happened? Gross Domestic Product and Nonfarm Employment 1,500 1,000

4.0

500 2.0

0 -500

0.0 -2.0

Forecast

-1,500

Why is this being ignored?

-4.0

-1,000

Employment change (000s)

Percentage change in GDP

6.0

-2,000 -2,500

-6.0 09 Q1

10 Q1

11 Q1 GDP

12 Q1

13 Q1

Nonfarm employment

Source: BLS, BEA, U of M RSQE June 17, 2013.

14 Q1

15 Q1 2

Everyone stayed inside and turned up the heat and businesses raided their warehouses Major Activity Contribution to GDP Change in Current Quarter

0.5

-1.0 -1.5

Services

-0.5

Nondurable

0.0

Durable

Percentage GDP

1.0

Inventory

Nonresidential

1.5

Residential

2.0

-2.0 -2.5 Personal consumption

Investment

Net export

Government 3

We have finally gotten all the jobs back nationwide Total Employment Index (100 = 2000 average) 110 105 100 95

However, the nation’s labor force has grown by 1.8 million workers, and the labor participation rate dropped from 66 percent to 62.8 percent.

90 85 80 2000

2002

2004

2006

2008

2010

2012

2014

U.S. Source: BLS and Upjohn Institute.

4

The first quarter’s output numbers are being ignored because of the improving job figures U.S. Job Openings and New Hires 5,000

8 Job openings at end of month

7

Thousands (000s)

4,000

6

3,500 3,000

5

2,500

4

2,000

3

1,500

2

1,000

1

Job seekers per opening

500 0 2006

2007

2008

Unemployed / job openings

4,500

0 2009

2010

Source: BLS Job Opening and Labor Turnover.

2011

2012

2013

2014 5

People are finding jobs and the number of longterm unemployed persons is dropping slowly 12

50 45

Unemployment rate

10

40 35

8

30

6

25 20

4

15 10

2

5 0

0 2009

2010 Unemployment rate

2011

2012

2013

Percentage unemployed 27 weeks or more

U.S. Unemployment Rate and Long-Term Unemployment

2014

Percentage unemployed 27 weeks or more

Source: BLS Job Opening and Labor Turnover.

6

Consumer confidence is rising as is household debt, however… Consumer Confidence and Change in Consumer Debt 30.0

90

25.0

80

20.0

Billions ($)

15.0

60

10.0 5.0

50

0.0

40

-5.0

30

-10.0

Index: 1995 = 100

70

20

-15.0 -20.0

10

-25.0

0 2009

2010

2011

Consumer debt

2012

2013

2014

Consumer confidence

Source: New York Federal Reserve and Conference Board.

7

The Fed is slowing its bond purchases but interest rates are holding steady Interest Rates and Inflation 6.0

Annual percentage rate

5.0 4.0

30-year mortgages

10-year Treasury bill

3.0 2.0 1.0 3-month Treasury bill

0.0 -1.0 12-month change in CPI-U

-2.0 -3.0 2009

2010

2011

2012

Source: New York Federal Reserve and BLS CPI.

2013

2014 8

The financial situation is stable but clearly not robust

Net percentage of respondents

Federal Reserve Senior Loan Officers Survey: Demand and Lending Standards for Commercial and Industrial Loans by Medium-to-Large Firms 100 80 Reporting tightening standards 60 40 20 0 -20 -40 -60 Reporting stronger loan demand -80 -100 2009 Q1 2010 Q1 2011 Q1

2012 Q1

2013 Q1

2014 Q1 9

Corporate profits are still high and the employment gap is closing 100%

14%

98%

12%

96%

10%

94% 92%

8%

90%

6%

88%

4%

86% 84%

2%

82%

0%

Employment rate

Corp. profits pct. of GDP

Employment rate

Employment Rate and Corporate Profits

Corporate profits 10

The dollar is holding its value and our trade balance remains negative but is stable U.S. Trade Balance and Nominal Index of the Value of the Dollar against Seven Major Currencies 0

90

-10,000

85 80

-20,000

Major currencies' dollar index

75

-30,000

70

-40,000

65

-50,000

Trade balance

60

-60,000

55

-70,000

50 2009

2010

2011

2012

2013

2014 11

So let’s sum up • The economy stumbled in the first quarter but no one seems to care • Employment has finally recovered however the labor force has increased by 1.8 million workers and labor participation rates are still low • Confidence is growing but loan demand remains flat • The Fed will continue to slowly ease its purchasing of bonds but will likely keep interest rates low

12

Looking toward 2020 • It is possible that this slow-growth environment may continue for the next five years: – Washington, DC, will likely remain deeply divided which will allow only modest policy proposals to be passed – The Federal Reserve will keep its focus on employment as long as inflation remains quiet, suggesting that interest rates will remain low – The income inequality situation will likely remain unchanged and will be a drag on the economy because of a lack of a strong middle class 13

Michigan employment trends • Employment increased by 54,000 jobs in 2013

– Manufacturers added 17,800 jobs during the year – If you are willing to assume an employment multiplier for manufacturing of three, all of the state’s employment growth in 2013 was due— directly and indirectly— to its manufacturers

Source: University of Michigan.

14

Michigan employment trends • University of Michigan is forecasting an increase of 66,700 jobs in 2014 and another 65,000 in 2015 • During the first five months of 2014 employment slipped by 1,100

Source: University of Michigan.

15

Employment in the state increased by 54,000 jobs in 2013 Employment Change, 2012 to 2013 25

Manufacturing

Job change (000s)

20 Prof., tech.

15 Retail trade

Health care Hospitality

10 5 0 -5

Transport., util. Finance

Construction Wholesale

Admin. and support Arts, ent., rec.

Other serv.

Management Information Educ. services Real estate Government

-10 Source: BLS CES.

16

The state’s unemployment rate has improved and now stands at 7.5 percent Unemployment Rate 16

Percent of labor force

14 12 10 8 6 4 2 0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: BLS LAUS.

17

However, the state has not yet recovered from the recession • Statewide, employment lost 408,200 jobs during the Great Recession, and has gained 288,300 back during the recovery so far • In other words, the state is still short 120,000 jobs • In manufacturing the loss is 41,200 jobs

18

Auto sales continue to pick up and are forecast to drive past 16 million units in 2014 24

15.5 million units in 2013

22 20

Units (millions)

18 16 14 12 10 8 6 4 2 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: BEA.

19

A deeper fall but following Great Lakes trends Total Employment Index (Dec. 2007 base period) 115 110 105 100 95 90 85 80 2000

2002

2004

2006 U.S.

2008

Michigan

Source: BLS and Upjohn Institute.

2010

2012

2014

GLS 20

Lagging in services to the other Great Lakes states Private Service-providing Employment Index (Dec. 2007 base period)

105 100 95 90 85 2000

2002

2004

2006 U.S.

2008

Michigan

Source: BLS and Upjohn Institute.

2010

2012

2014

GLS 21

A boost in employment due to autos Index of Manufacturing Employment (Dec. 2007 base period)

160 140 120 100 80 60 2000

2002

2004

2006 U.S.

2008

Michigan

Source: BLS and Upjohn Institute.

2010

2012

2014

GLS 22

A very slow comeback Change in employment levels during and after the recession, and pre-recession to current level change (Employment in 1,000s)

Total

GLS

Michigan

U.S.

-1,091.3 (-7.4%)

-405.4 (-11.3%)

-7,606 (-6.6%)

811.4 (5.5%)

332.8 (9.3%)

8,242 (7.1%)

Employment gap

-279.9 (-1.9%)

-72.6 (-2%)

636 (0.5%)

Recessionary loss

-496.9 (-3.5%)

-205.8 (-5.9%)

-3,852 (-3.3%)

562 (4%)

155.3 (4.5%)

6,953 (6%)

65.1 (0.5%)

-50.5 (-1.5%)

3101 (2.7%)

-437.6 (-17.7%)

-165.3 (-27.3%)

-2,020 (-14.7%)

176.4 (7.1%)

120.2 (19.8%)

379 (2.8%)

-261.2 (-10.6%)

-45.1 (-7.4%)

-1,641 (-11.9%)

Recessionary loss Post-recession gain

Services

Post-recession gain Employment gap

Manufacturing

Recessionary loss Post-recession gain Employment gap

Source: BLS and Upjohn Institute.

23

So what does this mean for 2020? • Economically, Michigan will be a “smaller” state – less employment and a smaller share of the nation’s population • It is reasonable to be believe that car sales could plateau at 16+ million units and stay there for the next 5 years providing a solid floor for the state economy • The state’s population will be older 24

Projected demographic change in the state Population Profile 3,500

Population (000)

3,000 2,500 2,000 1,500 1,000 500 0 1990

1995 0-19

2000 20-34

2005

2010

35-49

Source: W.E. Upjohn Institute REMI Model.

50-64

2015

2020

65-79

2025

2030

79+ 25

Demographic change in the state – dependency population Population Profile 3,500

Population (000)

3,000 2,500 2,000 1,500 1,000 500 0

1990

1995

2000

2005

0-19

2010

65-79

Source: W.E. Upjohn Institute REMI Model.

2015

2020

2025

2030

79+ 26

Demographic change in the state– working-age adult Population Profile 2,500

Population (000)

2,000 1,500 1,000 500 0

1990

1995

2000

2005

20-34

2010 35-49

Source: W.E. Upjohn Institute REMI Model.

2015

2020

2025

2030

50-64 27

So what? • The number of kids will slowly rise • The number of 20- to 35-year-olds is growing in the state – Back to the city movement and place making activities – Future demand on the schools – Retraining needs • A growing elderly population – active and older – Changing consumer patterns – Financially conservative 28

So what? • Working age adults—experienced workers are leaving the stage and it is unclear if younger workers will take their place – Construction and manufacturing will face shortages if they can’t attract younger workers

• A growing elderly population – active and older – Changing consumption patterns – Budget minded 29

To boldly go where data do not exist • Targeting industry strategies are very risky; this includes the “Blue Economy” movement – Only exception is targeted strategies based on expected demographic change • Our current short-term thinking environment is not conducive to innovation • There needs to be an organization that will be in the state for the long-run and is interested in creating an innovative environment – It cannot be government – It cannot be an economic development organization or foundations 30

Innovation and the production cycle • Concentrated on expansion and not attraction • Not industry specific –focuses on the health of the firm and its products • Based on the belief that regions must constantly change from what they have been producing to What the Changing World Needs

31

Stages in a firm’s products’ life cycle Stage 1: Birth—An environment of entrepreneurship Stage 2: Product development and wealth creation—An environment for success Stage 3: Product standardization—Low-cost, competitive environment Stage 4: Death—An environment of abandonment

32

Stages in a firm’s products’ life cycle: old firms can become young again Stage 2: Product development and wealth creation—An environment for success Stage 3: Product standardization— Low cost, competitive environment

Is there a role for Consumers Energy in helping firms to make this leap back in time? 33

New Generation–Creating 20/20 Vision–what can a near-sighted economist contribute? George A. Erickcek W.E. Upjohn Institute for Employment Research July 17, 2014