Download Northeast Ohio’s Economic Development Challenge

Northeast Ohio’s Economic Development Challenge
Edward W. (Ned) Hill
Vice President for Economic Development
Cleveland State University
Interim Dean, Levin College of Urban Affairs
I dreamed that I was an economist and I had to explain what
happened!
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Real Tombstones
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What is the outlook?
o Liquidity trap, credit crunch
o Macroeconomic problems affects core domestic sectors in
Ohio:
o Automobile assembly
o Housing related
o Construction and building materials
o Furniture
o Chemicals
o Public policy and pricing favors:
o Energy
o Food processing—well growing
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Market activity from Barrons
Corporate Debt
Friday, October 24, 2008
None expected this week.
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Commercial Paper Outstanding
Source: Board of Governors of the Federal
Reserve System
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Discount rate spread in the commercial paper market
Source: Board of Governors of the Federal
Reserve System
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Source: Cleveland Federal
Reserve Bank
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Oil: Peak $145, now $68.50
140
June 1: $133.93
120
Aug 1:$116.60
Price per barrel ($08)
100
80
60
40
20
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
0
Year(month)
Source: St Louis Federal Reserve Bank,
download October 29, 2008
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Source: Wall Street Journal Market
Data Center, October 29, 2008
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Ohio is America’s economic battleground
Economic performance:
Northeast Ohio’s economic performance
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NEO is a sizeable economy
Economic performance:
How big is the regional economy? Think of NEO as the 17th
largest metro economy in the US. Or, if we were a nation, the
37nd largest national economy
Cleveland
Akron
Canton
Youngstown
NE Ohio
2006 GDP
($2001 million)
88,982
22,895
10,987
14,955
137,819
Rank
26
74
135
109
17
If Northeast Ohio were recognized as an economic region we
would rank behind:
o San Diego
Ahead of:
o Austin-San Antonio, Denver, St. Louis, Charlotte, Portland
Source: US Bureau of Economic
Analysis, October 2,2008
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Notes: GMP = Gross Metropolitan Product
GSP = Gross State Product
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NEO is a sizeable economy
Economic performance:
Metropolitan per capita income in 2006
There are challenges
Akron
Canton
Cleveland, Mentor, Lorain
Youngstown
US Metros
Real $2001 out of 363 metropolitan areas
GDP $2001
2006
per capita income
32,702
26,971
42,265
25,937
41,510
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Source: US Bureau of Economic Analysis, October 2,2008
Rank
158
259
55
281
62.5
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150.0
United States
130.0
% change GDP from 1990
GDP growth rates trail the nation
Economic performance:
The economic challenge for the region and Ohio was in late
1990s until the end of the 2001 recession
110.0
Ohio
90.0
Cleveland
-Akron
CSA
70.0
50.0
30.0
10.0
-10.0
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Year
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Statewide manufacturing is a driver
Economic performance:
Manufacturing's death in Ohio has been greatly exaggerated
and overly anticipated
Percent change from 2001 to 2006
Total
Manufacturing Nonmanufacturing
Real GDP
6.3
6.0
6.4
Employment
-2.2
-16.8
0.9
Percent change from 2001 to 2007
Total
Real GDP
6.7
Manufacturing Nonmanufacturing
5.9
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6.9
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Why manufacturing?
Productivity gain from manufacturing in Ohio led the state’s weak
recovery from the 2001 recession
United States
Year
2001
2002
2003
2004
2005
2006
2007
Source: US Bureau of Economic
Analysis, October 2, 2008
Total
9,836,576
9,981,850
10,225,679
10,580,223
10,899,704
11,240,107
11,467,503
16.6%
Mfg
1,346,866
1,384,377
1,400,092
1,478,319
1,492,984
1,536,573
1,571,679
16.7%
Ohio
Mfg as %
Total
13.7%
13.9%
13.7%
14.0%
13.7%
13.7%
13.7%
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Total
365,735
373,457
378,719
387,436
389,956
388,921
390,334
6.7%
Mfg
75,961
80,612
79,307
83,240
82,096
80,554
80,443
5.9%
Mfg as %
Total
20.8%
21.6%
20.9%
21.5%
21.1%
20.7%
20.6%
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Legacy of place
Economic performance:
Why is job growth so slow? The big 5 forces
1.
Tyranny of the product cycle
o
o
Unbalanced product portfolio weighted toward older products
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 uncertainty
o
o
o
5.
Work rules
Cost uncertainty—health care, torts, mandates, & energy
Benefits wedge
Failed business strategies of three key employers
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Northeast Ohio's Output Portfolio
Ohio Growth
Corporate and Division
Headquarters
10.0%
Strong Economic
Base
Drivers in good health
Important Supplier
Base
Drivers that need a
transformation in
Ohio
Traditionally
Competitive Base
Drivers with
challenged
strategies
Hospitals
Banking
Ohio Competitiveness
5.0%
Metal Wholesalers
Insurance
Carriers
0.0%
Other Electrical
Equipment
Spring & Wire
-10.0%
0.0
1.0
Nonferrous Metal
Production and Processing
Steel Product
Other Support Activities
for Transportation
Boiler, Tank,
and Shipping Container
Forging and Stamping
Coating, Engraving,
Heat Treating
Motor Vehicle
Body and Trailer
-5.0%
Other Fabricated
Metal Product
Cutlery and Handtool
Other Transportation
Equipment Chemistry*
Environmental
Technology
Machine Shops
Fo
un
dr
ie
s
Northeastern Ohio Output Growth Rate (CAGR 2000-2006)
Portfolio of economic drivers from 2000 - 2006
Economic performance:
15.0%
Growth Opportunity
Base
Drivers to build
on in Ohio
Metalworking
Machinery
'Motor Vehicle Parts
Motor Vehicle
Alumina and Aluminum
Production and Processing
2.0
Iron and Steel Mills
Household Appliance
Electric Lighting
Equipment
3.0
4.0
5.0
6.0
7.0
8.0
Northeastern Ohio Competitiveness (2006 Output Location Quotient)
*Chemistry combines five related industries: Soap, Cleaning Compound, and Toiletries (NAICS 3256), Rubber Product (NAICS 3262),
Paint, Coating, and Adhesive (NAICS 3255), Clay Product & Refractory (NAICS 3271), and Other Nonmetallic Mineral Product (NAICS 3279)
= $1B in 2006 Output
Source: Economy.com
Miscellaneous
Chemistry
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IT
intense
Auto
Metal
*Compound Annual Growth Rate (CAGR) is the year-overyear growth rate of an output over a specified period of time
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Northeast Ohio's Job Portfolio
Banking
10.0%
Northeast Ohio Output Growth Rate (CAGR 2000-2006)
Portfolio of economic drivers from 2000 - 2006
Economic performance:
15.0%
Hospitals
Metal Wholesalers
Metalworking
Machinery
Other Transportation Equipment
Corporate and Division
Headquarters
Other Fabricated
Metal Product
5.0%
Nonferrous Metal
Production and Processing
Insurance Carriers
Chemistry*
Environmental Technology
Steel Product
Forging and Stamping
0.0%
Machine Shops
Foundries
'Coating, Engraving,
Heat Treating
Cutlery and Handtool
Motor Vehicle Parts
'Motor Vehicle
Body and Trailer
Other Electrical Equipment
-5.0%
Household
Appliance
Spring
& Wire
Other Support Activities for
Transportation
Iron and Steel Mills Alumina and Aluminum
Production and Processing
Motor Vehicle
Electric Lighting Equipment
Boiler, Tank, and
Shipping Container
*Compound Annual Growth Rate (CAGR) is
the year-over-year growth rate of
an output over a specified period of time
-10.0%
-14.0%
-12.0%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
Northeast Ohio Job Growth Rate (CAGR 2000-2006)
*Chemistry combines five related industries: Soap, Cleaning Compound, and Toiletries (NAICS 3256), Rubber Product (NAICS 3262),
Paint, Coating, and Adhesive (NAICS 3255), Clay Product & Refractory (NAICS 3271), and Other Nonmetallic Mineral Product (NAICS 3279))
Source: Economy. com
= $1B in 2006 Output
Miscellaneous
Chemistry
IT
Intense
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Auto
Metal
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Four facts explain the performance of this market area
Low rates of innovation &
entrepreneurship
Four observations
Economic performance:
Changing economic advantage
Failed corporate strategies and old
products
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Place-based legacy costs
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Site location professionals
Economic perceptions:
Strengths and opportunities in NEO
o Network of population centers, each with unique
characteristics and operating environments
o Depth in professional services industries, including banking,
insurance, and medical services
o Depth in traditional manufacturing and technical skill sets
o Diversity of manufacturing (food, chemicals, automotive,
etc.)
o Educational resources
o Air access, particularly its status as a Continental hub
o History as a strong headquarters location (in particular, in
banking and insurance)
o Strong cultural institutions
o Multimodal freight transportation
o Strong tradition in research and scientific initiatives
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Site location professionals
Economic perceptions:
Threats and challenges to NEO
o Low to declining population growth
o Does this make economic sense? Is cause and effect
backwards?
o Role for targeted talent recruitment—remember the labor
agents of the early 20th Century
o The threat of becoming an increasingly commoditydriven economy, dominated by global competitors
(China and possibly India)
o Why the China model for industrial production is beginning
to break down
o How this can fit into NE Ohio’s revival
o A legacy of organized labor: work rules & legacy costs
o The antidote is new firms; new industries; new business
culture
o 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
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Regional business leaders
Economic perceptions:
What local business leaders in the region say
o Ingrained mindset: “The culture of Northeast Ohio is
resistant to change.” “It’s very difficult to do business in
Northeast Ohio. [Workers] see the company as the
enemy.”
o Unions: Unions are seen as being averse to change, or
slow to change, because of internal political pressures.
This is a perception that the panelists consider
detrimental to the area because it seems so out of sync
with today’s rapidly changing world.
o Finance: “As bankers, it’s tough to get our arms around
and get behind how older industries are trying to
innovate.”
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Regional business leaders
Economic perceptions:
What local business leaders in the region say
Workforce: That aging workforce bodes problems for the future.
o Most praise their incumbent workers, and many say they are able
to hold onto these prized workers by compensating and treating
them well.
o The difficulty, they said, is in finding replacement workers with
the right skills, attitude, and ethic.
o Moving to Northeast Ohio is viewed as too risky a prospect for
managers experienced in leading entrepreneurial companies
because they see few other opportunities in the area. “If the
venture fails, they have nowhere to go with their skill sets.”
o Manufacturing companies with new operations in the Southwest
state that the Economic Development service and training
programs are superior in the Southeastern states but that work
ethic is superior in Ohio.
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Focus on workforce
Workforce challenges
STEM
education
Fast growth
management
Technical training
Innovation
practices
Workplace literacy &
numeracy
Process
improvement
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From the academic literature
Conclusions:
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
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Ohio Regional Day VI
Source: W.E. Upjohn Institute, NEO Dashboard
Indicators
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Regional business leaders
Economic perceptions:
Observations—required changes in business behavior
o Business strategy needs to shift to top line revenue growth,
while maintaining middle line cost discipline
o “There is a difference between a lean organization and an
anorexic organization.”
o “You cannot starve yourself to health.”
o “If you cannot export in this dollar environment you have a
problem.”
o “In product innovation there should be no such thing as
failure, only feedback. You need a system of constant and
low cost feedback.”
o “Fail fast; fail cheap.”—Doug Hall
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What is Northeast Ohio’s competitive advantage?
Managing portfolios, not betting on silver bullets
Competitive advantage:
The competitive advantage of Northeast Ohio
o Portfolio economy: mix of what Baumol, Litan, & Schramm
call large firm capitalism & emerging entrepreneurial
capitalism
o Required areas of product improvement
o Education & workforce (incumbent workers)
o Entrepreneurial management
o Workplace flexibility
o Areas of demonstrated competitive competence
o
o
o
o
o
Headquarters, insurance, banking & health care
Materials production/fabrication
Chemistry
Industrial design
Secondarily: logistics
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Where is your firm?
Conclusion:
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.
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