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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! Northeast Ohio Regional Day VI 2 Real Tombstones Northeast Ohio Regional Day VI 3 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 Northeast Ohio Regional Day VI 4 Market activity from Barrons Corporate Debt Friday, October 24, 2008 None expected this week. Northeast Ohio Regional Day VI 5 Commercial Paper Outstanding Source: Board of Governors of the Federal Reserve System Northeast Ohio Regional Day VI 6 Discount rate spread in the commercial paper market Source: Board of Governors of the Federal Reserve System Northeast Ohio Regional Day VI 7 Source: Cleveland Federal Reserve Bank Northeast Ohio Regional Day VI 8 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 Northeast Ohio Regional Day VI Source: Wall Street Journal Market Data Center, October 29, 2008 9 Northeast Ohio Regional Day VI 10 Ohio is America’s economic battleground Economic performance: Northeast Ohio’s economic performance Northeast Ohio Regional Day VI 11 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 Northeast Ohio Regional Day VI Notes: GMP = Gross Metropolitan Product GSP = Gross State Product 12 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 Northeast Ohio Regional Day VI Source: US Bureau of Economic Analysis, October 2,2008 Rank 158 259 55 281 62.5 13 150.0 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 Northeast Ohio Regional Day VI 14 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 Northeast Ohio Regional Day VI 6.9 15 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% Northeast Ohio Regional Day VI 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% 16 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 Northeast Ohio Regional Day VI 17 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 Northeast Ohio Regional Day VI IT intense Auto Metal *Compound Annual Growth Rate (CAGR) is the year-overyear growth rate of an output over a specified period of time 18 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 Northeast Ohio Regional Day VI Auto Metal 19 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 Northeast Ohio Regional Day VI Place-based legacy costs 20 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 Northeast Ohio Regional Day VI 21 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 Northeast Ohio Regional Day VI 22 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.” Northeast Ohio Regional Day VI 23 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. Northeast Ohio Regional Day VI 24 Focus on workforce Workforce challenges STEM education Fast growth management Technical training Innovation practices Workplace literacy & numeracy Process improvement Northeast Ohio Regional Day VI 25 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 Northeast Ohio Regional Day VI Source: W.E. Upjohn Institute, NEO Dashboard Indicators 26 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 Northeast Ohio Regional Day VI 27 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 Northeast Ohio Regional Day VI 29 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. Northeast Ohio Regional Day VI 30 Northeast Ohio Regional Day VI 31