Howes: Rebound in autos, economy buoys sentiment in MI
The last time Charles Ballard’s State of the State survey found so much enthusiasm over Michigan’s economy, John Engler was governor, Bill Clinton was president and Detroit’s automakers were minting money.
That was 16 years — and another era — ago. In between came the Great Recession and epic reckonings that buried for good post-war economic expectations birthed in the affluent 1950s and ’60s, a rigid template ill-suited to parrying foreign competition and changing market dynamics.
Two of Detroit’s three automakers collapsed into federally induced Chapter 11. The state lost nearly 1 million jobs. The city successfully negotiated the largest municipal bankruptcy in American history. In response, pragmatic political leaders are combining with new civic and business leadership, and reinvestment in Detroit, to redirect the economic arc of the state.
In Michigan State’s spring survey, released Wednesday, 60 percent of the respondents rated their financial situation as good or excellent, and 66 percent predicted things would be even better next year — the most positive such sentiment since 1999.
“We’re much better situated than we were,” Ballard, a professor of economics and director of the State of the State survey, said in an interview. “The American auto companies ... 20 years ago developed a cost structure that was difficult to sustain. They had such big legacy costs. Their margins looked really good in 1999.”
Until they didn’t. The next decade traced a downward spiral that claimed jobs, plants and expectations of entitlement, culminating in a searing recession here. Michigan created 450,000 jobs in the following rebound and made meaningful strides in diversifying its economy; but employment still is roughly 400,000 jobs below total jobs in 2000.
Hardest hit is the bottom half of the income distribution, Ballard said. The Great Recession erased gains in inflation-adjusted household income, delivering “very little progress” from the 1970s to 2013, a reminder that the good times reflected in the sentiment of the Michigan State survey and Comerica Bank’s Michigan Economic Activity Index are not necessarily widely shared.
But the macro trends are promising. A meaningful high-tech sector is developing in Detroit. Business leaders are investing private capital in Detroit, reversing a decades-long exodus. Agricultural production, as well as a burgeoning brewing industry, are becoming meaningful contributors to the state economy.
Prices in housing, devastated by the recession, are rebounding to pre-crash levels thanks, in part, to cheap mortgage money. The average age of cars and trucks now is 11.5 years, IHS Automotive reported this week, signaling steady demand for replacement metal. More competitive cost structures and more realistic leadership benefit an auto industry that still is the spine of Michigan manufacturing and technology.
“These are still colossal companies,” Ballard continued, referring to General Motors Co., Ford Motor Co. and FCA US LLC’s Chrysler unit. “But my sense is they’re more nimble than they were — by a lot. They’re not perfect, but the break-even point is a whole lot better.”
That can make bad times like 2008-2009 easier to weather without making devastating cuts in people and products. In good times like now, lower break-even thresholds can be a license to print money, very big money, as second quarter earnings reports demonstrate.
Powered by North America, Ford booked a record pre-tax profit of $2.9 billion in the April-through-June quarter, mirroring GM’s $2.9 billion profits. FCA is expected to report strong results Thursday, though likely not as rich as those delivered by its cross-town rivals.
Is it 1999 all over again?
Let’s hope not; hope is not a strategy. Two things are different today: First, the uncompetitive, capital-destroying structures found in the Detroit automakers and the city’s municipal apparatus have been restructured, their balance sheets leaner and more flexible.
Second, generational change produced a new cadre of leaders in business and politics who know well Detroit’s legacy of confrontation and uncompetitiveness. They generally (and wisely) let neither inform their decision-making nor their bias for action over excuses.
Think Gov. Rick Snyder and Mayor Mike Duggan. Or GM CEO Mary Barra and Quicken Loans Inc. Chairman Dan Gilbert. Think continuing enthusiasm for Detroit or an increasingly bipartisan approach to tackling intractable problems, from the city’s debt-riddled books to the “grand bargain” that protected the Detroit Institute of Arts’ collection and bolstered pensions for city retirees.
It’s all one gigantic start, turbo-charged by a rising national economic cycle. But there are no guarantees “another catastrophe,” to borrow Ballard’s phrase, won’t happen again. If and when it does, Michigan, its largest city and its automakers should be better equipped for it.
Daniel Howes’ column runs Tuesdays, Thursdays and Fridays and can be found at http://detroitnews.com/staff/27151.