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Sunday, 06 July 2014 22:00

Manufacturing stagnation ahead? Report predicts little gain in manufacturing employment as GR economy diversifies

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Kent County’s most prevalent manufacturing industries are poised for stagnant employment growth over the next six years.

That’s according to a recent report by the Federal Reserve Bank of Chicago that compared the Grand Rapids area to peer Midwestern cities.

The Fed’s Industrial Cities Initiative (ICI) forecasts relatively flat growth in employment from 2010 to 2020 across Kent County’s most concentrated industries, namely furniture, plastics, rubber and machinery manufacturing. Based on national employment projections from the U.S. Bureau of Labor Statistics (BLS), the ICI report focuses on understanding overarching economic, social and demographic trends within industrial cities across the Midwest.

But local economists say the report undersells the potential of the broader West Michigan manufacturing sector, which could see employment growth of up to 3.1 percent this year, said Paul Isely, economic department chair and professor at Grand Valley State University.

“We are primed right now to do better than the U.S. average in every category that we are competing in — based on the wages, synergies and efficiencies that we are seeing across the region,” he said.

However, the ICI report’s findings on the future of manufacturing in West Michigan are more foreboding.

“Manufacturing employment has declined … and is unlikely to rebound,” the report concludes in a section comparing all the Midwestern cities included in the study.

The report based its findings on BLS data showing that manufacturing employment has declined steadily since 2001 with little recovery in jobs numbers in the years since the trough of the recession even as output grew. But West Michigan economists think the study does not take into account the extent of the industry’s recovery over the last five years.

“The (Fed’s) numbers are saying that we’ve had a bad 14 years — it doesn’t say we are getting better,” Isely said. “We’ve had a bad 10 to 11 years, but the last five haven’t been that bad. It is a big hole to dig out of, and we’ve done that here.”

Isely cited regional data that show from 2000 to 2009, employment in manufacturing declined from 88,900 to 57,200 jobs. But since the bottom of the recession in 2009, manufacturing employment has risen by 12,600 jobs, putting 2014 figures at 69,800, he said.

The manufacturing sector hasn’t seen large gains in employment because it has grown largely through increased productivity, efficiencies and automation, and more companies have outsourced non-essential positions to outside contractors, sources said.

Manufacturing output in West Michigan dropped roughly 10 percent from 2000 to 2012 while employment fell approximately 40 percent, Isely said. Since output dropped less than employment, each dollar of output requires fewer workers, he said.

“Efficiency gains combined with real wage changes means it is less expensive to build things in West Michigan,” he said. “This brings and holds jobs in the area, but doesn’t bode as well for workers.”

Dueling data

The ICI report predicts that output growth will continue to outstrip employment growth over the next six years. While manufacturing employment may increase to some extent, the sector will continue to grow through increased productivity, not headcount, said Dan Difranco, a senior research analyst at the Federal Reserve Bank of Chicago.

“The next 10 years in manufacturing will be driven by productivity rather than employment,” Difranco told MiBiz.

GVSU’s Isely agreed that manufacturing output will continue to improve, but he said he expects employment levels to grow beyond what the ICI report expects. As both metrics continue to improve, it will provide further evidence of the recovery in the manufacturing sector, he said.

In particular, the automotive supply chain will continue to be a driver of the area’s manufacturing growth and broader economy, said George Erickcek, a senior regional analyst with the W.E. Upjohn Institute for Employment Research in Kalamazoo. That’s because the auto industry remains primed for expansion based on rising demand, low interest rates for vehicle loans and an old fleet of vehicles currently on the road, Erickcek said.

There’s also good news for the region’s office furniture sector, which is expected to be buoyed by a strengthening of the national economy in the coming years, according to the Business and Institutional Furniture Manufacturers Association (BIFMA).

The industry group’s latest quarterly data projects $9.8 billion in production for 2014, a 4.8 percent increase from last year. The production forecast for 2015 is even more optimistic with an 8.8 percent increase to $10.6 billion.

The growth comes as welcome news after several years of sluggish performance for the sector.

“The furniture industry has historically always lagged in the recovery,” Erickeck said. “No one wants to buy new chairs and tables in a recession, so there are typically no increases in office furniture sales up to four years in a business cycle. Now that we are in the fourth or fifth year of our expansion, we expect office furniture sales to incline.”

Kent County’s concentration of office furniture manufacturers is six times the national average, the ICI report stated.

Growth in services shows diversification

While West Michigan’s economy is typically characterized as manufacturing-based, the ICI report shows the area is shifting toward a more diverse economy by transferring growth to service-oriented industries.

The top five industries in Kent County ranked by employment are in the service and medical sectors, the report stated. Administrative and support services account for 11.38 percent of total employment in Kent County. In contrast, the furniture industry employs approximately 1.95 percent of the local workforce.

The Fed also expects output growth in the service industries to outpace that of manufacturing. Output in the professional/technical services followed by administrative/support services are expected to lead this growth at rates of 3.6 and 3.4 percent, respectively.

A portion of the shift can be chalked up to investments made in health care and growing concentrations of food-related industries, said Erickcek of the Upjohn Institute.

Yet job growth in the service sector could also be a factor of manufacturers outsourcing more functions these days, economists said. The service sector now includes jobs in IT and other support services that were once counted as in-house manufacturing positions. However, manufacturers shed those jobs and contracted with other companies for those same functions as they looked to increase efficiencies and cut fixed costs, Isely said.

Representatives from the Fed acknowledge that a portion of the gains in support services could be from a shift in manufacturing functions, but not at a level that can account for all of the sector’s gains.

“I would just say that when you see the growth reported by the BLS, you should take that at face value,” Difranco said.

Jere Boyle, managing director of economic development at the Federal Reserve Bank of Chicago, sees the strengthening in service sectors relative to manufacturing as evidence that cities across the Midwest are diversifying their economies.

“Cities that are doing better — Grand Rapids being one of them — are the ones that are figuring out how to build a base from manufacturing to diversify the economy and expand job-creating activities,” Boyle told MiBiz. “As a group of cities, they cannot rely on an employment base in manufacturing to grow the economy.”

 

Read 2679 times Last modified on Wednesday, 13 August 2014 10:40

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