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Published in Economic Development

Post-pandemic supply chain shifts could boost state’s industrial economy

BY Sunday, December 20, 2020 06:05pm

Michigan’s economy could stand to benefit in the years ahead as manufacturers move to reshore work to the U.S. after dealing with severe disruptions in their foreign supply chains when the coronavirus first surfaced in China.

Reshoring industrial supply chains from overseas marks one opportunity that West Michigan has in 2021 and the years ahead, according to Jim Robey, director of regional economic planning services at the Kalamazoo-based W.E. Upjohn Institute for Employment Research

The ongoing difficulty that the pandemic triggered with global supply chains generates opportunity for a manufacturing center such as Michigan, Robey said this month during an annual economic outlook for the region hosted by The Right Place Inc.

“When you have a global network and you can’t move goods, it’s hard to build things,” Robey said. “I think there is huge demand and I talk to my friends in the site-selection world across the country and they’re seeing that experience, too. Once things can happen, we believe they will happen.”

The regionalization of supply chains “is back on the front burner” in economic development as companies begin to question whether overseas supply chains are sustainable over the long term with the just-in-time production model. 

“When you have a crisis like this, just in time doesn’t work, which is where we see an opportunity or potential opportunity of them reshoring,” said Right Place CEO Birgit Klohs. “Is there an opportunity for Michigan and then for West Michigan in the reshoring of part of that supply chain? In the short term, it’s a real issue, no question.”

Economic outlooks by Robey and others expect that manufacturing will lead Michigan’s continued economic recovery in 2021.

The state’s economy will benefit if manufacturers re-establish U.S.-based supply chains following the disruptions that began early in the global pandemic, particularly if companies create domestic parts supply chains.

“One thing that I think is going to be very interesting  is this concept of manufacturing jobs coming back to the U.S.,” said Jeff Korzenik, chief investment strategist for Fifth Third Bank.

“The old concept that job losses in manufacturing were somehow inevitable has been broken. The pandemic has highlighted the problems with a supply chain that is overly reliant on China,” Korzenik said. “When you shake up the global supply chain, the U.S. will pick up some benefits from that and obviously Michigan’s deep manufacturing history makes it well-positioned for some of this.”

In its annual outlook, the Upjohn Institute expects manufacturing employment in the region to grow a slight 0.1 percent in 2021 and 3.1 percent in 2022. Service-sector employment in 2021 will remain 20.7 percent below pre-COVID levels, according to the Upjohn Institute’s outlook.

Even with strength in the manufacturing sector, and as productivity and output grow, overall employment in the Grand Rapids area won’t return to pre-pandemic levels until “somewhere between 2023 and 2024,” Robey said.

‘Not a complete recovery’

Comerica Inc. Chief Economist Robert Dye believes Michigan’s economy sits poised to receive a lift in 2021 from the manufacturing and industrial supply base as the broader U.S. economy and demand pick up during the year.

“As a whole, Michigan is very well positioned to feel a lift from a growing U.S. economy and a very much more optimistic economy in the second half of next year,” Dye said. “There’s a whole lot of pent-up demand out there and that will be very good for the Michigan economy through the second half of 2021 and into 2022.”

One “big question” for West Michigan is the office furniture industry. The pandemic “has definitely broken through that aversion to remote working,” which has implications for demand in the office furniture industry and for commercial real estate, Dye said.

“We all know that it works and we can do it now,” he said of working from home.

In November, Comerica forecast Real GDP growth of 4.3 percent for Michigan’s economy in the fourth quarter and 2.6 percent in the first quarter of 2021. Comerica expects the state’s Real GDP to average negative 5.7 percent for all of 2020 and grow to a 4.5 percent annualized rate for all of next year.

Michigan’s unemployment rate, expected to finish the year at 7.5 percent for the fourth quarter, will improve to 6.9 percent in the final three months of 2021, according to Comerica’s outlook.

Meanwhile, University of Michigan economists expect the state to add 137,400 jobs next year and 99,400 in 2022. The projected job growth by the end of 2022 would return Michigan to within 3.4 percent of pre-pandemic employment levels recorded in the first quarter of 2020.

“We’re seeing a substantial recovery, but not a complete recovery to where we were prior” to the pandemic, said Gabriel Ehrlich, director of University of Michigan’s Research Seminar in Quantitative Economics.

The automotive and construction industries will lead the growth over the next two years, with losses continuing in the leisure and hospitality industry and other sectors, according to University of Michigan economists.

“We are seeing a two-track recovery from the pandemic. Customer-facing industries lost more jobs and have recovered more slowly than other sectors. We expect that trend to continue,” Ehrlich said.

Unequal recovery

In his monthly report, Grand Valley State University economist Brian Long, director of supply chain management research at the Seidman College of Business, noted the region “remains on the recovery track that began in July.” Even so, Long warned that given the effects of the second wave of COVID-19, “we should not be surprised if our statistics flatten or even turn slightly negative in the next few months.”

“However, there seems to be universal agreement that when the new vaccine (or vaccines) finally reach a large portion of the population, we should see an economic boom,” Long wrote in the December report.

Industrial purchasing managers in Grand Rapids and Kalamazoo answering Long’s November survey complain that their foreign and domestic supply chains “are still far from getting back to normal,” resulting in manufacturers struggling to maintain their production schedules as some components or materials are delayed.

If COVID-19 gets under control and vaccines are effective and widely distributed, “we may see a short economic boom as pent-up demand fuels a round of purchases at both the consumer and industrial levels,” said Long, who hopes that Congress will enact a new economic stimulus package “to assist the vulnerable sections of the economy through the gap.”

“However, it is worth remembering that some retail businesses, some restaurants, some movie theaters, and some segments of the office furniture business will NOT come back,” Long wrote.

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