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Home News  Ever so slowly, ’fragile’ economy coming back
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Wednesday, December 1,2010

Ever so slowly, ’fragile’ economy coming back

by Kyle Melinn

For Bruce Rendon of Rendon Quality Construction, 2009 was the worst year in his company’s 28 years of existence. The year 2010 doesn’t look much better. Few people are building, meaning work is scarce for him and his falling number of employees.


Some weeks, Rendon said he doesn’t take a paycheck so he can cover his employees’ pay and benefits. If the former Michigan Homebuilders Association president didn’t have some loyal repeat customers, he said he doesn’t know where his company would be.


But Rendon said he believes he may be seeing some signs of recovery in the last quarter of the year. He doesn’t want to get his hopes up, but he believes Michigan has finally hit bottom.


"They say housing starts are a first indicator for an economy turning around. I know it was in 1982," Rendon said. "I’m hoping we’ve turned the corner."


Rendon’s on-the-field observations mirror those of local economists. After a long, 10-year slide to economic devastation, where Michigan’s per capita income ranking has slid from 18th among the 50 states in 2000 to 37th by 2008, Michigan’s economy appears to be heading in the other direction.


That was the conclusion of the recent Research Seminar in Quantitative Economics forecast at the University of Michigan, the study state government economists use, in part, to make their estimates.


"It is our sense that we are now approaching the turning point from negative to positive job creation," read the report.


Don’t throw the confetti, yet. The economists warn that the focus needs to be on keeping the economic growth going in the right direction. Don’t focus on recreating the 843,000 jobs the state lost in the last decade.


House Fiscal Agency Director Mitch Bean said the national economy is beginning to rebound and that is helping the state come back, but the road back likely will be a long one.


Consider these numbers: When times were booming in the 1990s, when unemployment was at 3 percent, Michigan’s economy was growing at a clip of 1.6 or 1.7 percent a year.


If the same type of 1.6 percent job growth happens every year until Michigan’s number of employed workers reaches 2000 levels, we’ll be waiting until 2025 or 2026 for a full rebound.


That’s the depth of the job losses since 2000. Seen another way, in a 10-year period, Michigan lost 18.5 percent of its jobs, an "unprecedented loss" of jobs, House Fiscal Agency economist Jim Stanzel said.


"The trend is going the other way," Bean said. "We’re not expecting things to go gangbusters, but the hemorrhaging has stopped. But we’re not out of the woods, yet."


The gauge to look at is not unemployment numbers, even though that’s always the public’s focus, Bean said. Our unemployment rate may be falling steadily from a December 2009 high of 14.5 percent to 12.8 percent last month, but that doesn’t tell the story.


These figures only count those collecting unemployment checks.


More and more unemployed individuals are running out of their unemployment benefits, meaning that statistically speaking, they are no longer in the job market and do not appear on monthly unemployment insurance sheets released by the state and federal government.


If the number of people entering the workforce only matches the number of people who have exhausted their unemployment benefits, the state isn’t really coming out ahead, Bean said.


"The jobs number and the unemployment number can move in opposite directions," he said. "Unemployment can be going down, but your economy may not be improving."


The jobs lost over the past decade were good-paying manufacturing line jobs, Stanzel added. Over time, they may be replaced with, say, a telemarketing job or a service industry job, where the pay rate is substantially less.


"Even if we get job growth, it’s the type of job that becomes an issue," he said.


Be it a Wal-Mart job or a restaurant job, unemployment rates will still be high for the next couple of years. Our days of being in double-digit unemployment state won’t change tomorrow or even next year.


"Improvement" also doesn’t mean "settled." Certain segments of the economy still aren’t quite right. Take the banking industry. Bean projects that more banks will fail over the next few years.


Yes, some people are making a lot of money. They have high credit scores. They have access to credit. But small businesses and families struggling to get by are still having trouble tapping that money stream, Bean said.


Fewer people are buying houses. Demand for houses is down. Houses are worth less. Property values drop. Homeowners are paying fewer property taxes. Less property tax money means local governments and school districts can’t pay their bills.


Already, 41 school districts are in a combined deficit of $400 to $450 million and Bean said more will follow.


State law doesn’t allow property taxes to increase more than 5 percent or the rate of inflation a year.


That’s good news for homeowners who don’t want to pay an exploding property tax bill. That’s bad news for local governments and school districts.


"Between that and the state of the housing market, they won’t get that tax base back for over a decade," Bean said.


A similar dynamic is taking place in the state government, which relies more on income and sales tax revenue. People are making, as a whole, less money than they once did. What money they are making isn’t getting spent.


It’s a cruel cycle. The money state and local governments have to spend on public services goes down at a time when the need for those services go up, Bean said.


"The economy is beginning to improve, but we’re improving from a low point," he said.


What if things don’t get better?


Here’s a ghoulish thought. What if things don’t get better?


That’s a possibility.


Doug Drake, an economist for Public Policy Associates, said it looks like the state has bottomed out, but he’s not convinced.


"It’s all really very fragile," he said. "You know the saying, ’Cheer up, it could get worse?’ Well … . "


If Congress declines to pass another extension on the number of weeks the unemployed can receive financial assistance, 2 million Americans will lose their unemployment benefits by Christmas.


In Michigan, 162,000 have already exhausted their jobless benefits this year from January through November 2010, and another 181,500 will exhaust their unemployment benefits from December through April 2011, according to Stephen Geskey, director of Michigan’s Unemployment Insurance Agency.


An extension, nationally, will cost $65 billion. Michigan’s chunk would be 3 percent of that, Drake said.


"The impact of that would be twofold," Drake said. "It would put a crimp in Christmas sales, which would hurt retail hiring. The impact would impact people’s attitude on the economy."


That, in turn, could stunt the number of people willing to buy cars nationwide. That’s bad news for Michigan, the Auto Capitol of the United States.


The European Union on Sunday approved a $112.53 billion aid package to bailout debt-strapped Ireland, but what happens if "Portugal goes off the pier in a couple months, maybe followed by Spain?" Drake asks.


The impact to credit markets, interest rates and the stability of world markets would send ripples to Michigan.


"What if that whack job in North Korea actually does something?" Drake added. "It’s a negative in the short term because it scares the crap out of people."


If a substantial recovery is coming to Michigan, things need to go right for the next couple of months, he said. The international stuff needs to settle down. Authorities across the country need to continue preventing terrorists from blowing up Christmas tree lighting ceremonies and similar catastrophes.


"It’s basically a question of confidence," he said.


The answer isn’t as simple as "shopping our way to prosperity," either. That may again help in the short term, but the public is overextended on their credit as it is, Drake said.


The conclusions reached in the University of Michigan forecast throws water on the hopes of people like Rendon, who sees glimmers of hope in the housing market. The economists at the University of Michigan see the risk to the state’s housing market "leaning to the down side," which could slow an economic recovery.


A lot of homes are still in foreclosure. A lot of homeowners are still underwater in their payments — a situation amplified by folks using old home equity loans to pay off their credit cards.


"It’s not like you can go back and get any money back for that big-screen TV you bought six years ago," Drake said.


Don’t get Drake wrong. It appears Michigan has hit bottom.


But he’s throwing up the caution flags to punctuate the point that it will take five to 10 years for Michigan to get back to where we were in 2000. We’ll probably never see our economy match its heights of the 1960s.


"Overall, we’re going to be OK. It’s going to be a long time, slow and steady," Drake said. "I don’t think the glide path back up is very steep."

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