northeast ohio’s economic development challenge edward w. (ned) hill vice president for economic...
TRANSCRIPT
Northeast Ohio’s Economic Development Challenge
Edward W. (Ned) HillVice President for Economic DevelopmentCleveland State UniversityInterim Dean, Levin College of Urban Affairs
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I dreamed that I was an economist and I had to explain what happened!
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Real Tombstones
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What is the outlook?
o Liquidity trap, credit crunch
o Macroeconomic problems affects core domestic sectors in Ohio:o Automobile assemblyo Housing related
o Construction and building materialso Furniture
o Chemicals
o Public policy and pricing favors:o Energyo Food processing—well growing
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Market activity from Barrons
Corporate Debt Friday, October 24, 2008 None expected this week.
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Commercial Paper Outstanding
Source: Board of Governors of the Federal Reserve System
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Discount rate spread in the commercial paper market
Source: Board of Governors of the Federal Reserve System
Northeast Ohio Regional Day VI 8Source: Cleveland Federal Reserve Bank
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Oil: Peak $145, now $68.50
0
20
40
60
80
100
120
140
2000
2001
2002
2003
2004
2005
2006
2007
Year(month)
Pri
ce p
er
barr
el ($
08
)
J une 1: $133.93
Aug 1:$116.60
Source: St Louis Federal Reserve Bank, download October 29, 2008
Source: Wall Street Journal Market Data Center, October 29, 2008
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Northeast Ohio’s economic performance
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Oh
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econ
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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
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
Econ
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NEO
is a
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con
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y
Notes: GMP = Gross Metropolitan Product
GSP = Gross State Product
2006 GDP($2001 million) Rank
Cleveland 88,982 26Akron 22,895 74Canton 10,987 135Youngstown 14,955 109NE Ohio 137,819 17
Source: US Bureau of Economic Analysis, October 2,2008
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Metropolitan per capita income in 2006There are challenges
GDP $20012006
per capita income RankAkron 32,702 158Canton 26,971 259Cleveland, Mentor, Lorain 42,265 55Youngstown 25,937 281US Metros 41,510 62.5
Real $2001 out of 363 metropolitan areas
Source: US Bureau of Economic Analysis, October 2,2008
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NEO
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The economic challenge for the region and Ohio was in late 1990s until the end of the 2001 recession
-10.0
10.0
30.0
50.0
70.0
90.0
110.0
130.0
150.0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Year
% c
han
ge G
DP fro
m 1
990
United States
Ohio
Cleveland-Akron
CSA
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GD
P g
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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 Manufacturing Nonmanufacturing
Real GDP 6.7 5.9 6.9
Econ
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Sta
tew
ide m
an
ufa
ctu
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g is a
dri
ver
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Productivity gain from manufacturing in Ohio led the state’s weak recovery from the 2001 recession
Wh
y m
an
ufa
ctu
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g?
United States OhioMfg as % Mfg as %
Year Total Mfg Total Total Mfg Total2001 9,836,576 1,346,866 13.7% 365,735 75,961 20.8%2002 9,981,850 1,384,377 13.9% 373,457 80,612 21.6%2003 10,225,679 1,400,092 13.7% 378,719 79,307 20.9%2004 10,580,223 1,478,319 14.0% 387,436 83,240 21.5%2005 10,899,704 1,492,984 13.7% 389,956 82,096 21.1%2006 11,240,107 1,536,573 13.7% 388,921 80,554 20.7%2007 11,467,503 1,571,679 13.7% 390,334 80,443 20.6%
16.6% 16.7% 6.7% 5.9%
Source: US Bureau of Economic Analysis, October 2, 2008
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Why is job growth so slow? The big 5 forces
1. Tyranny of the product cycleo Unbalanced product portfolio weighted toward older
productso 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 uncertaintyo Work ruleso Cost uncertainty—health care, torts, mandates, & energy o Benefits wedge
5. Failed business strategies of three key employers
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= $1B in 2006 Output
Northeast Ohio's Output Portfolio
Other Support Activities for Transportation
Other Transportation Equipment
Environmental Technology
Boiler, Tank, and Shipping Container
Spring & Wire
Alumina and Aluminum Production and Processing
Cutlery and Handtool
Other Electrical Equipment
Motor Vehicle Body and Trailer
Coating, Engraving, Heat Treating
Steel Product
Forging and Stamping
Metalworking Machinery
Nonferrous Metal Production and Processing
Foun
dries
Electric Lighting Equipment
Household Appliance
Iron and Steel MillsMotor Vehicle
Metal Wholesalers Machine ShopsOther Fabricated Metal Product
Insurance Carriers
'Motor Vehicle Parts
Corporate and Division Headquarters
Banking Hospitals
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0
Northeastern Ohio Competitiveness (2006 Output Location Quotient)
No
rth
east
ern
Oh
io O
utp
ut
Gro
wth
Rat
e (C
AG
R 2
000-
2006
)
Chemistry*
Growth OpportunityBase
Drivers to buildon in Ohio
Strong EconomicBase
Drivers in good health
Important SupplierBase
Drivers that need atransformation in
Ohio
TraditionallyCompetitive Base
Drivers withchallengedstrategiesO
hio
Gro
wth
Ohio Competitiveness
*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)
*Compound Annual Growth Rate (CAGR) is the year-over-year growth rate of an output over a specified period of time
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Port
folio o
f econ
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rivers
fro
m 2
00
0 -
20
06
IT intense
MetalAutoChemistryMiscellaneous
Source: Economy.com
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= $1B in 2006 Output
*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))
Northeast Ohio's Job Portfolio
Alumina and Aluminum Production and Processing
Iron and Steel Mills
Steel Product
Nonferrous Metal Production and Processing
Foundries
Forging and Stamping
Cutlery and Handtool
Boiler, Tank, and Shipping ContainerSpring
& Wire
Machine Shops
'Coating, Engraving, Heat Treating
Other Fabricated Metal Product
Metalworking Machinery
Electric Lighting Equipment
Household Appliance
Other Electrical Equipment
Motor Vehicle
'Motor Vehicle Body and Trailer
Motor Vehicle Parts
Other Transportation Equipment
Metal Wholesalers
Other Support Activities for Transportation
Banking
Insurance Carriers
Corporate and Division Headquarters
Environmental Technology
Hospitals
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
-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)
No
rth
ea
st
Oh
io O
utp
ut
Gro
wth
Ra
te (
CA
GR
20
00
-20
06
)
Chemistry*
Source: Economy. com
*Compound Annual Growth Rate (CAGR) is the year-over-year growth rate of an output over a specified period of time
Econ
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Port
folio o
f econ
om
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rivers
fro
m 2
00
0 -
20
06
MetalAutoChemistryMiscellaneous
IT Intense
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Four facts explain the performance of this market areaChanging economic
advantageLow rates of innovation
& entrepreneurship
Failed corporate strategies and old products
Place-based legacy costsEcon
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Fou
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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 resourceso Air access, particularly its status as a Continental hubo History as a strong headquarters location (in
particular, in banking and insurance)o Strong cultural institutionso Multimodal freight transportationo Strong tradition in research and scientific initiatives
Econ
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Sit
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Threats and challenges to NEO
o Low to declining population growtho Does this make economic sense? Is cause and
effect backwards?o Role for targeted talent recruitment—remember the
labor agents of the early 20th Centuryo The threat of becoming an increasingly
commodity-driven economy, dominated by global competitors (China and possibly India)o Why the China model for industrial production is
beginning to break downo How this can fit into NE Ohio’s revival
o A legacy of organized labor: work rules & legacy costso The antidote is new firms; new industries; new
business cultureo 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
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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.”
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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.
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Workforce challenges
Workplace literacy & numeracy
Technical training
STEM education
Process improvemen
t
Innovation practices
Fast growth managementF
ocu
s o
n
work
forc
e
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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
Source: W.E. Upjohn Institute, NEO Dashboard Indicators
Con
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Fro
m t
he a
cad
em
ic lit
era
ture
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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
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What is Northeast Ohio’s competitive advantage?
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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 improvemento Education & workforce (incumbent workers)o Entrepreneurial managemento Workplace flexibility
o Areas of demonstrated competitive competenceo Headquarters, insurance, banking & health careo Materials production/fabricationo Chemistryo Industrial designo Secondarily: logistics
Com
peti
tive a
dvan
tag
e:
Man
ag
ing
port
folios,
not
bett
ing
on
silver
bu
llets
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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.
Con
clu
sio
n:
Wh
ere
is y
ou
r fi
rm?
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