northeast ohio’s economic development challenge edward w. (ned) hill vice president for economic...

Northeast Ohio’s Economic Development Challenge

Edward W. (Ned) HillVice President for Economic DevelopmentCleveland State UniversityInterim Dean, Levin College of Urban Affairs

Northeast Ohio Regional Day VI 2

I dreamed that I was an economist and I had to explain what happened!


Real Tombstones


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


Market activity from Barrons

Corporate Debt Friday, October 24, 2008 None expected this week.


Commercial Paper Outstanding

Source: Board of Governors of the Federal Reserve System


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


Oil: Peak $145, now $68.50

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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


Northeast Ohio’s economic performance

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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

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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


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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The economic challenge for the region and Ohio was in late 1990s until the end of the 2001 recession

-10.0

10.0

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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

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United States

Ohio

Cleveland-Akron

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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

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Productivity gain from manufacturing in Ohio led the state’s weak recovery from the 2001 recession

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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


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%

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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)

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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

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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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MetalAutoChemistryMiscellaneous

Source: Economy.com


= $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)

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Source: Economy. com

*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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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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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

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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

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Innovation practices

Fast growth managementF

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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

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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?


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

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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.

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northeast ohio’s economic development challenge edward w. (ned) hill vice president for economic...

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