Tuesday, December 31, 2013 at 5:52 PM
The economic rollercoaster that was 2013 painted a broad and mixed picture, including here in northeast Ohio. Companies like the Bank of America laid off a thousand workers in Beachwood, while Solon scored 250 jobs courtesy of Nestles. ideastream’s Brian Bull revisited some of the year’s economic winners and losers with Ned Hill, Dean of the Levin College of Urban Affairs at Cleveland State University.
Hill: The company that had the worst outcome was the Bank of America call center in Beachwood. That call center handled applications for mortgage refinancing. When interest rates started to tick up a little bit, the refinancing market dried up. Demand for the call center dropped, and Bank of America shut it down.
And I think my recollection is that the Cleveland Clinic owns that facility and that they may be doing some shuffling around and filling it back up. But it just points out that what takes place in an individual market for a product, really affects outcomes for a company.
But you also have to look at the impact of Ohio’s—and more importantly, the U.S.’s—turgid recovery - from the Great Recession, and that’s really set the pace for most of the state.
Bull: One of more notable losses that’s coming – that was just announced a short while ago – had to also deal with Lockheed. And I understand the hit there is to the tune of one plant and 500 workers.
Hill: Right. The Lockheed plant is a particular disappointment. And there again, you’re seeing budget realities at the national level. It’s nothing going on with the region, it’s nothing about the competitiveness of the state. It’s everything to do with the sequester, the cut in the federal military spending. And the fact that Lockheed has too many facilities. And it looks like there was a tradeoff made between the facility in Akron and the one that was in Schenectady, New York. And they’re going to slowly concentrate their R & D activity in New York State.
The difficult thing here, is that while most of it really looks at activities going to build blimps, and dirigibles, or balloons…but the fact is that they made some very technically sophisticated products there. They also did some product testing there. One of Cleveland’s fuel cell companies has had its fuel cell being tested out of that facility.
So that hurts. It’s also – I think— a million-dollar-a-year taxpayer to the City of Akron. As much as ideologues like to say that government spending doesn’t affect the economy, there’s case #1 that it clearly does.
You can argue about whether the Pentagon’s budget’s too big or too small, but that was one big facility for us that’s being axed.
Bull: Another substantial one – not necessarily in the northeast region – but there in southern Ohio, was Ormet Corporation, which like Bank of America – had to lay off 1,000 workers. Any point of view on that?
Hill: Yeah, Ormet’s a company that’s been on life support long time. In fact, its operations in Ohio don’t make sense at all. Reality caught up with them. It’s a very big aluminum smelter, it has a special economic development tariff in its electric bills, that’s paid by every single household and business in Central Ohio. And it’s to the tune of $2 a month for every single meter down there.
And it’s a direct subsidy to the production cost of the smelter. Now, aluminum smelters go to places where electricity is very cheap, and it is the biggest employer in Appalachia. So there’s lots of political pressure to keep it up and going. In reality, smelters should be close to places where electricity comes from hydroelectric power, and also right now there’s a global surplus of aluminum ingots. Mostly because of gross overbuilding of aluminum smelters in Russia, Brazil, and China.
A company like Alcoa is an example. Only buy smelters during the downside of the cycle. Partially you get capacity off the market. And the other is to find cheap sources for aluminum. So this is a company that finally just had to pull the plug. And they’ve got this interesting…the subsidy in the electric bills, is tied to the electric rates, and with electric rates going up, it made the Ohio location even worse. So this is one where euthanasia was called for.
Bull: The rest on my list are minor compared at least to the three we’ve talked about. We have American Greetings that laid off about two dozen people, give or take…Diebold, with 100 laid off in the Akron/Canton, area….Akron General, Summa Health, roughly 88 laid off between the two of them. So I don’t know if there’s anything necessarily notable here in the layoffs that I’ve seen. But if you had anything to say in particular to the smaller – but I’m sure to the workers no less consequential – layoffs, I’d be curious to hear.
Hill: Well, the ones that are interesting, are the lists coming out of Summit County and health care. And if you had expanded your net, you’ll notice there are health care layoffs also in the Youngstown area, the Cleveland Clinic itself has announced a small series of layoffs and cost control. And there’s a little bit of shock, because isn’t health care supposed to take us to the future, and isn’t health care going to be our future. Well, there are a couple things to pay attention to here.
First is, you’re actually seeing cost control work. And if cost controls work and the rate of increase in medical expenditures goes down, that’s gonna cost jobs.
The second thing that we have to remember…uh, we’re very, very proud of our health care, and we’ve got some wonderful institutions, and the Cleveland Clinic exports medical services outside the region, all to the good…but the reason why we have so much health care here, is that we’re older than the national average, we’re fatter than the national average, and we’re better insured than the national average. So that is a sign that increases demand for medical services.
But we have to remember that that sector of the economy – health care – is only as strong as the rest of the economy is, because they’re the ones that pay the health care bills. By the way, we’re above—we’re more expensive than the national average here too, because of the lack of competition. So you have to realize that if there isn’t cost control in the health care industry, that increases the operating costs of the people who pay for health insurance.
So I actually see the downturn in employment and the restructuring in the health industry, to be a very good thing. And I’m not going to see my doctor for the next month.
Bull: Nor should anyone after the holiday feasting wraps up.
Hill: Well, that’s a different thing, right.
Bull: Let’s shift gears now, Ed. We can talk now about some of the companies and industries that actually had a very good upturn in 2013. I’m looking particularly at car makers and steel manufacturers.
Hill: Both have done very well, and all are pretty much at capacity. The auto industry bounced back very quickly from the recession, largely around here because of the domestically headquartered cars. Bounced back as soon as recession came, so Lordstown reopened. The Parma metal facility did well. Brook Park is just making the EcoBoost engine, selling very, very well.
The Lordstown had a small blip in late summer, early fall, in sales of the Cruze, but the Cruze has also now picked up. So all that is great for Northeast Ohio.
And we also have to look at Honda, I think it’s the 3rd largest employer in the state. It employs about 19,000 people right now. They’ve invested very heavily in the state over the past year. They’ve increased the size of their R&D dept. They have all their big frame cars engineered here in Ohio, made in Alabama. And Honda out of Marysville, is shipping product out to the rest of the world from Ohio.
So you’d say, ‘Why is this happening?’ Well Honda’s got problems in its two other core markets. By the way, its largest market’s North America. Japan is in slow growth, and Japanese name plate car sales in China have trended down because of the political crisis between China and Japan over the ocean rights and the islands off the Chinese coast.
So believe it or not, that affects economic development in Ohio. And so Honda’s looked at the globe, and it’s investing in the market where it’s getting its greatest returns, which is North America.
They’ve changed their Russells Point transmission plant so the continuous variable transmission comes out of there. North American’s largest engine plant is in Anna, Ohio. They’ve got an assembly plant in East Liberty and another one in Marysville, which are by the same 85,000 acre campus. And believe it or not, do you realize that they’re the biggest exporter of organic soybeans from Ohio?
Bull: Totally slipped my mind.
Hill: Yeah, what they have is, the containers, when they ship parts into the United States, are sitting there, and to ship them back to Japan, they’re now very aggressive marketers of organic soybeans back in Japan. So it’s an interesting company.
You can then look at the announcements over the past month of GM expanding and investing in its transmission plant in Toledo, that’s a 10-speed transmission. And Chrysler doing very serious investment in the Toledo area.
So as cars go, so goes the steel company. And so ArcelorMittal has had a very, very good year. It’s more than just the visit of the president. The president was there because it’s the most efficient steel plant in the United States. Not the biggest. The biggest is still in Gary (Indiana). But they make very high quality sheet. And the revival of the auto industry is doing well by it.
The other thing that’s helping the steel plant is that there’s been a small uptick in light goods. Those are appliances, as the apartment market’s coming back. Not the housing market. And so the appliance industry’s very strong in the western part of the state, particularly Whirlpool. And they’ve had a very positive impact on the steel industry.
And the last part of steel is shale oil drilling. It’s the pipe plants. USX Lorain has had a third shift, they’ve had an unfortunate fire and explosion which hurts them. There is a doubling of a pipe plant out in Youngstown, who’d have thought there’d be expansion of steel in the Youngtown area. The Timken Company despite their split, is doing very well selling into the oil and shale market, with drill bits, as well as materials around pipe. They don’t make pipe themselves. USX Mansfield, is doing a good job with pipes. So the conversion of the economy from an oil economy to natural gas economy is helping our basic industries in the state.
Bull: Finally as we get ready to celebrate and ring in the New Year, I’m sure that many people in Solon are hoping people ring it in with frozen pizzas. And that comes with a new development that Nestlé’s announced just a few weeks ago.
Hill: Correct. You know, an economist would look at that and say, ‘Of course they were always going to expand here, because of the size of the facility.’ But no, it turned out there were four competing locations. I would not be surprised if we end up having other announcements going forward about Nestle increasing its investment in that facility.
But that investment also brings up another point: we are now a very competitive food processing region. In fact, when I was going over to China a couple weeks ago, I was paying attention to some people from Smuckers who were going over there to expand the jams and jellies business in China. But they are on a growth tear is the only way to look at it. And the Snack food industry—given the amount of eating in solace we have to do while watching sports teams—it’s doing very well. So it’s really showing that the food-based economy here is doing well on the national level.
The part of the Nestle announcement that’s most exciting, is their R & D facility is moving there. That’s sticky. You don’t move those things around a lot. And you tend to roll out product close to where the R & D facility is.
So if you think about my ramblings here, the two parts that I’m much excited about is the R&D facility in Solon around Nestle, and Honda’s expansion of R & D down in Columbus area.
I know that Columbus isn’t in your listener’s area, but IBM’s also done some very large investment in Columbus on R & D, around big data. Which says good things for the state.
Bull: Last but not least, now that we’ve done a recap of 2013, Ned, do you have any predictions for what 2014 has in store for some of Ohio’s biggest industries or companies?
Hill: Well, at this point I think what you’re looking at, is the fed announcement that they’re going to start unwinding the stimulus, but doing it very slowly. Interest rates are going to stay very low for the next couple years, at least. All of which means that the economy may finally be on a stronger growth path. Because while we’ve been in recovery since 2009, it’s been—as I said earlier—turgid.
And so you expect an acceleration of the recovery. And that means that Ohio will do what it normally does, when it comes into recovery, tend to bounce back faster than the nation, particularly if interest rates are cheap, and it’s because of autos and chemicals. And then we tend to slow down because we don’t have a lot of new products in the state.
So the next boost really is going to depend on what happens with natural gas and shale. We’ve seen large spending increases coming in the counties with lots of activity, but not lots of employment. That’s because the workforce has been coming from out of state.
The real big question here is do we end up getting a cracker or a number of crackers in the tri-state area: Western Pennsylvania, western West Virginia, or eastern Ohio. Which—if that happens, a spot market around plastic feed stocks will develop, which will help our manufacturing.
A cracker is a very large chemical facility that takes ethylene – which is the natural gas liquid—and distills it into the different feed stocks for the plastic industry. There’s just a lot of unknowns going on with shale. What makes our shale in the Utica interesting dry gas, is the presence of those natural gas liquids, `cause they’re worth more.
And the other two points – it’s not going to be a 2014 thing, it’ll be a longer play - is gonna be how we do around education. That’s improving the quality of the workforce. And also does the entrepreneurship revival, and renaissance, which jumpstarts it from the core of—really start to gain traction? Those are the two major wild cards.
Bull: Alright, well Ned….thank you very much for your time. And have a Happy New Year!
Hill: Same to you, Brian. It’s an absolute pleasure ending the year with you.
A shorter, edited version of our conversation with Ned Hill, that aired on WCPN on New Year's Eve (4:07)
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