West MI Economy Up and Up or Edge of the Precipice? Upjohn Scans the Market

The impact of tariffs on West Michigan comes into sharp focus in the W.E. Upjohn Institute for Employment Research team's latest quarterly report, all the way to the micro level in each of the West Michigan Labor Markets including the Niles-Benton Harbor Standard Metropolitan Statistical Area, or simply SMSA.

The authors of the report start out by saying, "Depending on how you read the tea leaves, the economy is either on a moon shot, up and up, or it is heedlessly approaching the edge of a precipice, where it may totter and possibly soon plunge into a financial abyss. Different prognosticators have differing views on the matter."

The report opener goes on to add, "Some look at rumblings of trade wars, inflationary trends, tightening credit, the relaxing of regulatory oversight, and a serious lack of workers and see hard times ahead, a repeat of the debacle a decade ago. Others have a more sunny disposition, arguing, 'So far, so good.' Let’s look at the factors."

The report then goes into a nearly 30-page analysis of the current market conditions. For our region, they write, "The Niles–Benton Harbor area has potential tariff exposure due to a large concentration of primary metal and fabricated metal producers. Local producers that use imported metals may see prices rise. Conversely, the Trump administration levied tariffs on imported washing machines earlier in the year to protect domestic appliance manufacturers, including Whirlpool."

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The newest issue of Business Outlook from the W.E. Upjohn Institute for Employment Research focuses on the state of the economy, with special attention paid to the likelihood of a recession and the recently enacted and announced tariffs. Moody’s currently forecasts the likelihood of a recession in the next six months as relatively low,  at around 10-percent.

Michigan’s tariff exposure is not fully known yet. Many manufacturers in Michigan use aluminum and steel, which now carry 10-percent and 25-percent tariffs, respectively, on imports from all but a select few countries. The new report says, "We do not yet know what the increased cost of goods from such tariffs will be, but it may be minimal relative to total costs for all inputs."

The United States, Mexico, Canada Agreement (USMCA), the replacement for the North American Free Trade Agreement, preserves tariff-free movement of auto parts within North America. Canada is Michigan’s major foreign trading partner: nearly $30 billion in auto-related goods was exported to that country from Michigan in 2016. Michigan produces relatively little in soybean exports compared to neighboring states, suggesting that there will be little shock to Michigan growers.

Authors note, "While we know the amount of products Michigan exports, we do not have the same data for regions within the state. This issue of Business Outlook uses relative share in major exporting industries to try to determine how an area might be exposed to export tariffs. Also, we look at the cost of imported metals to consider how an area might be affected by input tariffs. These data are based on a national input-output matrix and assume that local producers consume inputs at the same rate as the national average."

The report concludes, "Acknowledging that the tariff situation may harm individual firms greater than others, our data looks only at the economy for the area of west Michigan. Some firms may be greatly impacted while many may be minimally impacted."

Here is a market-by-market snapshot from the report:

BATTLE CREEK MSA

Battle Creek has some potential exposure to tariffs. Fabricated and primary metal producers, which use tariff-exposed metals such as steel and aluminum as inputs, employ more than 2,000 people in the area. Auto parts production, a large portion of the local economy, may be impacted by rising costs, but the recently negotiated USMCA preserved tariff-free movement of auto parts in North America.

GRAND RAPIDS–WYOMING MSA

The Grand Rapids area may have potential exposure in fabricated metal and furniture production. Both these industries rely on steel and aluminum, which may result in increased costs if local products use imported goods.

HOLLAND–OTTAWA COUNTY

Ottawa County has potential tariff exposure, with roughly 4,700 workers employed in fabricated metal production and nearly 3,000 workers in machinery production. Both these industries rely on aluminum and steel, but we do not know to what degree local producers use imported metals, or whether the tariffs may hurt their bottom line.

KALAMAZOO-PORTAGE MSA

Kalamazoo appears to be relatively insulated from tariffs. Major manufacturing in the area includes pharmaceuticals and medical devices, neither of which use a large amount of inputs affected by tariffs, nor are they currently subject to major tariffs by other countries.

MUSKEGON MSA

The tariff exposure in Muskegon is unknown. A large share of manufacturers in the area use tariff-exposed inputs. However, there are also primary metal producers that may be the beneficiary of U.S. manufacturers switching to domestically produced metals.

NILES–BENTON HARBOR MSA

The Niles–Benton Harbor area has potential tariff exposure due to a large concentration of primary metal and fabricated metal producers. Local producers that use imported metals may see prices rise. Conversely, the Trump administration levied tariffs on imported washing machines earlier in the year to protect domestic appliance manufacturers, including Whirlpool.

Business Outlook for West Michigan is a quarterly publication of the W.E. Upjohn Institute for Employment Research, a nonprofit research organization established on July 1, 1945. It is an activity of the W.E. Upjohn Unemployment Trustee Corporation, which was formed in 1932 to administer a fund set aside by the late Dr. W.E. Upjohn for the purpose of carrying on “research into the causes and effects of unemployment and measures for the alleviation of unemployment.”

You can read the full report by click this link:

Business-Outlook-Vol.-34-No.-2-Fall-2018