Weighing in on Ohio's economy.

Ohio's economy is complex. For the local economy to thrive and succeed, it must change. But change isn't easy. The state is dealing with slow, local economic recovery from a national recession. And, competition--not only global, but domestic, as well--further complicates the matter. But, Ohio's

This simply isn't the same old Ohio economy.

Manufacturing undoubtedly is still the state's muscle. However, products and processes have changed, and Ohio will have to continue to roll with the economic punches to remain competitive.

Ohio is prepared for that fight, claims Steve Kelley, senior economist with the Ohio Department of Development's (ODOD's) Office of Strategic Research. Kelly said Ohio's continued capital investments will lead to an abundance of new-product development.

"There are lots of new products in the marketplace--we're not producing the same types of things we did 25 years ago," Kelly said. "But, we've seen major capital investments by industries here in the last 10 years. Ohio is in a competitive position to take advantage of that."

ODOD statistics project total employment in the state will increase 12.5 percent from 1998 to 2008--an increase of nearly 740,000 jobs. And, manufacturing is the largest of Ohio's 10 major sectors based on gross state product ODOD further reports that Ohio's manufacturing sector employs one million people.

"Manufacturing obviously will continue to play a key role in Ohio's future--even though there has been a decrease in those types of jobs here in the past 10 to 20 years," noted economist Kenneth Mayland, Ph.D., president of ClearView Economics, LLC, in Pepper Pike, Ohio.

"Manufacturing is important not only to the regional economy, but to the national economy, as well," Mayland said. "Although there has been a downtrend in jobs, productivity growth in manufacturing has been outstanding. That's because you can produce more output with fewer employees. This is a bittersweet loss."

Mayland said Ohio would retain manufacturing jobs and grow that sector if it establishes increased high-tech activity.

"Manufacturers are producing less steel and other durable goods--areas that were once strong," he explained. "Now, we're producing more in areas like pharmaceuticals and computers, which is considered high-tech manufacturing.

Those are areas where the country has done well, but Ohio has below-average representation. We're not tech-heavy as a state, and that doesn't appear to be changing in the future in a meaningful way where we have measurable impact."

Mayland said areas experiencing increased high-tech development are California, the West Coast in general, and Texas. Other areas that have garnered a great deal of high-tech development are the mountain states, such as Colorado and Utah. Mayland stressed that Ohio must grow in that manner, too.

"It's a developmental issue," he said, "and it ties directly into the educational system in the state. For example, if you have an MIT, it's not surprising you have a lot of firms located around Boston. If you have a Stanford, it's not surprising that you have Silicon Valley close by. What is Ohio's high-tech anchor?"

He cited health care as a potential building block for Ohio's high-tech activity.

"We have strong teaching institutions in Cleveland, Columbus, and Cincinnati," he said. "So, health care and the related research is a potential high-tech area where we've already got our foot in the door. That area can definitely be looked at in regard to economic development efforts."

ODOD's Kelley noted that Ohio indeed is aware of and has responded to its high-tech needs. He added that high-tech responsibilities are "a function of every industry and every company here."

"We are investing through universities today," he explained. "New products, specifically our initiative in fuel cells, will pay dividends in the next decade.

Additionally, businesses are looking at strategic alliances. And we have universities and corporations here who are unique world leaders. They will draw into this area."

"Furthermore, the Great Lakes Region is one of the world's largest manufacturing platforms--bar none--particularly in durable goods. That is not going to change."

In referring to the fuel cell initiative, Kelley pointed out specifics of Gov. Bob Taft's $100 million, three-year plan, which proves Ohio is investing and positioning itself as a national leader. The initiative focuses on investments in research, project demonstration, and job creation for Ohio citizens.

The Fuel Cell Initiative, an integral part of the Governor's Third Frontier Project will focus on three core areas. It calls for the ODOD to allocate $75 million for various financing projects; $25 million for research, development and demonstration; and $3 million for training.

"Being able to efficiently produce a fuel cell that matches power structures with engines will have a dramatic economic impact here," Kelly said.

The Recession

Richard DeKaser, senior vice president and chief economist with National City Corp., in Cleveland, said Ohio has recovered "modestly" from the recession of 2001. He said comparing Ohio's recovery to national recovery is difficult, though.

"Ohio does not exactly have the metrics to do a pure apples-toapples comparison," said DeKaser. "Something you can compare are employment trends. Employment nationally fell 1.5 percent over that (recession) period. Ohio's downturn came sooner--in mid2000 rather than March 2001--and it extended through the middle of this year. So, it began earlier, persisted for longer, and the total decline was greater. Compared to 1.5 percent in jobs on the national level, Ohio saw it at 2.5 percent"

DeKaser cited a couple of reasons for the difference between the state's employment figures and the national numbers.

"First, it has to do with Ohio's industry mix," he said. "Ohio has a disproportionate representation of companies that produce capital goods--and of companies that produce goods used by their suppliers that produce capital goods. The steel industry is a perfect example of this. It provides raw materials for things like industrial machinery."

Those types of companies, DeKaser added, represent what likely was the weakest sector in 2001. And, it is the sector slowest to recover in 2002.

"Ohio has a high concentration of those companies, and it is reflected in our own relatively slow turnaround," he added.

DeKaser said he is optimistic about Ohio's economic future.

"Looking forward causes me to be optimistic for Ohio to play catch-up in 2003," he continued. "Economic resurgence in the past year specifically is the result of strong consumer spending and the housing market Those are the two drivers, and the reasons for that are tax cuts and low interest rates.

"As we get into 2003 I think we'll see a shift in economic activity. Consumers are likely to be more subdued, and housing will show declines, I expect However, business investment spending, which has been moribund for the past two years, should show recovery.

Why?

"Now is a great time for businesses to replace worn out equipment or expand for greater capacity," DeKaser replied. "We've seen profits recover and I believe that will be ongoing. That provides the financial resources for firms to invest in capital goods. That will play more to the strengths of Ohio's economy. Recovery in the state thus far has been lackluster. However, I believe it will be more considerable in the year ahead."

Mayland said the auto industry has played a critical role in helping Ohio maintain its economic pace in the past two years.

"That industry is big in Ohio, and this year it's having a pretty good year," he said. "It may be the third best year of sales ever in the auto industry overall. In 2001 the industry had its second best year ever, and that was the recession year. The fact that the auto industry has held up so well financially demonstrates that they are moving product--keeping production lines going here. And, there are a whole line of subcontractors and suppliers that feed the auto industry."

That success could have a downside, too.

"If auto sales were so good in 2001 and 2002, that limits the prospects for 2003," noted Mayland. "So, it's been a help in holding up the economy in Ohio this year. But, by virtue of doing so well it doesn't give it a chance for a snapback next year. It becomes a limiting factor for the Ohio economy in 2003."

The Third Frontier?

Mayland and DeKaser both pointed out that there has been a shift in the "economic center of mass" in this country away from the Northeast and Midwest toward the Sunbelt--from North Carolina to Florida to Texas to California.

"The Northeast and Midwest have lost market share to the Sunbelt and Mountain States," said Mayland. "There has been an ongoing loss. For example, birthrates--of people and of businesses--are higher in Sunbelt and Mountain States. Those areas have more favorable business climates. There are better costs in relation to doing business--labor, taxes and land.

"The Northeast and Midwest are disadvantaged in those areas. Not just in the business climate, but literally in the physical climate. There is an attraction in being someplace warm and sunny, or alternatively in the mountains."

Gov. Taft this fall released a report detailing Ohio's economic growth strategy for the Third Frontier. The report was prepared for the Ohio Business 200, a meeting of the top 100 private and top 100 public companies in Ohio. Entitled "Jobs & Prosperity: Ohio's Strategy for the Third Frontier," the report outlines the progress made to strengthen Ohio's economy and the actions needed to transform the economy and create higher-paying jobs.

The Governor's Jobs & Prosperity plan focuses on five key strategies:

* Innovation

* Entrepreneurship

* Fostering Success

* Workforce

* Supporting our Strengths

The strategies outlined in the plan are based on recent studies drawing attention to the new realities of the "knowledge economy."

Mayland agreed that knowledge will play a large role in Ohio's future expansion, but said the state must be prepared to walk that talk.

"Being high-tech is being knowledge-based," he said. "It's the engineering and knowledge that lays out semiconductors, and produces pharmaceuticals that can extend lives. This is all knowledge-based stuff. So, it's easy to say we need to be knowledge-based. But doing it is another story.

"Do we have universities that can attract the best students, and the best researchers to keep students here, that are incubators for new companies? This is an area where improvement is highly desired--where improvement is necessary."

The Role of Small Business

The state has other programs in place to promote and support economic growth. For example, Ohio's 10 Edison Technology Incubators offer new, technology-based small businesses assistance. The incubators have both business and educational partners.

However, B.J. Wiberg, director of the Ohio Small Business Council, a division of the Ohio Chamber of Commerce, said the state needs to create a more supportive environment for small businesses, which "drive the engine" of the economy.

"I see small businesses as a vital part of any future economy," Wiberg said.

"This sector continually rejuvenates itself through start-up businesses, and this is vital for a vibrant economy. You have people willing to take that risk, because they have a better idea and a dream how to make that a reality.

"Whether it's a high-tech business, a beauty salon, or a CPA firm--that's what keeps us on the leading edge. Re-innovations are brought to the marketplace through small businesses. If Ohio is going to be a leading state, we have to ensure a climate that encourages that kind of thing. We can't just recruit businesses or grow businesses from within the state."

Wiberg went on to say that small businesses don't make major headlines like larger businesses do. However, some small-business economic statistics are alarming.

"For example, if every small business in Ohio next year hired just one person, it wouldn't make a headline," he said. "But, you would have 250,000 more employed people here if that were to happen. That's significant."

Wiberg continued that the Governor's Third Frontier project could help stimulate small business growth. But, the state needs to seek out businesses and make them aware of state-operated programs.

"Small businesses need to know what the state is doing and how to tap into it," he explained. "Their minds are thinking day-to-day how to meet needs of customers. The government has various incentive programs, but they need to do a better job of moving those to realities for the small-business sector. They can't expect small businesses to do that They just don't have the resources."

Wiberg added that the past 10 to 20 years have been hard on small businesses. Cutting red tape would help.

"There has been a gradual trend in the loss of 'freedom to enterprise,'" he said. "Through the years our public policies have become more restrictive. It's a little here, a little there, and it's the biggest dissuader for people to go out and take risk."

Wiberg went on to say that studies indicate that states with high economic freedoms continually have high investments in business startups, an influx of talent and resources, and have the greatest per capita income growth.

"Legislators are dealing with various issues day to day, so they don't see this," he said. "Most of them are experts only in the one field in which they are educated. Ohio's small business needs to better educate these officials to try to get back to where we were in regard to rules."

Gross State Product by Sector

Services             18.8%
Government           10.9%
Ag.-Forest.-Fishing   0.9%
Mining                0.4%
Construction          4.5%
Manufacturing        24.0%
Trans.-Comm.-Util.    7.3%
Wholesale             7.1%
Retail                9.7%
F.I.R.E.             16.4%

ODOD statistics project total employment in the state will increase 12.5
percent from 1998 to 2008--an increase of nearly 740,000 jobs. And,
manufacturing is the largest of Ohio's 10 major sectors based on gross
state product. ODOD further reports that Ohio's manufacturing sector
employs one million people.

Note: Table made from pie chart

Wage and Salary Employment October 2002

Industry             Employment  Percent

Total for Ohio        5,498       100.0%
Mining                   12         0.2%
Construction            229         4.2%
Manufacturing           997        18.1%
Trans/Utilities         244         4.4%
Wholesale Trade         284         5.2%
Retail Trade          1,032        18.8%
Fin/Ins/Real Estate     312         5.7%
Services              1,587        28.9%
Government              801        14.6%

Note: Nonfarm payroll employment in thousands.

Source: Ohio Bureau of Labor Market Information.

RELATED ARTICLE: Ohio CPAs identify the worst in 2002 and predict better conditions for 2003

After the economic slide of 2001 and 2002, Ohio's CPAs say that Ohio will be on the rebound in 2003. The results are from The Ohio Society of CPAs' 19th annual year-end CPA Poll.

Almost 500 CPAs from around the state responded to questions about a variety of business issues from interest rates, business starts and the availability of capital funding to inflation and economic expansion. The poll also examines Ohio's business climate by region and forecasts performance among 18 industry sectors.

Factors Affecting Economic Downturn

Ohio CPAs blamed 2002's lackluster economy on economic uncertainty, 55.5 percent, and stock market volatility, 42.3 percent. These are up slightly from last year and mirror their opinion about factors negatively affecting the national economy. Health care costs were also a concern with 37.7 percent, down slightly from 39.3 percent in 2001. Respondents indicated that the September 11 terrorist attacks were less of an economic influence in 2002 with only 29.6 percent compared to 56 percent in 2001. Military action posed a slight concern at 20.5 percent and unemployment significantly dropped as an area of concern from 41.6 percent in 2001 to 18.3 percent in 2002.

Factors Significant to Economic Recovery

CPAs polled saw some positive economic influences in 2002. Declining interest rates continue to be the predominant positive economic factor at 78.4 percent; however, slightly down from 84.6 percent in 2001. The Bush administration once again was identified as a positive, yet decreasing influence, 42.9 percent compared to 53.3 percent last year. Low inflation rates gained ground as a positive component in 2002 with 34.9 percent up from 11.1 percent in 2001. Respondents also credit the Republican control of the U.S. House and Senate, 26.3 percent, as a catalyst for economic rebound.

"Just as we saw signs of economic recovery in 2001, the tragic events of September 11 unfolded, putting the brakes on the economy and hitting certain industries particularly hard," Sandy Pierce, CPA, Ohio Society Executive Board Chair, said. "However, consumers hung on and now, with continued low inflation and substantially lower interest rates; the economic recovery is expected to continue moving forward in 2003."

2003 Economic Forecast

Ohio's CPAs are confident that we will see economic recovery in 2003, but they are allowing more time for it to occur. A little over a third, 36.4 percent say that relief will come in the second quarter and 32.8 percent in the third quarter. Last year 39.4 percent said that the economy would turn around primarily in second quarter.

Looking ahead to 2003, 47.4 percent say that declining interest rates are expected to stimulate economic growth. The Bush administration was also viewed positively with 38.2 percent of CPAs believing the administration will be a driving force behind economic recovery in 2003, while 36.1 percent credit the prospect of declining taxes and 34.7 percent envision a boost in consumer confidence. The Republican control of the U.S. House and Senate gives Ohio CPAs cause for optimism with 34.5 percent citing this as a positive factor.

On the national front, Ohio CPAs say that energy costs, 29.2 percent, productivity rates, 23.7 percent, and homeland security, 23.6 percent, are the top three factors affecting the national inflation rate. Just under a fifth, 19.2 percent, believe that labor costs will also figure into the inflation equation.

Labor costs are tied closely to the predicted profitability of clients and organizations in 2003. Thirty seven percent of respondents say that labor costs will impact profitability with 34.2 percent attributing it to productivity rates. This is similar to last year's predictions of labor costs, 31.2 percent and productivity rates 41.2 percent.

Ohio Regional Current Conditions

Central and Southeast Ohio rated economic conditions the highest with 74.8 percent good/normal and 72.4 percent good/normal, respectively. Northwest Ohio showed 64.8 percent felt the economy was good/normal with Southwest Dayton and Cincinnati areas very close, rating their economic condition good/normal with 59 percent and 58 respectively. The only area of the state with a majority of respondents citing the economy as bad was Northeast Ohio at 64.3 percent.

Ohio CPAs remain optimistic with 54.4 percent expecting the economy to be better in 2003. A significant number, 40.9 percent, expect conditions to remain the same. Only 4.7 percent see things taking a turn for the worse.

Ohio Forecast by Region

Ohio's regional outlook is equally optimistic. Southwest Dayton respondents see a brighter future with 60.3 percent predicting a better economy in 2003. Northwest and Northeast Ohio share that view reporting 55.8 percent and 53.3 percent favorable outlooks. Central Ohio is split between 49.5 percent forecasting improvement and 47.5 percent expecting a flat economy. Southeast Cincinnati shows similar figures with 46.4 percent seeing a better outlook and 44.9 percent seeing no change. Southeast Ohio strongly believes that economic conditions will remain unchanged by 65 percent of those polled.

Performance by Industry Sector

Poll respondents were asked to examine and evaluate various industry sectors in Ohio and gauge each sector's potential for improvement for the coming year.

Like last year, high technology is expected to improve the most in 2003 with 41.3 percent expecting improvement. Services are expected to rise 40.7 percent and manufacturing 38.2 percent. All are up from 2002 levels.

"Last year we said that technology had nowhere to go but up considering 2001's dismal performance," J. Clarke Price, CAE, president and CEO of The Ohio Society of CPAs, said. "Our members have not given up hope. They expect to see technology, services and manufacturing all rebound in 2003."

Also expected to see a gain in 2003 is travel/leisure/tourism according to 33.1 percent of the CPAS responding.

CPAs report that the industries hardest hit in Ohio in 2002 were manufacturing, 38.9 percent, up from 37.7 percent in 2001, high technology, 13.8 percent, up from 12.9 percent and travel/leisure/tourism, 13.7 percent and showing signs of improvement after rating 24.5 percent last year.

Industry sectors that fared best in Ohio last year included real estate, up from 19.2 percent in 2001 to 35.9 percent in 2002; services, which dropped slightly from 18.9 percent in 2001 to 18.6 percent this year. Also lower, but surviving in Ohio is health care at 18 percent and banking/finance at 13.8 percent.

This year-end version of the CPA poll was conducted by polling 466 of The Ohio Society's 23,000 members. The sample has been weighted according to membership in each Ohio region and has a margin of error of +-4.5 percent at the 95 percent confidence level.

Factors expected to positively affect the economy in 2003

Declining interest rates          47.4%
Bush Administration policies      38.2%
Prospect of decreasing taxes      36.1%
Consumer confidence               34.7%
Republican control of U.S. House  34.5%
and senate

As they help their clients and companies with business planning, Ohio
CPAs major causes of concern are:

Rising health care costs             46%
Potential for economic slowdown    44.7%
Stock market fluctuations            17%
Increase in government regulation  16.2%
Reduction of bank credit           16.1%
Global uncertainties               11.4%

Expectations six months from now show:

Better                            54.4%
Same                              40.9%
Worse                              4.7%

Present business conditions are:

Good                               5.1%
Normal                            42.9%
Bad                                 52%

Recovery from the country's current economic position is
expected in 2003:

First quarter   11.7%
Second quarter  36.4%
Third quarter   32.8%
Fourth quarter  19.1%

Economic and Interest Rate Forecast

This chart is provided as a service of National City at
www.nationalcity.com/corporate/economist. It provides the latest
information on real GDP, prices and compensation and other key
economic and interest indicators.

                                       2002:2  2002.3  2002.4  2003.1

Real GDP (annualized rates of change)

Gross Domestic Product                    1.3     3.1     1.2     3.0
 Final Sales                             -0.1     3.2     0.3     2.7
 Consumption                              1.8     4.2    -0.9     2.6
 Fixed Investment                        -1.0     0.2     1.9     2.3
  Nonresidential                         -2.4     0.6     1.6     4.9
   Business Equipment                     3.3     6.5     4.2     7.4
   Structures                           -17.6   -16.0    -6.5    -3.0
  Residential                             2.7    -0.8     2.8    -3.6
 Exports                                 14.3     2.1     4.8     5.1
 Imports                                 22.2     2.5     1.5     4.8
 Government                               1.4     1.8     2.1     3.6

Prices & Compensation (annualized
rate of change)

 GDP Deflator                             1.2     1.1     2.2     2.5
 Consumer Price Index                     3.4     1.9     2.6     2.1
  Ex. Food & Energy                       2.2     2.0     2.7     2.2
 Producer Price Index                     1.2    -0.8     0.6     1.6
  Ex. Food & Energy                       0.5    -1.1     1.1     1.8
 Employment Cost Index                    4.4     2.5     2.9     3.0

Other Key Measures

 Industrial Production (% chg)            4.2     3.6     0.8     3.2
 Consumer Confidence (1966=100)          94.1    87.3    80.4    87.5
 Housing Starts (Mil units)              1.67    1.71    1.65    1.56
 Vehicles Sales (Mil. units)             16.4    17.7    15.9    16.2
 Unemployment Rate (%)                    5.9     5.7     5.9     5.9
 Payroll Employment (% chg)              -0.2     0.5     0.3     0.8
 Federal Surplus (FY, $ bil.)              16     -42      -5    -100
 S&P 500 Index                           1068     895     878     935

International

 Current Account ($ bil)                 -520    -538    -549    -535
 % of GDP                                 5.0     5.1     5.2     5.0
 Foreign Crude Oil ($/barrel)            24.1    25.7    26.1    23.8

Interest Rates (%)

 Federal Funds                           1.75    1.74    1.44    1.25
 3-Mo. T-Bill (discount)                 1.72    1.65    1.37    1.24
 6-Mo. T-Bill (discount)                 1.87    1.64    1.37    1.29
 1-Yr. T-Bill                            2.34    1.81    1.51    1.52
 2-Yr. T-Note                            3.22    2.23    1.94    2.18
 10-Yr. T-Note                           5.10    4.26    4.04    4.23

                                       2003.2  2001   2002  2003

Real GDP (annualized rates of change)

Gross Domestic Product                    3.0   1.2    2.3   2.8
 Final Sales                              3.5   2.3    1.7   2.5
 Consumption                              3.4   3.1    3.0   2.4
 Fixed Investment                         3.0  -2.0   -3.2   2.5
  Nonresidential                          6.8  -3.2   -5.6   4.0
   Business Equipment                     9.4  -4.4   -1.9   7.2
   Structures                            -1.5   0.9  -15.6  -5.8
  Residential                            -5.8   1.5    3.3  -1.1
 Exports                                  4.4  -4.5   -1.2   5.2
 Imports                                  1.6  -2.7    3.2   4.1
 Government                               2.2   3.6    4.1   2.5

Prices & Compensation (annualized
rate of change)

 GDP Deflator                             2.2   2.2    1.2   2.1
 Consumer Price Index                     2.2   2.8    1.6   2.4
  Ex. Food & Energy                       2.5   2.7    2.4   2.4
 Producer Price Index                     0.8   2.0   -1.5   0.9
  Ex. Food & Energy                       1.3   1.4    0.1   1.1
 Employment Cost Index                    3.7   4.1    3.7   3.2

Other Key Measures

 Industrial Production (% chg)            5.3  -3.7   -0.4     4
 Consumer Confidence (1966=100)          89.8  89.2   88.7  90.9
 Housing Starts (Mil units)              1.56  1.60   1.69  1.58
 Vehicles Sales (Mil. units)             16.9  17.1   16.6  17.1
 Unemployment Rate (%)                    6.1   4.8    5.8   5.9
 Payroll Employment (% chg)               1.0   0.2   -0.8   1.0
 Federal Surplus (FY, $ bil.)             -66   127   -159  -231
 S&P 500 Index                           1004  1192    993  1041

International

 Current Account ($ bil)                 -533  -393   -514  -543
 % of GDP                                 4.9   3.8    4.9   5.0
 Foreign Crude Oil ($/barrel)            22.7  22.0   23.8  23.3

Interest Rates (%)

 Federal Funds                           1.25  3.92   1.66  1.48
 3-Mo. T-Bill (discount)                 1.26  3.39   1.61  1.52
 6-Mo. T-Bill (discount)                 1.34  3.33   1.68  1.57
 1-Yr. T-Bill                            1.56  3.48   2.00  1.76
 2-Yr. T-Note                            2.27  3.82   2.65  2.38
 10-Yr. T-Note                           4.43  5.02   4.62  4.43

National City Economics

Nov. 13, 2002

Source: National City

Todd P. McCollough has held public relations/communications positions for several Central Ohio businesses. He currently is corporate communications manager for a local private company. A former reporter for several newspapers in Ohio and Pennsylvania, he still periodically writes articles for specialty publications.