Michigan's economic woes on the ballot

Republican presidential hopeful Mitt Romney sits in the Ford Explorer concept car as his wife, Ann, watches at the auto show Monday.

DETROIT (CNNMoney.com) -- Like planets lining up in a rare combination, the annual Detroit auto show and presidential election converged in Michigan this week. Both serve to shine a harsh light on the severe economic problems plaguing the state.

Detroit's automakers are cutting tens of thousands of good-paying jobs to bring manufacturing capacity in line with lower demand for their products.

But it's not only the Big Three. Bankruptcies have swept across the region's auto parts makers and suppliers - large and small - leaving many workers without jobs.

"Michigan is definitely in a recession, no ifs ands or buts," said David Wyss, chief economist for Standard & Poor's. "Detroit is suffering badly and it's not going to improve any time soon."

Manufacturing employment in Michigan has dropped by nearly a third - or 300,000 jobs - since 1999. At that time, the Big Three accounted for more than two out of every three cars sold in the United States and profits were strong on growing demand by American buyers for expensive SUVs and pickups.

But those profits and market share seem like distant memories, and U.S. sales are about evenly split between domestic and import brands.

General Motors Corp. (GM, Fortune 500), Ford Motor Co. (F, Fortune 500) and Chrysler LLC all lost money on their core U.S. auto operations last year, and the state's unemployment rate has doubled.

Michigan's unemployment hit 7.4 percent in November, a full percentage point worse than the state with the next highest rate: Alaska. Michigan lost 76,500 jobs in the previous 12 months and was the only state to report a jobs drop during that time. And the worst is not over. Last week, a state agency forecast that unemployment would rise to 8.2 percent this year and 8.7 percent in 2009.

Much of the country is suffering from a sharp turn back in housing. But Michigan and neighboring states Ohio and Indiana, which have also seen auto-related job cuts, are mired in an old-fashioned economic downturn brought on by the sharp rise in unemployment by homeowners. It has left Michigan with some of the worst housing problems in the country.

In the third quarter of 2007, Michigan led the country in the percentage of mortgages going into foreclosure. It is second only to Mississippi in the percentage of mortgages that are delinquent by 90 days or more and thus heading towards foreclosure. More than one out of every 20 mortgages in the state are either in foreclosure or on the brink. The median home sales price in the broader Detroit metropolitan area plunged more than 7 percent in the last year, according to the National Association of Realtors.

"In Michigan and Ohio, the problem continues to be the declines in demand due to drops in employment and population that have left empty houses in cities like Cleveland, Detroit and Flint," said Doug Duncan, chief economist for the Mortgage Bankers Association.

There have been some glimmers of light in the gloom of the Michigan economic woes. Casinos became legal in Detroit in 1999, and the city has enjoyed a of a building and tourism boom. MGM Grand opened a 400-room hotel and casino in October, spending more than $800 million, and two other casinos are under construction or renovation.

The visitor total has been boosted by Canadians streaming across the nearby border, as the appreciation of the Canadian currency versus the U.S. dollar has increased their purchasing power. Numerous malls and retailers in the Detroit suburbs have reported a doubling in business from Canadian customers.

But even the growth in hospitality employment helped along by the Canadian invasion hasn't made up for lost auto jobs, said Larry Alexander, president of the Detroit Metro Convention and Visitors Bureau.

In fact, the number of tourism jobs hasn't risen back to the 72,000 level of 1999, when business travel related to the auto industry was driving visitors. He expects that the new casinos will push employment in the sector above 60,000 by the end of the year, up from 55,000 in 2006.

Michigan's woes have provided plenty of fodder for the presidential candidates - particularly the Republicans.

The state moved its primary up to Jan. 15 in hopes of getting more attention from candidates, but that violated rules of both parties governing the timing of delegate selection. The Democratic Party stripped the state of all delegates, and none of the leading candidates have campaigned here. Sen. Hillary Clinton is the only top-tier Democrat whose name appears on the ballot, and supporters of other candidates are being urged to vote for an undecided.

But the Republicans have been blanketing the state with television ads and campaign appearances.

Arizona Sen. John McCain, who won the state's Republican primary eight years ago, has been stressing the need for better job retraining as well as changes in unemployment insurance, including giving displaced workers who can only find lower-paying jobs a few years of supplemental assistance. But he also said he couldn't promise a return of the lost manufacturing jobs.

"Here's a little straight talk I know the people of Michigan will understand. Some jobs that have left Michigan are not coming back," he said in a speech Saturday. "And the answer to that isn't to raise false hopes that somehow we can bring back lost jobs but to create new ones."

That tough-love message was quickly answered by his rival, former Massachusetts Gov. Mitt Romney, a Michigan native whose father was a former automotive executive and governor.

"The pessimists are wrong. The auto industry and all its jobs do not have to be lost," he said Monday, speaking to the Detroit Economic Club.

"I hear people from time to time say, 'Well, that's Michigan's problem.' Or, they say something like, 'Well, it's the car companies. They just brought it on themselves,'" Romney said.

"But that's where they're wrong. What Michigan is feeling will be felt by the entire nation unless we win the economic battle here."

Romney, arguing that businesses need less government regulation, cited the higher fuel economy standards recently signed by President Bush as an example of what is hurting the industry.

But Michigan was losing the jobs, and U.S. automakers were losing market share, even as fuel economy rules stayed essentially unchanged over the last two decades, so those rules are not a cause of the state's problems.

The third major Republican to campaign here, former Arkansas Gov. Mike Huckabee, said Monday he would help Michigan's unemployment rate by cutting regulations and by enforcing "fair" trade agreements with China and other nations that export.

"I think we can bring a lot of these jobs back," Huckabee said. "But our free-trade agreements have to be fair trade agreements. They're not. The Chinese dump products on us that have lead in them. We aren't enforcing our trade agreements in a manner in which we should. So there's an unfair competition."

But China is actually more of a life preserver right now for the U.S. auto industry - not a threat. All three have relationships with Chinese automakers and all have been helped by rapidly growing Chinese auto sales while North American sales decline.

Still, the Michigan economy struggles. Wyss, the economist at S&P, said the state's continuing dependence on the domestic segment of the auto industry will make a recovery difficult.

"It's not as bad as the early 1980s, but it's bad," said Wyss. "It'll come back eventually, but it's going to take a while, and it's going to have to come from more than just the auto companies."