EYE ON THE ECONOMY.

Four regional experts tell us what to expect in 2001

We've been hearing all the phrases: What goes up must come down. Nothing lasts forever. Soft landing. But what's the real economic lowdown for 2001? Four of the region's top experts discussed that question at the 35th Annual Economic Outlook Luncheon co-sponsored by The Economic Club of Detroit and the Detroit Regional Chamber. Here are some highlights from the prestigious December event at Cobo Center.

FINANCE

David L. Littmann

Senior Vice President & Chief Economist 

Comerica Bank

FLYING AT A LOWER ALTITUDE

The financial reality is that the Federal Reserve has engineered a slowdown, much in the same way it decelerated economic activity in the 1995-1996 period by raising interest rates by three full percentage points over the span of only 11 months during 1994. And this is why 2000's 5 percent real GDP growth is likely to be trimmed to just over 3 percent in 2001. Already, half a year after the Fed Board of Governors ended its current round of money tightening, the economy is showing unmistakable signs of slowdown.

Until the Federal Reserve reverses course and begins to lower short-term rates, the economy will move to a lower altitude. Not a "soft landing," mind you. Not a landing at all for that matter. But flight at a significantly lower altitude. This is what happened six years ago, and this is the most likely scenario for 2001.

The year 2001 is likely to become the difficult transition year between a boom year like 2000 and a comeback year like 2002, where we see a stepped-up growth in both the U.S. and global economies. The outlook for the year ahead, while not recessionary, is mostly likely to be sub-par and considerably below our longer-term growth potential.

Manufacturing

Joseph C. Day

Chairman & CEO 

Freudenberg-NOK General Partnership

MORE PRESSURE ON SUPPLIERS

To protect market share and compete with Japanese automakers in both quality and cost, domestic automakers should mandate that their suppliers adopt lean systems. Currently, the domestic automakers spend about $6 billion a year on warranty repairs, or an average of $500 per new car sold. The Japanese auto industry has significant advantage, as their warranty costs per new car sold are perhaps less than $75 per car.

The difference is that the Japanese vehicle manufacturers demand that their suppliers practice the lean business principles commonly known as the Toyota Production System. With the Japanese automakers, either you learn and practice lean -- or you're kicked out of their supply base. Many of us in the supply base have been preaching the same thing to the U.S. vehicle and supply community, but to little avail. Until the U.S. automotive community mandates lean processes from their suppliers, the costs won't come out, the quality won't go up and the overall competitiveness will suffer.

Lower U.S. vehicle sales volumes predicted for 2001 (between 15.8 million and 16.5 million units vs. 17.5 million for 2000) could create turmoil for many suppliers, especially those who allowed significant cost to creep into their operations as they scrambled to serve the unprecedented vehicle productions rates of 1999 and 2000.

ENERGY

Anthony F Earley Jr.

Chairman, President & CEO

DTE Energy Co.

DEREGULATION WILL WORK

Residential customers, as well as businesses, will have to pay much closer attention to their energy needs. Deregulation demands it. It is no longer just a matter of flipping a switch or hooking up to the local substation. It is no longer a matter of paying the established tariff set by the Public Service Commission.

The good news is that electric restructuring legislation in Michigan will provide for a more orderly transition to competition. The drafters of our legislation paid attention to the early warning signs in California and established a multi-year rate freeze to protect residential customers; they allowed Michigan utilities to retain generation which provides a hedge against wild market swings. And Michigan did not mandate a quasigovernmental power pool with complex rules that allow for gaming the system. While we are just at the front end of restructuring - all customers will be able to select a supplier by Jan. 1, 2002-I don't anticipate California-like problems.

Construction

David B. Hanson

Senior Vice President,

Walbridge Aldinger Co.

President-Elect, Associated General

Contractors, Greater Detroit Chapter

A BUMP IN THE ROAD

The majority of contractors in the Greater Detroit Chapter of the Associated General Contractors are entering 2001 with backlogs at or near record levels. But most of us believe that our backlog of work moving into 2002, a year from now, will be at less than the record levels the industry is experiencing today.

This will come about through a growth in new orders of only 1 percent nationally and we may experience a slight decline in new orders here in southeastern Michigan in 2001.

A "flat" year for new construction sales does not mean that construction is drying up. The final word is strong continuing activity in a weakening sales market. The continuing uncertainty on how hard the soft landing will be places uncertainty on third and fourth quarter new orders and therefore the direction of the industry in 2002.

However, I remain optimistic that we are hitting a bump in the road rather than falling off the cliff. The continued reengineering of our economy, our aging infrastructure and the increasingly mobile population all bode well for continued strong activity, albeit at a flat or slightly declining rate, in the construction industry.