99 years of economic insights for Indiana

The IBR is a publication of the Indiana Business Research Center at IU's Kelley School of Business.

Executive Editor, Carol O. Rogers
Managing Editor, Brittany L. Hotchkiss


First National Bank and Trust

STAR Financial Bank

First National Bank and Trust

The short-term economic forecast for Kokomo can be summed up with one word: uncertainty. The local Kokomo economy will suffer in 2006 more from the apprehension and fear of impending local manufacturing changes rather than from the changes themselves, which will not occur for some time.

It is difficult to focus on the local economy when it is so heavily dependent on global markets, since our largest local employers have locations and vendors scattered across the world. As our largest employers go, so goes the city. With that said, a large amount of apprehension exists in the local economy while the second largest employer, Delphi, works through a reorganization plan that will most likely drag out to the end of 2006. Meanwhile, the largest employer, DaimlerChrysler, is financially sound and continues to benefit from its large capital investments in Kokomo. Kokomo was at one time number one in the nation for European investment, almost entirely due to DaimlerChrysler. However, DaimlerChrysler will be closely monitoring the wage negations with Delphi as their next contract negotiations near in 2007. Workers are one of the most important and expensive commodities to the majority of large corporations, and the most efficient productivity for the lowest price will prevail in their strategic planning in nearly all instances. Compensation restructuring and/or job reductions at Delphi will negatively affect Kokomo.

Kokomo’s economy remains heavily tied to the manufacturing industry, specifically the automotive industry. Manufacturing jobs in the area and the state as a whole continue to be lost permanently to competition, mainly from overseas facilities as their productivity and operations in general continue to improve (see Figure 1). The auto industry is volatile, but has been very strong in the past twelve months, as loan rates remained low and incentive pricing, including offering employee discounts to everyone, kept sales strong. This kept demand high for a second year in a row with a different marketing approach to the 0 percent financing that was offered in 2004. This has helped protect jobs in the area, but the automakers may not be able to maintain this sales pace and the demand may fall back to normal levels as interest rates increase and they prepare a new marketing approach in 2006. The automakers have been showing signs of a shift in strategies to being more focused on productivity and cost of production to remain competitive for some time. Changes have been slow because of strong sales and long-term union contracts. Changes are inevitable and will have large consequences on the local manufacturing job market.

Figure 1
Howard County Manufacturing Jobs and Average Weekly Wages, 2001:1 to 2005:1

Figure 1

Our local charities will also feel the brunt of the community’s apprehension and most are already searching for additional funds. A slump in the local economy will only increase the need for their services and decrease the amounts of money that they will have to operate.

Job creation will continue to lag well behind the state averages and will remain difficult due to the strong union influences and higher than average wages. The city would like to attract more high-paying jobs but as the economy changes, those types of jobs will require a higher level of skills and education than we may be able to offer at this point in time. The focus shifts to education, the quality of our schools and teachers and attracting the businesses that will hire the college graduates before they leave the area. Our local middle-class workers are being slowly reduced to just the working class, as wages and benefits are squeezed downward. The current Delphi situation will speed up this occurrence, which will have severe consequences in the short-run, but may make Kokomo much more attractive to outside investment in the long-run depending on the outcomes.

The local real estate market will remain soft in the coming year as apprehension and speculation on salaries and job security remain the main topic of discussion. That, along with the anticipation of higher mortgage interest rates, will have the biggest impact on an individual’s decisions to buy or build a home in the area. The housing market has been averaging over eight hundred listings per month with only an average of just over one hundred sold per month through the third quarter of this year. There are also more than four hundred completed building lots available in the county at the present time with more being developed. These figures along with very low appreciation rates of homes and slowly declining population trends, make it difficult for homeowners to move within the county as well as elsewhere.

The trend for the upper middle-class wage earners in recent years has been to buy or build in counties south of Kokomo and commute. Nearly 5,000 people commute to Kokomo from Tipton and Hamilton counties alone. Compare this to the 1,400 workers commuting out of Howard County to Tipton, Hamilton and Marion counties.

Building permits have also declined in the past three years, from 448 in 2002, to 353 in 2003 to 268 in 2004. As of the third quarter of 2005, less than 125 residential building permits have been issued. Home values can also be directly related to the average family incomes of the area, especially since we don’t have a major tourist attraction or any major natural draws such as lakes, mountains or an ocean to inflate demand and pricing. It is also unfortunate that the number one individual seller of homes in Howard County at the present time has been the sheriff and his numbers could increase in 2006.

Overall, the Delphi proceedings may benefit Kokomo in the long run as pieces of the company are consolidated and Kokomo has the opportunity benefit from some of those contractions. Unfortunately, in the short run, local consumer confidence levels are low while the community waits on the outcome. This will affect small business owners the most as they compete for fewer disposable dollars from consumers. The consumers will most likely be a little more conservative for now and the total manufacturing salaries and wages in the county will inevitably see a reduction of some amount. Factor in increasing short-term interest rates, health care costs, and fuel and energy costs (compared to the twelve-month period just ended) and the most likely outcome will be a net loss of businesses in Kokomo during 2006. This is a domino effect as the small business owners do what they must to survive, cutting expenses themselves, which could be a reduction of hours or workforce as well. The key to their success will be the number of businesses that draw the transient or destination consumer from the north, east and west and those simply traveling through town.

Kokomo has always been resilient. Examples of past struggles would include the Continental Steel closing, the Chrysler bankruptcy in the 1980s and more recently the Haynes bankruptcy filing. The current troubles within the U.S. auto industry have been compared to the U.S. steel industry. The year 2006 will be another that tests the resiliency of Kokomo, as the second-largest employer makes drastic changes in its corporation. However, Delphi has a well-trained and skilled workforce with one of the best divisions of the company located in Kokomo. Kokomo should be able to rise to the occasion, reinvent itself, and actually come out of this better than it was going in.