UPDATE 3-Fitch downgrades Michigan on auto industry woes

(Adds Michigan's reaction)

By Lisa Lambert

WASHINGTON, July 10 (Reuters) - Citing concerns about the "significant deterioration" of Michigan's economy, Fitch Ratings downgraded the state's general obligation ratings on Friday by one notch to A-plus, the fifth-highest investment grade level, from AA-minus.

Fitch said it lowered the ratings because of high unemployment levels in the U.S. automotive manufacturing sector, which is largely concentrated in Michigan.

"Fitch believes the automotive sector will continue to be under stress due to the financial crises and global economic recession," it said in a statement.

The rating agency, however, revised Michigan's ratings outlook to stable from negative, saying the Midwestern state has a history of promptly addressing budget problems during recessions and it expects "the state will take appropriate actions" if its revenue continues to drop.

"We're somewhat surprised," said Michigan Treasury Department spokesman Terry Stanton, noting that the other two major rating agencies, Standard & Poor's and Moody's Investor Services, recently reaffirmed their ratings for the state.

"From our standpoint, our revenue, economic and employment projections for the remainder of the current fiscal year and for fiscal year 2010 took the bankruptcies and the contract in Michigan's auto industry into account," he added.

For 25 out of the 26 past months, Michigan has had the highest unemployment rate of the 50 U.S. states, according to Labor Department statistics, as two of the three dominant car makers in the United States floundered and ultimately filed for bankruptcy.

On Friday, General Motors GMGMQ.PK emerged from bankruptcy protection, and said it would cut 6,000 white-collar jobs. It will also cut its North American executive team overseeing operations.

"Between 2000 and 2008, over 165,000 automotive and automotive parts manufacturing jobs have been lost in Michigan, and over 50,000 additional jobs are estimated to have been lost in these sectors through May 2009 with limited recovery expected," Fitch wrote.

That has greatly depressed revenue, with the Rockefeller Institute reporting last month that Michigan's income tax revenue in the first quarter of the year was down 34.4 percent from the same time last year.

Detroit's school district is exploring whether filing for bankruptcy is a viable option, and the state is hoping to save $120 million by closing some of its prisons. It is also having employees take six unpaid furlough days through September in an effort to save $22 million. ( additional reporting by Kevin Krolicki in Detroit and Karen Pierog in Chicago)