From U-M: Michigan’s economy weathers a challenging year

ANN ARBOR—The Michigan economy turned decidedly chilly this year as the United Auto Workers strike against General Motors, the trade war, and job cuts at Ford and GM all contributed to the slowest annual growth since the Great Recession.

But sustained growth should return for 2020 and 2021, albeit at a modest pace compared with 2017-2018, say University of Michigan economists Gabriel Ehrlich, Donald Grimes and Michael McWilliams and researcher Jacob Burton.

Michigan’s gross domestic product fell from 2.5% in 2018 to just 0.4% in 2019. Growth is expected to return next year rising to 1.3% and then another 0.9% in 2021.

“The sun stopped shining on Michigan’s economy this year, but fortunately we are used to capricious weather,” said Ehrlich, director of U-M’s Research Seminar in Quantitative Economics. “We expect the economy to change from very challenging to more neutral over the next two years with moderate job growth.”

Their analysis of the state’s economy also takes a first look at the city of Detroit’s economy as part of the city’s University Economic Analysis Partnership. U-M’s RSQE, Michigan State University and Wayne State University are in a five-year agreement to collaborate with the city to create city-level forecasts.

Their preliminary forecast projects the household employment count among Detroit residents to grow by an average of 1.1% in 2020 and 2021, outpacing the expected growth for Michigan.

“There are two major reasons that we expect Detroit’s economy to grow more quickly than the overall Michigan economy,” Grimes said. “First, Detroit has a higher unemployment rate and lower labor force participation rate than the state overall—which translates into a higher proportion of Detroit residents available to be hired for jobs. And second, the increased economic activity in Detroit is creating a substantial number of new jobs.”

The forecast calls for the unemployment rate in Detroit to edge down from 9% in 2018 to 8.6% in 2021. That’s similar to the decline in Michigan’s unemployment rate from 4.1% to 3.7% that they are forecasting for the same period.

“We expect the ongoing economic recovery in Michigan’s largest city to be a key driver of the state’s economic growth over the next few years,” Ehrlich said.

Other findings in the 2020-21 Michigan forecast include:

Jobs: The state will add 23,300 jobs this year, 29,000 in 2020 and 25,900 in 2021, or about half the pace seen in 2017-18. The forecast is close to the maximum rate the state’s labor market can sustain given the state’s low unemployment rate and aging workforce.

Automotive sector: U.S. light vehicle sales have slowed from recent years, and the Detroit Three’s share of sales has also nudged down to 41% from 41.7% a year ago. U-M economists forecast sales to decline from 17.2 million units in 2018 to 16.7 million units by 2021. And the Detroit Three’s light vehicle sales are forecast to decline from 7.2 million units last year to 7 million this year and 6.8 million units in 2020 and 2021.

Those totals would be the lowest for the Detroit Three since 2012, but more than 50% higher than the recessionary level of vehicles sales in 2009.

The UAW-GM strike is projected to bring Michigan’s job growth rate into negative territory in the fourth quarter—or a forecast of -0.8% at an annualized rate—as the strike reduced the state’s payroll job count by 31,500 jobs in October.

Manufacturing is expected to add 2,100 jobs this year, 2,000 in 2020 and 1,600 in 2021.

Top growth sectors: Leading sectors for gains in 2019 have been government, professional and business services, and leisure and hospitality. The professional and business services sector is forecast to add 11,600 jobs by 2021.

Michigan’s government sector lost jobs from 2003 to 2015, but has been adding jobs since 2016. It will add about 3,900 jobs this year and 7,000 next year when the 2020 Census drives the hiring of temporary workers. Then it will lose 300 jobs in 2021 as these workers come off the payroll.

Unemployment: Michigan’s unemployment rate will average 4.1% in 2019 and then will drop to 3.7% by 2021. That rate would be on a par with 1999 and 2000 as the lowest annual average unemployment rate since the current data series began in 1976.

Income: Personal income growth is expected to fall from 4.9% in 2018 to 4.1% this year, along with the slower job growth. The forecast is for income growth to moderate in the 3.6-3.7% range over the next two years.