Michigan’s economy is off to a strong start this year and expected to experience steady job growth, low unemployment and progress toward lower inflation over the next two years, according to University of Michigan economists.

Meanwhile, the U.S. economy as a whole offers a slightly noisier picture. It’s holding up unexpectedly well in the face of monetary policy tightening by the Federal Reserve, the economists say, but stubborn inflation leads them to suspect a period of slower growth will be necessary to tame it later this year and pave the way for growth to re-accelerate by the end of 2025.

The findings come from the state and U.S. economic forecasts released Friday by U-M’s Research Seminar in Quantitative Economics. The team of economic forecasters plan to present them at the Consensus Revenue Estimating Conference, a key step of the state’s annual budgeting process.

Stateside, the economists envision solid success during the next two years: They project about 76,000 job gains in 2024-25 with a jobless rate hovering just below 4% (3.8%-3.9%).

The forecast takes Michigan’s payroll job count to 2.4% above its pre-pandemic level by the end of 2025—though it leaves the state 3.2% below its all-time employment peak during the second quarter of 2000.

However, they note one “disappointing element” in their forecast: Growth of real disposable income remains tepid, with a decline of 0.6% this year—due in part to “pesky inflation”—and growth of 1.4% in 2025.

On the national front, the economic outlook hinges on the near-term trajectory of inflation, and the report says “the recent spike suggests that the last mile of inflation normalization may take longer than many had hoped after the rapid disinflation at the end of 2023.”

The relatively strong economy has been buoyed by “robust” consumption—a lot of buying of goods and services—but the report sees cracks in the consumer facade: Credit card and auto loan delinquencies have been rising, growth of revolving consumer credit appears to be slowing and sales of new light vehicles seem to be flatlining.

If those trends continue, the economists say, consumption and labor market outlooks could be in for some significant deterioration.

Adding complexity to the forecast is the real estate sector. They expect a gradual return to pre-pandemic pricing trends but affordability remains a concern.

“While we continue to expect rental inflation to slow, it is entirely too possible that rents will continue growing fast as unaffordable mortgages keep homeownership out of reach for many households,” said Daniil Manaenkov, co-author of the U.S. economic forecast. “Such a development would make it more difficult for overall inflation to decline all the way toward the Fed’s target.”

Generally, the forecast for the labor market calls for a gradual cooldown this year and moderate to stable job growth next year, but it notes a more rapid cooling and higher-than-expected joblessness is not out of the question. The expectation is the Fed will cut rates slowly with only one cut later this year and three in 2025.

The researchers say the recent pace of job gains likely has been helped by the inflow of immigrants. The additional workers could have alleviated some supply constraints by working jobs that wouldn’t have otherwise been filled and possibly restrained wage growth in some industries.

In sum, the economists expect a slight deceleration in economic growth in the near term but healthy growth throughout the forecast. They caution that while there is risk and volatility in every economic outlook, “inflation is notoriously hard to forecast.”

“Overall, we see the economy as nearing a ‘soft landing’ from the recent surge in inflation,” said Gabriel Ehrlich, RSQE director and co-author of the Michigan forecast. “It will take a while longer for inflation to qualify as truly tamed, but so far, both the U.S. and Michigan economies have held up better than we had feared in the face of high interest rates.”

Ehrlich’s co-authors on the Michigan forecast were Jacob Burton and Michael McWilliams. Manaenkov’s co-authors on the U.S. forecast were Ehrlich, Burton, Kyle Henson and Yinuo Zhang.