U-M economists: Michigan slowly emerges from COVID-19 recession, income inequality concerns rise

November 20, 2020
Contact: Jeff Karoub jkaroub@umich.edu

Restaurant Take Out Only Sign During the Corona Virus Pandemic. Image credit: iStock

Michigan’s economy is expected to gradually emerge from the pandemic-induced recession, but the pace and degree of the recovery will vary widely—with greater, longer-term losses disproportionately affecting workers with lower incomes and skills.

Employment and incomes are forecast to rise over the course of the next two years and the state’s automotive and construction industries are expected to grow during that period. Yet job losses are expected to persist in the leisure and hospitality industry and other sectors employing many lower-income workers—intensifying income inequality, say University of Michigan economists.

“We are seeing a two-track recovery from the pandemic. Customer-facing industries lost more jobs and have recovered more slowly than other sectors. We expect that trend to continue. Workers in those industries are likely to need extra help before a vaccine becomes widely available,” said Gabriel Ehrlich, director of U-M’s Research Seminar in Quantitative Economics, which has been producing a state forecast for nearly 50 years.

Ehrlich co-authored the 2021-22 Michigan economic outlook with colleagues Jacob Burton, Donald Grimes and Michael McWilliams.

By the end of this year, the economists expect Michigan jobs in higher-wage industries will be down about 4.2% from the peak, middle-wage industries will be down about 6.7% and those in the lower-wage industries down 14.6%. By the end of 2022, however, jobs in higher-wage industries are forecast to exceed pre-pandemic levels, while middle-wage jobs will be down 2.2% and those in the lower wage will be down 8.3%.

“On the one hand, it is encouraging that the recovery from the COVID-19 recession is likely to create a nearly complete jobs recovery in higher- and middle-wage industries,” the report says. “Unfortunately, the relatively weak job growth in lower-wage industries is going to leave a disproportionately large number of lower-educational attainment and lower-skilled workers facing long-term job loss. The unbalanced job recovery is likely to greatly exacerbate income inequality in Michigan (and undoubtedly the U.S. as well).”

The researchers say the two key factors influencing the shape and speed of the recovery are the arrival of additional federal money for residents as well as state and local governments, and the availability of safe, effective coronavirus vaccines.

In short, the report’s authors warn of a “very difficult winter,” with “glimmers of hope for a decent economic recovery on the side.”

Other findings in the forecast:

Jobs: The forecast calls for 82,000 additional job gains in the fourth quarter, which would leave Michigan 8.6% below its first quarter payroll employment count. Next year, the state’s economy is expected to add 137,400 jobs and 99,400 the following year. In that scenario, Michigan would end 2022 with 152,000 fewer jobs than it had in the first quarter of 2020—a 3.4% shortfall.

Unemployment: The state government estimated Michigan’s unemployment rate fell to 5.5% in October, but it cautioned labor force trends for the month were hard to evaluate. It added a better measure of recent trends may be the three-month average, which for August-October was 7.6%. The unemployment rate is anticipated to continue its decline at a slower pace. As vaccines become widely distributed and the public health situation improves, the jobless rate is expected to decline to 6.6% by the end of 2021 and 5.6% by the end of 2022. That would remain 1.7 percentage points higher than its pre-pandemic level.

Income: Incomes are forecast to fall another 2.5% in the fourth quarter with limited federal support. That decline would take aggregate personal income to 0.7% below the first quarter level. Economists say the aggregate number hides divergent fortunes for different households: Many face dire situations, with dwindling savings from the earlier stimulus and poor employment prospects. Further, they say, personal income grew at an average pace of 3.9% per year from 2010 through 2019, so the expected decline is larger relative to the pre-pandemic trend.

Personal income is expected to grow by 4.4% in 2020, fall by 1.5% in 2021, and rise 2.9% in 2022. In level terms, personal income in 2022 is expected to come in 5.8% higher than in 2019.

Automotive industry: Sales have recovered briskly from their downturn early in the pandemic. Economists forecast that total light vehicle sales will fall from 17 million units in 2019 to 14.5 million this year, before rebounding to 16.3 million in 2021 and 16.7 million in 2022.

Researchers project that the market disruptions caused by the COVID-19 pandemic will continue to settle down, and the Detroit Three automakers will claim about 41% of the market this year, on par with 2019. They expect Detroit Three sales will comprise 41.4% of the market in 2021 and 40.9% in 2022.

The state’s manufacturing industry is forecast to lose 64,400 jobs in 2020 due to the shutdowns of plants this spring and the drop in light vehicle sales. Manufacturing is anticipated to recover 31,500 jobs in 2021 and 17,500 jobs in 2022. A highlight, researchers say, is the “sector’s apparent ability to operate safely amid the pandemic.”

Sector snapshots: Beyond Michigan’s big automotive industry, construction has been a pandemic “bright spot,” benefiting from people spending more time at home and capitalizing on historically low mortgage rates. Since rebounding in the latter half of 2020, the construction sector is expected to lose only 6,600 jobs this year, add 12,100 in 2021 and 7,300 in 2022.

Economists were surprised by large job losses in private education and health services. They say postponement and cancellation of elective procedures took a bite out of health systems’ revenues in the second quarter, leading to job losses. There was some recovery in the third quarter. Researchers cautiously hope the sector avoids a “double dip” though it’s a risk. They forecast a recovery of 22,600 jobs in 2021 and 13,300 in 2022.

The leisure and hospitality industry has been the hardest hit, and sharp increases in COVID-19 cases this fall continue to hurt the bottom line. Economists also hope this sector avoids a double dip. They envision a loss of 131,600 jobs in 2020, a 21,000-job gain in 2021 and 27,200 rise in 2022. Overall, this would still be 83,500 jobs lower than in 2019.

 

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