U-M forecast: Michigan economy recovering but nagging inflation, supply strains remain concerns

November 19, 2021
Contact: Jeff Karoub jkaroub@umich.edu

Michigan’s economy is recovering from the pandemic-induced recession at a faster pace than previous downturns, but a sharp rise in inflation and supply chain difficulties have been souring perceptions of the economy.

Job growth has been healthy this year and is expected to continue over the next two years, and personal incomes also are forecast to rise after large-scale government stimulus cushioned them from the pandemic. However, high inflation will continue to cut into purchasing power, say University of Michigan economists.

“All things considered, this year’s economic performance offers many reasons to be thankful. As we look ahead, we expect the mostly good news to continue, with a nearly complete recovery by the end of 2023,” said Gabriel Ehrlich, director of U-M’s Research Seminar in Quantitative Economics, which has been forecasting the state economy for nearly 50 years.

Ehrlich co-authored the 2022-23 Michigan economic outlook with colleagues Jacob Burton, Donald Grimes, Owen Kay and Michael McWilliams.

Employment growth recently has been a bright spot in the recovery, with gains of more than 50,000 jobs in the third quarter after a relatively disappointing pace of 25,000 per quarter in the first half of 2021. Growth is expected to moderate in the quarters to come but economists forecast a payroll job count to get within 0.6% of its pre-pandemic level by the end of 2023.

That, researchers say, represents a far faster recovery than the state experienced during its long downturn in the early 2000s.

Government support in the form of unemployment insurance and other benefits protected personal income from rising joblessness. The economists estimate aggregate personal income in Michigan sits roughly 5% higher right now than at the end of 2019. That’s expected to continue growing, putting personal income 17% higher in 2023 than it was before the pandemic.

Still, they note, “stubbornly high inflation is a fly in the ointment” of the strong income growth during the recovery. Real disposable income, which accounts for taxes and rising prices, is forecast to be just 3.1% higher at the end of 2023 than at the end of 2019.

The catalysts for the producer and consumer price spikes are pandemic-related supply constraints and rising demand. The Bureau of Labor Statistics reports that in October, prices for all urban consumers nationally rose 6.2% year-over-year—the fastest increase since December 1990. U-M economists measure local inflation by the growth rate of the Detroit Consumer Price Index, which tells a similar story.

Other findings in the forecast:

Unemployment: The state jobless rate is expected to average about 6% in the final quarter of this year and first quarter of 2022 before dropping more rapidly over the rest of next year. Unemployment is forecast to average 5% by the end of next year and 4.5% by the end of 2023—less than a percentage point higher than the pre-pandemic level.

Labor force participation: Economists expect conditions to start improving in earnest by the end of next year, as the public health situation improves to the point that vulnerable workers feel safe to return to work and caregiving responsibilities become more predictable. They say the labor force participation rate should rise from 59% at the beginning of next year to 60.4% by the end of 2023—still below the nearly 62% rate recorded at the end of 2019.

Automotive industry: Economists say while the worst of the microchip shortage that’s plagued the industry appears to be over, other supply chain strains could come to the fore. However, they say production and sales should start improving.

Economists forecast that total light vehicle sales will rise from 13.3 million units in the third quarter to 13.8 million in the fourth quarter, then jump to 16 million next year. They remain optimistic that sales will exceed pre-pandemic levels during the second half of 2023, with sales of 17.3 million vehicles for that year.

Researchers project the Detroit Three automakers’ market share has started to recover as supply constraints ease. Their share is expected to rise from a low of 33% in the second quarter of this year to nearly 40% during the same period next year. They expect the Detroit automakers will account for 38% of sales at the end of 2023.

Sector snapshots: Blue-collar industries have recovered nearly four-fifths of their job losses from the beginning of the pandemic, and economists expect them to recover to their pre-pandemic level by the middle of next year and to reach nearly 5% higher than that level by the end of 2023. Construction and wholesale trade, transportation and utilities are thought to post the strongest job gains within the sector.

Researchers note manufacturing employment should also fully recover, ending 2023 a bit less than 2% higher than before the pandemic.

Lower-education attainment services jobs, such as those in retail and hospitality, plunged more than 30% at the beginning of the pandemic. They have recovered more than two-thirds of those losses yet remain 10% below their pre-pandemic level. Economists expect steady growth over the next two years, but employment remains roughly 5% below pre-pandemic at the end of 2023.

“The pandemic scrambled how we work, play, shop and travel,” McWilliams said, “and it will take time to fully recover.”

The economists say that “while Michigan’s economy has experienced some setbacks this year, we remain hopeful that the state will see a nearly complete economic recovery by the end of our forecast.”

“Our sanguine expectations come from our judgment that the economy of 2019 was fundamentally healthy and that once the pandemic subsides those fundamentals will take the wheel,” they said. “Despite our optimism, the path moving forward will not be easy for everyone. The pandemic took an especially heavy toll on job opportunities for less-educated workers, and we anticipate a challenging few years for those seeking an initial foothold in the labor market.”