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After 10 years of steady growth, Michigan’s economy faces headwinds

After 10 years of steady growth, Michigan’s economy faces headwinds
Thursday, Jul 11, 2019


As of July, the U.S. economic recovery from the Great Recession is now the longest in American history, dating to the 1850s. Yet several factors are emerging that could leave the state more vulnerable to the next downturn, from automotive industry trends to skirmishes over international trade.

Bridge Magazine July 9, 2019  Lindsay VanHulleMike Wilkinson  Economy

A decade since 2009 — the end of the worst recession in generations — Michigan’s economy has grown at a tortoise pace: Slow and steady.

Today, unemployment is low. Most of the jobs lost in Michigan during the 2000s have been regained. And consumers are still generally optimistic, though they’re concerned about talk of tariffs.

Michigan (and the nation) is now enjoying the longest economic recovery in more than a century. Yet several factors are emerging that could leave the state more vulnerable to the next downturn, from transformations in the automotive industry that are costing some manufacturing jobs, to ongoing talent challenges, to international trade skirmishes Michigan has limited power to control.

The ongoing national expansion surpasses the previous record, from March 1991 to March 2001, and economists say it isn’t expected to end anytime soon. Put simply, a growing economy doesn’t die just because it’s old.

While economists don’t forecast a recession is imminent, they caution that Michigan’s economy remains tied to the cyclical fate of the auto industry, even if the state is less reliant on manufacturing than it used to be. American consumers are buying fewer new cars as the industry restructures toward more electric and self-driving vehicles — a transformation that has led to layoffs even amid near-record low unemployment rates.

As home base to Ford, General Motors and Chrysler, Michigan also is more likely than other states to be harmed by escalating global trade disputes because the auto industry is a global business. Uncertainty surrounding federal trade policy, more than any other factor, is emerging as a cautionary sign tempering economists’ otherwise optimistic  forecasts.

“That certainly has a big impact on Michigan businesses,” said Robert Dye, chief economist for Dallas-based Comerica Bank, who tracks Michigan’s economy.

“So much of the manufacturing supply chains cross borders multiple times that that creates uncertainty for businesses,” Dye told Bridge. “It makes it very difficult for some businesses to have a lot of confidence about what their capital expenditures (and hiring) need to be over the next few years.”

Here’s a look at how Michigan’s economy has fared over the past decade — and some red flags that could affect Michigan in the next recession, whenever it comes.

Unemployment and the labor force

From a peak of 13.7 percent in 2009, Michigan’s jobless rate had fallen to 4.1 percent last year, where it has roughly remained, according to the Michigan Department of Technology, Management and Budget.

“It’s still amazing to me that we have done as well as we have done,” said Don Grimes, senior research specialist at the University of Michigan’s Research Seminar in Quantitative Economics. “I don’t think people quite appreciate how deep a hole we found ourselves in, in 2009 and 2010 — a structural hole, not just a business cycle downturn.”

Dye, of Comerica Bank, said he thinks unemployment in Michigan has likely reached its low point and will begin to edge higher.

Yet the unemployment rate alone doesn’t paint a complete picture about how many people are without a job. The official rate includes only those who are unemployed, available to work and have actively looked for a job in the past four weeks. People who don’t have a job but haven’t looked for work are considered to be out of the labor force and not counted among the unemployed.

Michigan’s jobless rate would be 7.6 percent through the first quarter of this year if it were to include workers who had looked for a job in the last year and people employed fewer than 35 hours a week but can’t find a full-time job despite wanting one. That’s the same as the national rate. Among Michigan’s neighbors, only Illinois and Ohio are higher.

Bruce Weaver, a DTMB economic analyst, said the state’s labor force generally has grown more slowly than the rest of the nation. The labor force rate is at least partly based on population growth, Weaver said, which has been slower in Michigan than the U.S. rate.

More than 40 percent of Michigan households in 2017 were impoverished or struggled to afford basic needs from housing to child care, according to a study of the working poor released this year by the Michigan Association of United Ways.

Many Michiganders continue to work more than one job to make ends meet, and often part-time jobs don’t offer employer-sponsored health insurance, said Gilda Jacobs, president and CEO of the Michigan League for Public Policy, which advocates for policies that support vulnerable residents.

The shift from a goods-producing economy toward an information-based one has made it more difficult for people with low educational attainment or few of the skills required for today’s in-demand jobs to earn a higher wage, she said.

“The recovery just hasn’t worked for everybody, and a lot of people that are in some of those jobs that they’re cobbling together two or three don’t have the skill set that they need to get the higher-paid jobs,” Jacobs said. “We need to make certain that with this economic recovery, that there’s a path for everybody to be able to get out of low-paying jobs into jobs that pay more.”

Jobs

Michigan is still climbing out of the hole it fell into during the 2000s.

By the middle of 2009, after the official end of the Great Recession, the state had shed more than 859,000 jobs from its peak in 2000.

We’ve made up a lot of ground. But we’re not yet above ground: By 2021, economists at the University of Michigan predict Michigan will only have regained 80 percent of the jobs it lost since 2000, or about 688,000.

It’s possible the state might never get all of them back.

Several economists said Michigan’s demographics are working against it. The state’s population is getting older, and Michigan will need an influx of younger, working-age residents — either moving into Michigan or staying in Michigan after college — to draw more people into the workforce.

More people continue to leave Michigan than move in, due to retirees seeking warmer climates and lower-tax states, as well as displacement of manufacturing jobs during the recession.

This outbound trend is “a fundamental drag on a state economy,” Dye said.

Though two positive trends are worth noting. First, Michigan’s population losses to other states have largely abated, down from nearly 100,000 net losses a decade ago, with far fewer leaving than earlier this decade.

Second, the state’s overall population is again growing, if slowly, after a decade in which Michigan was the only state to lose population.

Michigan should focus on attracting and keeping talented young workers and college graduates in the state to boost its labor force, Dye said.

Michigan has enjoyed robust job growth since 2011, though the pace of jobs added each year has been slowing ever since, according to federal data.

Wages and income

Wages have grown slowly throughout the recovery, something economists say has been puzzling given the low unemployment numbers. A tight job market often leads companies to raise wages as they compete for a limited pool of employees.

Charles Ballard, an economist at Michigan State University, said one explanation could be that productivity has slowed. Another could be that while the labor market is close to full employment, luring some people who previously sat out the job search back to work, Michigan’s aging demographics will limit how many older people are drawn back in.

During the Great Recession, which Michigan fell into long before the rest of the nation, household incomes fell the farthest of any state. Though incomes are recovering, they lag the growth seen in most other states.

From 2005 to 2010, median household income fell in every region in the country when adjusted for inflation, ranging from 2.4 percent in the South to 6.7 percent in the Midwest; it fell 12 percent in Michigan.

Incomes in Michigan have grown solidly since 2010, but the state remains in the middle of the pack of states.

In 2005, Michigan’s median income was equal to the rest of the Midwest and the U.S. as a whole. Today, it’s 5 percent below the rest of the Midwest and close to 10 percent below the nation.

The state’s sluggish income gains are partly linked to its low educational attainment rate, several economists told Bridge.

Just 29.1 percent of Michiganders 25 and older have at least a bachelor’s degree, according to federal estimates from 2017. That ranked Michigan 31st in 2017, below the national average. The percentage rises to 38.6 percent when people with a two-year associate’s degree are included.

For decades, Michiganders could get high-paying manufacturing jobs, especially in the automotive industry, straight out of high school. That’s no longer the case. Detroit’s automakers, for example, negotiated two wage tiers with the United Auto Workers union as the industry hurtled toward bankruptcy in 2007, allowing entry-level workers to be paid less than more senior colleagues.

Shifts in the economy over time have caused personal income to more closely align with a person’s educational attainment, meaning those with more education are more likely to have higher incomes, several economists said.

Over time, manufacturing’s share of the economy began to shrink. (Manufacturing was 21 percent of Michigan’s nonfarm workforce in 1990; last year, it was 14.3 percent, data show.) Detroit’s three automakers began to lose market share to foreign-based brands. Increased factory automation means fewer workers are needed to build cars or other goods, leading to a decline in demand for those skills.

“We sort of ran into the perfect storm,” Ballard said. “We had a below-national-average educational attainment, and we had heavy involvement in a sector that was in relative decline. We had a great run, but we’re sort of caught flat-footed when the economy began to change away from manufacturing and much more toward higher-tech, higher-skill” industries.

Grimes, of U-M, said Michigan must increase its share of college-educated workers if it wants to boost income in the state.

And, he said, the auto industry could be among the leaders of that charge. Carmakers are looking to build more electric cars and self-driving vehicles, which they hope will attract more tech talent to Michigan.

The Big Three’s success in the next 15 years will be shaped “by their ability to attract really well-educated people to work in autonomous vehicles in Michigan,” Grimes said. “If all that stuff ends up out in California or some other tech hub location — if Apple and Google sort of win that battle for dominance in the autonomous vehicle space — it’s not going to be good for Michigan.

“They’ve got a very good chance of pulling this off,” Grimes said of the Detroit automakers.

One prominent effort: Dearborn-based Ford Motor Co.’s purchase of the dilapidated Michigan Central Station depot in Detroit, with plans to renovate the building as part of a $740 million project to create a hub for electric and autonomous vehicle technology in the city’s revived Corktown neighborhood.

Rural Michigan lags in recovery

While all of Michigan’s 83 counties have significantly lower unemployment rates than they did 10 years ago, a majority — 49 counties — still have jobless rates higher than the 3.9 percent state average in May, data show.

Of the 10 counties with the highest unemployment rates, six are in the Upper Peninsula, while another three are in the rural northeastern Lower Peninsula. Alger County in the U.P. had the highest jobless rate in May, at 7.8 percent.

Rural Michigan has struggled to attract the kind of job growth that has concentrated in urban areas since 2009, economists said, a trend hardly unique to Michigan. Rural counties tend to have fewer people, and those who remain are older, less healthy and more likely to be retired. And they lack widespread access to high-speed internet, making it more challenging to attract companies to locate there.

Helping rural areas compete in today’s economy is “a key political question,” said Dye, of Comerica, “and I think it’s one that’s going to affect just about every state in the country.”

Aside from the rural-urban divide, the gap between high-income and low-income earners also has been pronounced. Economists said people earning at the top of the income bracket have seen better income growth in this recovery, though wage growth is beginning to reach lower-income workers, who were more negatively affected by the downturn.

For example, the share of Michigan households with incomes below $45,000 has fallen since the recession, while the percentage of households making between $45,000 and $100,000 has climbed, according to data from the University of Michigan.

“A tight labor market really does help, especially at the bottom,” said Gabriel Ehrlich, director of the University of Michigan’s Research Seminar in Quantitative Economics.

“It’s important not to … give up on the idea that economic expansion can help everyone,” Ehrlich said. “It might take a lot longer than we’d like. It might be slow. But my view is, if you have an economic expansion that lasts long enough … eventually that does help folks at the bottom.”

Cautionary signs emerging

Economists aren’t predicting another recession in the next few years, saying there’s still room for growth, albeit slower. Yet some cracks are beginning to emerge that they say are concerning.

Chief among them is the threat of federal tariffs.

The uncertainty those threats have created can’t neatly be measured in a statistical model, said Ehrlich of U-M, who said his team’s forecasts show it’s unlikely for current trade tensions to tip the national economy into recession.

That said, Michigan is particularly exposed to trade risk because of its reliance on the global auto industry, he said.

Americans also are buying fewer new cars, contributing to forecasts showing slower economic growth in Michigan in the next few years.

Big purchases like cars can be put off when the economy goes south, which makes Michigan more sensitive to down cycles as a result, Grimes said.

The transformation of the auto industry also is worth watching, said Dye. He said he thinks competing announcements of plant closures and new factory investments “is going to go on here for quite some time.”

By the time it settles, there likely will be a net reduction in manufacturing jobs, he said, though new technology for electric and autonomous vehicles will create new types of jobs.

“They’re just going to be different jobs,” Dye said. “You have to be nimble to take advantage of that.”

Source: Bridge Magazine

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