Michigan’s recovery from the pandemic recession will last beyond 2022, according to University of Michigan economists who recently released new economic forecasts for the state and the nation.
The annual reports offer glimpses into some strengths and many changes for Michigan as it pushes its way out of the pandemic recession.
The bottom line for the state, the economists said, is that the jobs recovery already underway should continue, although at a slower pace.
“It’s shaping up to be a very difficult winter, but there are glimmers of hope for a decent economic recovery,” according to the forecast from U-M’s Research Center for Quantitative Economics (RSQE).
At the same time, low-wage workers will find far fewer jobs, with a deeper economic divide predicted between high-wage, high-skilled jobs and low-skilled jobs. And the state’s projected budget deficits for the next two years will challenge state elected officials.
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The federal government controls the two biggest variables for how the state’s economic rebound will play out, the report said: a second – but, so far, stalled – federal stimulus package to aid unemployed workers, struggling businesses and local governments; and the vaccines that are reported to be close to public distribution.
But even if both are in place by early 2021, the recent uptick in COVID-19 cases, hospitalizations and deaths signal more concerns for the state’s rebound.
“You have to conclude that fatalities are going to continue rising over the next few weeks in Michigan,” economist Gabriel Ehrlich, director of RSQE, said during a presentation of the forecast. “COVID is really in the driver’s seat for the economy right now.”
On Nov. 21, the state crested 300,000 confirmed cases of COVID-19 since the pandemic began in March. And the daily case count continues to climb. Last Tuesday, the state’s rate of new cases reached 70 per day for every 100,000 people. It was 31 per 100,000 on Nov. 1 and just eight daily cases per 100,000 as of Oct. 1.
While the vaccines that may start distribution before the end of the year signal a potential end to the pandemic, the forecast was based on the likelihood that widespread distribution isn’t likely until mid-2021.
Even with those variables, the state’s rebound likely won’t follow the extremes seen during the Great Recession and some business sectors – like construction and high-income jobs – should be back sooner.
“In contrast to the previous business cycle, the Michigan and national economies were fundamentally healthy prior to the COVID-19 pandemic, with no major imbalances to work through on the way to the new normal,” according to the U-M prediction for the state.
Employment through 2022
The jobs recovery continues, but at a slower pace than during summer, Ehrlich said. Michigan lost about 1.06 million jobs from February to April, when Michigan was under Gov. Gretchen Whitmer’s stay-at-home order.
But as the state reopened, jobs returned and many businesses adapted to allow their workforces to work from home, and the state regained at least 100,000 jobs each month from May through July.
Yet by the end of this year, the state is still expected to be down 380,500 jobs, or 8.6 percent below the number of people employed in the state during the first quarter.
“The pace of the recovery has slowed down very noticeably over the past few months,” Ehrlich said.
The jobs recovery will continue to slow into 2021, he added. On most measures of the economy, Ehrlich said that concluding “a substantial recovery but not complete recovery” will be a recurrent theme.
Michigan will still be 152,000 jobs below employment in the first quarter of 2022 – a 3.2 percent decline from a year earlier.
That comes after the state is forecast to add 143,010 jobs from the fourth quarter of this year to the end of 2021, and another 85,400 by the end of 2022.
But the job growth isn’t equal.
The state can anticipate job recovery that is divided into two categories, Ehrlich said: Slow recovery industries, like leisure, hospitality and other services that have higher levels of personal contact. In two years, the hotel and restaurant industry likely will still have 20 percent fewer jobs than before the pandemic. That means 83,500 fewer jobs.
“When you look at the low-wage industries, we’re not forecasting a recovery,” Ehrlich said. “We’d love to be wrong about this. We expect unemployment in low wage industries to remain about 8 percent lower, even two years from now.”
Small business closings could play a role in that, including restaurants and retail.
Beyond leisure and hospitality, the U-M report cautions that job freezes or losses could come in government, and also health care and education. Manufacturing, meanwhile, should be down 15,400 jobs by the end of 2022 after losing 64,400 jobs this year.
All other industries, he said, should see a faster recovery and will be close to pre-pandemic levels in two years. That includes transportation-related jobs, which includes consumer delivery, like Amazon drivers and warehouse workers. Professional jobs that can be done from home also appear to be rebounding.
On a weekly basis, filings for unemployment (both traditional and Pandemic Unemployment Assistance) in Michigan continue, with the mid-November restrictions on restaurants likely to cause tens of thousands of layoffs. Initial filings for unemployment for the week ended Nov. 21 totaled 44,503, according to the federal Bureau of Labor Statistics.
Michigan’s budget will be affected, too
Michigan’s budget needs a federal stimulus package, Ehrlich said.
The $2 trillion CARES ACT aid package passed in March rippled across the economy, bolstering laid-off workers with expanded unemployment; small businesses with Paycheck Protection Program loans that could turn into grants, and local governments through funding to purchase protective equipment and maintain steady budgets.
Michigan benefitted from all those measures, including through unexpected sales tax revenue from the spending that resulted from the additional money reaching consumers.
However, Ehrlich warned that Michigan already forecasts a shortfall in Michigan’s budgets for the next two years: $2.7 billion in fiscal 2021 and $2.4 billion in fiscal 2022. Both of those figures assume some federal aid to offset lower income tax collections, corporate income tax, and sales and use taxes.
“Without more aid from the federal government, we’re going to be in serious trouble here in Michigan,” Ehrlich said. “We would expect school systems, health care systems and local governments to be forced into furloughs [of employees] and likely layoffs if we don’t see more federal aid.
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“That means teachers, police officers, firefighters and nurses who are going to be at risk of losing their jobs,” he said. “It would be bad for the economy and bad for communities.”
This year’s $62.8 billion budget passed in late September before it took effect on Oct. 1. It included $250 million in targeted cuts, many of which were related to health care savings from the federal government. At the time, officials said, the state’s unexpectedly fast economic rebound from COVID-19 and federal assistance helped Michigan avoid what once looked to be a $3 billion budget hole.
Over the next two years, Michigan can expect less income tax withholding from unemployment benefits that were increased by temporary federal payments of $600 for weeks. New stimulus, Ehrlich said, is likely to include less money for jobless workers. Business taxes also are projected to fall, with corporate income tax returns dropping from a 9.8 percent decline this year to a 12.2 percent drop in 2021. Overall business tax revenue will drop by 20.5 percent next fiscal year.
The U-M economist group has been doing state economic forecasts since 1973, with an error rate in recent years of zero or close to it, except during the Great Recession.
The 2020 forecast was rocked by coronavirus. Ehrlich looked back to what he and his colleagues predicted as “slow and steady growth” for 2020, and noted with some understatement that “things haven’t turned out quite that way.”
The year should have seen 0.7 percent growth in employment, but instead it fell 9.2 percent. Yet even that seems like a win for the state, which saw at least 40 percent of its workforce affected by some form of job disruption since mid-March and paid out more than $25 billion in jobless benefits.
“It could have been a lot worse,” Ehrlich said, “given what’s happened with employment in Michigan.”