The Road to Recovery

2010 Michigan Economic forecast

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Illustration by Don Kilpatrick III

Align government spending with revenue
Adopt a more equitable tax system
Support and retain more college graduates
Invest in cities and communities, especially Detroit

With or without jobs, most of us in southeast Michigan today cannot recall living through times beset with such economic and financial anxiety. And whether it occurs in 2010 or in the years shortly thereafter, it is almost inconceivable that citizens of Michigan will accept further radicalization away from our roots as a pace-setting economy.

Uppermost in everyone’s mind is whether 2010 will bring new job opportunities to Michigan. Having lost 783,000 private-sector jobs between 2000 and August of 2009 (representing 61 percent of all jobs lost in the U.S. over that period, according to the U.S. Bureau of Labor Statistics), this is a most appropriate concern.

And it is not the only concern. In mid-August, a motorist filling his vehicle at a gas station in Holly told the driver at the pump ahead of him how he once had a terrific job. He’s a heavy-truck operator who used to have constant work. “You know,” said the semi driver, “trucking is everything to the economy … you can tell when the economy is failing when trucking activity is on its back.”

Economically speaking, he’s “spot on” with his analysis. Since the 1920s, freight traffic, including railroad freight car loadings, has provided the finest coincident indicator of economic activity available. Nearly a century later, it is still marvelously indicative of business cycle conditions. In late August 2009, overall freight traffic and tonnage were down 15 percent to 20 percent from their peaks in the 2006-2008 period.

Michigan, of course, with automobile shipments running nearly 40 percent off their peaks, suffers more than the nation. Likewise, truck and rail shipments of overall construction materials, from crushed stone to lumber and wood products, are experiencing fewer loads, as well.

Starting Point: Optimism?

From the point of view of an economic forecaster, 2009 would typically offer an unprecedented case for optimism. The Michigan recession has been so deep for so long that incredible bargains exist for property, financing, housing, autos, and other goods and services. In Michigan, 2010 would be a cinch for 10 percent to 12 percent real economic expansion. After all, even a modest improvement next year would appear as a mammoth gain from a low base in 2009. But will it happen this time around, either nationally or in Michigan?

As of September 2009, there are signs of momentary stability. Housing prices have bottomed; stock markets have recovered some ground, albeit haltingly. Personal saving rates have skyrocketed to 7 percent as a share of after-tax income. This startling turnaround comes after several years of negative savings, which devour accumulated wealth. Higher saving rates traditionally foreshadow recovery, because they restore liquidity to personal and business financial statements. They’re harbingers of renewed confidence and spending capacity.

On the national level, unprecedented quantities of monetary pump-priming by the Federal Reserve and unimaginable amounts of deficit spending by the Treasury and Congress are already infusing the spending and investment streams of the nation. Normally, by now, our economic system would be so flush with liquidity and inundated with “shovel-ready” projects that the GDP would be surging on a rocket trajectory toward outer space.

But these are not normal times. And this is not a normal business cycle. Michigan is no longer in position to lead the nation or the world out of the recession. Nor does Michigan have the industrial base to prosper from a prolonged global upturn. A more appropriate question yields a more modest response: Can Michigan, in 2010, reverse its downward slide in real output, private-sector layoffs, income, and population?

On the Comeback Trail?

In previous recoveries, Michigan became the principal recipient of dollars that represented spending by households from other states. This is because there was great pent-up public demand for Michigan’s chief export to other states and the world — namely, the automobile. Households and firms had already postponed purchasing large-ticket durable goods when economic prospects for financing, for jobs, and for steady income were dicey. On average, our recessions have lasted nine months.

This was time enough for firms and individuals to rebuild their balance sheets, cash, liquidity, and confidence sufficiently to re-ignite spending and investment. They could also take renewed encouragement from generous sales discounts, low financing costs, and several counter-cyclical government programs — including unemployment-insurance payments and tax cuts — that accompanied the later stages of recession.

But this Michigan model of economic decline and resurgence has changed.

Its replacement model comes with a noncyclical imperative: Find new growth industries, based on human resourcefulness and natural resources.

And make it an industry that can price goods and services competitively in a manner that transcends traditional business cycles in a global economy.

An excellent preview of this new paradigm is what may now be emerging in the western portion of Michigan’s Upper Peninsula. Geographically, this is highly ironic, to put it mildly. After all, for three decades, Michigan’s U.P. has recurrently been visited by bouts of double-digit unemployment. It’s a region whose population numbers have risen and fallen but, overall, remained relatively unchanged, even amid statewide and nationwide growth. Also, the U.P. is an area of Michigan that has suffered chronic loss of image, not unlike parts of Appalachia, stemming from geographic isolation and declines in primary and extractive industries such as iron ore, copper, and timber.

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