Can you recall any period in Michigan’s history when an economic expansion lasted a decade or more?

Hint: If the same forces now boosting the U.S. real GDP growth rate above the 4 percent threshold persist through 2018, Michigan’s economy will handily expand through 2019. How is that possible, given that the first eight years of the expansion featured a slow-paced to stagnant performance?

Two years ago, when 2016 was drawing to a close, the outlook for Michigan was somber. The state narrowly dodged a recession bullet headed its way. Rising tax rates, financing costs, increased federal regulations, and household and business caution (especially with worry over health care availability and affordability) were hammering the outlook for our auto industry and state GDP growth.

Let’s review the cyclical developments that were placing Michigan’s economy in danger.

According to federal data, the U.S. economy didn’t begin its recovery from the “Great Recession (2007-2009)” until July 2009. Similarly, Michigan’s unemployment rate didn’t begin its descent from a peak of 17.2 percent until after July 2009. However, for Michigan, the road to recovery was still not assured. Recovery meant circumventing deep potholes of automaker and City of Detroit bankruptcies. It took seven years for the U.S. to regain the level of real per capita GDP attained prior to the recession. For Michigan, it took eight years (2007-2015).

What proved notable about the recovery in both cases was the seven years of continuous growth (2010-2016) and the relatively slow pace of that expansion — averaging barely 2 percent annually.

For Michigan, the other significant feature was the disturbing profile of the U.S. expansion; it was decelerating from average real growth rates between 2.5 percent and 3.0 percent (2013-2015) to a meager 1.6 percent in 2016. Meager real GDP growth in 2016 was inadequate to support year-to-year gains in vehicle sales and profitability, hinting at an end to Michigan’s steady, yet modest, phase of job growth and advances in purchasing power, especially in the manufacturing sector. Indeed, indices of consumer and business confidence were barely treading water by the fall of 2016.

Michigan’s total employment gains were 85,000 (2017-18), including 18,000 in manufacturing.

In Michigan, it seemed certain that the most “exuberant” portion of the automotive cyclical uplift was behind us. Most of the pent-up demand for replacing older vehicles, postponed during the deep and prolonged recession, had been met. Moreover, gains in wealth via stock market appreciation — e.g., 401(k) plans — and housing market valuations had begun to stall, awaiting policies that would ramp up or remove regulations and tax burdens on nearly everyone and everything that moved in the United States.

What’s more, the Federal Reserve repeatedly made clear throughout the financial world that it would continue raising the cost of capital (interest rates), remaining true to its policy of hiking federal fund rates in the years ahead.

These were the factors challenging the economic outlook for 2017 and 2018 as we moved toward the presidential election and year-end 2016. The economy, already operating at levels that were vulnerable to recession and exposure to sudden external shocks, went into “take-a-deep-breath” mode. As uncertainty rose, confidence with regard to decisions on new investments and large-ticket purchases froze.

Encounter of the Third Kind

Strangely enough to most observers two years ago, the angst of the American electorate translated into the election of a president with a staunch business and construction industry background from the private sector, rather than the political sector. Stranger still, stagnant small- and large-business confidence indicators began rising, probably because the newly elected president held rather nonconformist policymaking viewpoints on shaping economic policies and incentives favoring more real growth, productivity, and competitive activity.

The losing candidate had focused on wealth redistribution, political domination, and government intrusion into decisions made by firms and households. The incoming administration campaigned on rupturing status quo advocacies of incumbents and previous presidencies, embracing wholly distinct benchmarks and objectives.

The two most prominently targeted policies for early transformation focused on the regulatory climate, including America’s largest energy-producing component, the “clean coal” sector, and our single largest economic sector, health care. This isn’t to say that the new president and key advisers hadn’t also considered lowering marginal income tax rates across geographic and income brackets, or revamping U.S. military strength, or, for that matter, better policing and ensuring the security of national borders, as well as revitalizing a terribly demoralized U.S. banking and financial industry. But sticky-swamp political considerations meant that these latter initiatives were consigned to a different hour.

Rather than sink into economic stagnation or recession, as might be expected after seven continuous — albeit slow — years of uplift (2009-2016), the U.S. economy and the state of Michigan regained positive momentum and accelerated over the next two years (2017-2018). The past two years have unequivocally exhibited newsworthy growth:

• National employment gains exceeded 4.1 million net new jobs, including 414,000 in the manufacturing sector; Michigan’s total employment gains were 85,000, including 18,000 in manufacturing.
• There has been a reduction in the number of Michigan recipients of unemployment benefits. As of June 2018, there were 35,247 recipients, down 90 percent from the 2009 peak of 363,212, and constituting the lowest level of such dependency since 1987.
• Rising paychecks in Michigan and the U.S. have been bolstered by worker bonuses and profit-sharing (reinforcing lower taxes on profits and earnings in the automotive sector).
• The National Federation of Independent Businesses’ Small Business Survey Index of Optimism reached its second highest level ever. By registering 107.9 in July 2018, NFIB’s index is heralding prolonged buoyancy for Michigan’s GSP (gross state product): income, employment, construction, housing, retailing, and tourism.

This turnaround in economic optimism and vitality hasn’t occurred accidentally. Fundamental growth barriers have largely been removed. In a competitive market system, faster growth is achieved and maintained only with policies that spur incentives and productivity, chiefly in private sector industries. Deploying financial capital and labor resources more efficiently advances prosperity and supports greater quantities and qualities of affordable output and sales.

Energy Deregulation

The first round of radical reforms liberated many facets of America’s critical energy industries of coal, gas, and oil, along with their transportation infrastructures, for enhancing domestic consumption and U.S. fuel exports globally. So effective was this wholesale no-brainer of reform that just over a year later, the U.S. had become a net exporter of energy as well as the largest energy producer among nations.

With the regulatory shift, energy prices can now be stabilized by the entry of many viable competitive sources of domestic power such as oil and gas fracking, and clean coal. Making U.S. energy more reliable on the domestic and international scene keeps our supplies freer from disruption as well as more price-competitive in foreign markets. This is the kind of reform that keeps giving, because of its integral and pervasive role in everything an economy does to survive and thrive.

Between 8 million and 9 million Americans shuttle between two or more jobs in order to complete a workweek.

History books will recount how the extension of vital, state-of-the-art oil and gas pipelines had been halted for more than half a decade by political forces prior to 2017. Now, due to recent federal approvals, they could reach the finish lines to markets and their storage depots, and secure end zones. The American coal industry, having faced annihilation merely two short years ago, can now resume full-scale exploitation of the billions of dollars it had invested many years earlier to develop “clean coal” infrastructure and nuclear power alternatives. Confirming U.S. economic pre-eminence spanning centuries of wartime and peacetime, U.S. science and technologies, and savvy entrepreneurial investments (such as those applied to fracking), tilted energy’s growth advantage toward America.

Health Care Liberation

Health care has also been reformed. From 2010-2016, the health care budget of the nation rose from 14 percent to 19 percent of GDP.  As a result, the cost of health care will account for a fifth of U.S. economic activity by 2020. Passage of the “Affordable Care Act” by the Obama administration presaged expanded federally-directed spending on health care.

Probably the bitterest, least successful, and costliest parts of ACA (and without intended benefits to patients or worker security) centered on “mandated” health care requirements imposed on firms and their personnel. To the lasting credit of the new administration, an executive order broke the chain linking those mandated financial penalties imposed by ACA on workers and firms where they were employed.

This was a seminal policy reversal favoring workforce expansion. Firms responded instantly in their hiring behaviors, not only in their demand for additional workers, but also in their justification for providing bonuses, profit-sharing, and other monetary incentives to new and existing employees. It’s difficult to overstate the significance of this policy shift toward private sector choice and direction of dollars for something as personal as health care — both the insurance plans covering catastrophic events and regular checkups known as preventive care.

In this connection, it should be noted that prior to the passage of ACA, nearly 70 percent of U.S. workers gained access to their health care plans at their places of employment, instead of through a Washington bureaucracy that hired a Canadian firm to develop a comprehensive national program that failed to function. Those formulators were forced to apologize while its chief marketer snarled: “Lack of (ACA) transparency is a huge political advantage. Call it the stupidity of the American voter or whatever, but basically, that was really, really critical for the thing (ACA) to pass.”

Employment Twist

Michigan, like other states, is still beset with unfortunate anomalies from ACA. Examples of the distortions and displacements inflicted by top-down political intervention by lawmakers on marketplace firms and workersabound. The stories are familiar to some and, perhaps, a wake-up call to others.

Prior to 2017, firms that were unable to afford ACA-mandated health care plans for their full-time employees confronted punitive fines and penalties. For smaller firms in highly competitive sectors of the economy, there was wiggle room for opting out, mainly by switching to part-time help (less than 30 hours per week) and hiring a different team of part-timers to complete weekly shifts needed to serve client demands. For fast food chains, adaptive entrepreneurship could skirt senseless mandates by using personnel agencies to help a franchise share teams of workers. Despite the added expenses inflicted by this creative jig (hours, turnover, bookkeeping), chains and franchise establishments mostly survived until the mandates were trashed and more rational times prevailed.

Nevertheless, a legacy from the Potomac’s meddling has become apparent. Today, for example, between 8 million and 9 million Americans shuttle between two or more jobs in order to complete a workweek full enough to put bread on the table and provide savings for future exigencies. Many of these workers, surveyed by the U.S. Bureau of Labor Statistics each month to tally national unemployment rates, are considered “employed” rather than unemployed. Yet, millions would prefer a single, full-time job.  Yes, they respond to surveys that they are employed, and they’re counted as such by BLS’s primary unemployment measure: dubbed U-3.

These respondents also appear in a far less referenced unemployment measure (dubbed U-6), which acknowledges their involuntary, part-time status in the workforce. There’s a whopping difference in unemployment rates between U-3 and U-6 measures. As of July 2018, for example, the U-3 unemployment rate for the U.S. hit a new record low of 3.9 percent, while the U-6 rate stood at 7.5 percent (reflecting the millions of people dissatisfied with their part-time situations).

Fortunately, both measures of U.S. and Michigan unemployed have trended downward. But it’s worth remembering that the U-6 measure is every bit as valuable in explaining weaknesses still embedded in our job markets as the U-3 reveals elements of strength. For Michigan, economic policies and the public are better informed by referencing both measures, especially because the U-6 measure is roughly twice the size of the U-3 unemployment rate. The same consideration is recommended for tracking former job-seekers now discouraged from looking for work at all — possibly caused by tradeoffs between generous welfare benefits and high marginal tax rates on entry-level wages and benefits.

Reforms: 2018 “Round Two”

Economic reforms enacted in 2017 restored momentum to a weakening business climate, but the tempo of actual business activity accelerated in 2018. Here’s why.

In 2018, the implementation of U.S. growth-augmenting reforms featured lower tax rates and better trade deals affecting the 15 percent of U.S. GDP linked to our exports and imports. It was a one-two punch, perfectly timed to accentuate the two finest Michigan economic reforms made in many decades: 2012’s passage of Right-to-Work legislation and 2018’s removal of Michigan’s Prevailing Wage law — a special-interest regulation that had annually added 15-20 percent in unnecessary costs to constructing government facilities.

Essentially, Michigan, under the direction of Gov. Rick Snyder, had prepared a more fertile and receptive environment to prosper from three new federal economic reforms:

• Lower marginal tax rates on personal income, capital gains, corporate profits, inheritances, and estates restored U.S. capacity to save, invest, spend, expand, and hire. There were grassroots impacts to these policies, including in southeast Michigan’s hard-hit housing, construction, and leasing industries. For instance, issuance of net new-housing unit permits in the seven-county metro-Detroit area jumped from 4,881 to 6,995 between 2016 and 2017, more than doubling 2015’s totals. Between July 1, 2016, and July 1, 2018, the median listed housing price in Michigan rose 26.9 percent (from $165,050 to $209,500).
• Teams of foreign trade and Treasury officials within the new administration have begun a long series of renegotiations on trade agreements dating back many decades. Our trade partners are on every major continent. From China, Japan, and South Korea to Canada-Mexico and the EU, our U.S. strategy ultimately aims at reducing or eliminating taxes known as tariffs. To effectuate this reform, the U.S. possesses two exceptional tools for enlisting moral suasion and economic leverage.

First, the message to trading partners like China and the EU is this: “OK, if your definition of fair trade is to beg, borrow, or steal technology without paying for it (as the Soviet Union had done for 73 years, and as Russia still does today), then we will shut out foreign firms and individuals caught or suspected of such treachery; and moreover, if you believe in punishing our exports by erecting high tariffs, quotas, and other discouraging obstacles to our ability to compete in your markets (non-tariff barriers such as currency manipulation and prohibitively expensive rules, including red tape, capital and labor quota, and patent-sharing mandates), then, by golly, you must prefer it if we adopt and play the same game plan using your rulebook — the element of reciprocity.”

This is a very effective bargaining ploy in any negotiation, but chances are it will prove especially useful in negotiating better treatment of our trade with China, owing to China’s nearly 5-to-1 dependence on the U.S. importation of their goods versus China’s importation of U.S. merchandise and services.

The second great tool in U.S. trade negotiations is the most powerful one a nation could ever claim. It hasn’t been consciously or extensively deployed until now for two reasons: it’s a form of leverage lying right under our noses, and it takes more than an average politician’s two-year timeframe to gestate its fruitful outcomes. This tool is the inherent dynamism of our competitive market system that fosters technology, upward mobility, incentives, income, and wealth to participant households and firms on a scale that’s repeatedly proven to be better, faster, and cheaper than any socialist or other variant statist systems can muster.

The new administration also has subscribed to an age-old principle: Investment capital flows to places on earth where it’s “invited,” and remains in those countries where it’s “treated well” (not confiscated or frozen by burdensome tax regimes).

Nearly $1 trillion in income has returned to the U.S. just in the past 12 months.

For decades, U.S. corporate income tax rates were the highest in the industrialized world and ranked as the second most burdensome on earth, even compared with second- and third-world economies. By significantly chopping these business income tax rates, nearly $1 trillion in income has returned to the U.S. just in the past 12 months. This capital influx has propped our equity and bond markets and expanded investments in domestic plant and equipment, payrolls, and optimism.

Also, the initiative to reverse counterproductive policies from years past duplicates the astoundingly successful policies pursued by both Presidents Kennedy and Reagan with regard to cutting capital gains taxes in the 1960s and 1980s, respectively. Both policies raised immense sums of new tax revenue for state, local, and federal government coffers. Again, these enlightened economic policies, by enhancing long-term economic growth, open the door to greater fiscal safety and economic security in years to come. Incidentally, beyond this year’s likely repatriation of $1 trillion in heretofore frozen overseas profits, another estimated $4 trillion awaits repatriation should this enlightened policy era endure.

For 2019: Another Good, but Challenging, Year

Michigan’s growth cycle is now on track for full extension in 2019, thanks primarily to abrupt changes in national economic policy priorities and direction. Thanks also go to major legislative changes in Lansing that will vastly improve our business climate for many years.

Challenges for the next governor and legislature include the total state budget, now approaching $60 billion, with spending outpacing private sector growth — including growth rates of household real income, population, employment, and even energy prices. In addition, the underfunding of state and teacher pensions remains a severe threat that still hasn’t been fully addressed.

There are other problems and challenges. Per capita personal income in 2017 was 10 percent below the U.S. average, ranking the state 30 among 50 for this strategic variable. The ranking is only mitigated in part by Michigan’s equal ranking of 30th place in cost of living compared with other states. Michigan’s population growth remains only one-third that of the U.S. growth.

Allied Van Line’s Magnet Report for 2017 underscores this problem. The report measures more outbound moves than inbound moves for Michigan (giving us a magnet ranking of 46 out of 50 states). The net loss of productive families and retirees to other states is reflected in the political realm by a downsizing of Michigan’s electoral count after the 2020 census and pre-2024 election.

With 15 Electoral College votes (i.e., the sum of our elected representatives and senators in Washington, D.C.), Michigan will return to a level not seen since the 1912-1928 era. Our peak was attained at 21 electoral representatives during the halcyon years of 1964-1980.

The economic objectives most beneficial to Michigan’s future are threefold. Michigan can further buttress its gains by significantly reducing personal income taxes, as promised and as successfully implemented for Michigan corporations. Accompanying this reform, Lansing should finally deregulate the energy and business licensing industries in order to make Michigan a more competitive site to produce goods, make profits, and expand employment.

In turn, Lansing must quickly phase out “corporate welfare” by removing bureaucratic agencies that funnel hundreds of millions of dollars from taxpayers to special interest firms that are politically connected and favored at the expense of other firms and employees of the state.

Without such reforms now aligning with parallel efforts afoot in Washington, Michigan will spend many more decades outside the top 10 performing states with regard to economic attractiveness. Our economic future will only gain vibrancy if vigilance and engagement embrace policies that enhance our “lovely peninsula.”

The Way Forward

An alarm clock must have awakened a drowsy U.S. economy following the 2016 election. America’s GDP had been losing its forward motion between 2013 and 2016, but rather than succumb to rising interest rates and inflation, the economy in 2017 sprang from the couch.

Moreover, it acquired gusto, putting more than 4 million people into jobs — most at higher pay levels. By 2018, the country had visibly resumed prosperity, favoring our labor markets with the lowest unemployment rates on record for many states, and across nearly all gender and racial groups.

Capital markets also surged with enthusiasm, reflecting the strong comeback in employment and payrolls. Sharp cuts in tax rates on personal and business income and profits whipped new life into U.S. equity markets. From retail and financial stocks to construction, defense, and technology industries, accelerated household spending and business investment have showered capital markets and retirement plans and portfolios with greatly appreciated value. Aggregate net worth for the nation rose by $10 trillion, renewing a sense of financial security and optimism for Americans and our trading partners.

Twenty-one months after the new administration arrived on the banks of the Potomac, the wealth of the nation had risen in tandem with appreciation in both equity and housing markets. An amazing turnaround and then acceleration in the expansion of business activity reflect the threefold redirection in fundamental economic policy: energy industry deregulation, tax cuts that enabled repatriation of $1 trillion of corporate funds to be reinvested in a reinvigorated U.S. economy, and the redeployment of federal monies saved by having greatly diminished the number of welfare recipients and subsidies to unemployed persons.

Instead, the tax revenue was directed toward rebuilding our military, enhancing domestic security such as border security, and overall city and state law enforcement and courts. Therefore, in 2019 the U.S. economic outlook appears considerably strengthened.

In fact, three reliable leading indicators foretell growth, but not at the exuberant 4.2 percent rate of the second quarter in 2018. As of late summer, they predicted cautious acceleration in real GDP growth, perhaps stepping up from the average 3.2 percent in the first half to 3.5 percent in the second half of 2018.

This modest acceleration isn’t surprising in light of these headwinds: the rising costs of living and financing. In addition, might the Federal Reserve raise borrowing costs more than expected, thereby dampening growth? And might the Trump administration’s plan for removing tariffs and other barriers among the world’s trading countries fail?

In order to accelerate real GDP growth rates over the next four to six quarters, policymakers must implement “phase two” in their tax-cutting and deregulation, and in their efforts to liberalize international trade to achieve reciprocity and better behavior among our trading partners. Policy measures must be scrutinized carefully and frequently to assess the efficacy of “follow-through.” GDP acceleration doesn’t materialize by accident, as we continue to notice. Underscoring the urgency of more competitive, market-oriented reform, the current readings on our three reliable leading economic indicators, as of September 2018, are doing fine — but they’re hardly stellar.

The Yield Curve: The larger the arithmetical difference between a long-maturity security like the 30-year U.S. Treasury bond and a short maturity security like the three-month Treasury bill, the more likely the economy will show higher real GDP performance in the year ahead. In January 2018, this spread in yields was 1.37 percentage points, whereas by August the spread had compressed to a 1.08 differential. The narrowing spread isn’t congruent with faster growth predictions for 2019.

Index of Leading Indicators: The Conference Board’s LEI index also forecasts with accuracy into 2019. In June, the LEI pointed to “continuing solid growth with no short-term slowdown,” but the spokesman for the Conference Board noted that housing permits were “down again.” The housing sector is a broad and valuable forward indication of what 70 percent of the U.S. economy, driven by household spending, will be doing in the face of rising borrowing costs and perhaps higher inflation rates.

Consumer Sentiment: As of June, the consumer sentiment index from the University of Michigan stood at 99.3 compared to 98 in May. According to a U-M spokesman, consumers registered a “more favorable assessment of their current financial and household buying conditions.” The index has moderated from earlier levels, but remains optimistic in its outlook.

Until the probability of further growth-enhancing policies, including mastery over burgeoning national debt, becomes reality, it will be logical to forecast another growth year like 2018 for 2019 — but equally rational to dismiss the likelihood of an accelerated expansion.