Economic Uncertainty

Foreign trade wars, national elections, impeachment inquiries, sliding auto sales, and UAW/GM strike aftershocks could slow the state’s economic progress in 2020.
Economic Uncertainty

The economy in the United States in general, and Michigan in particular, is rolling along heading into 2020, but the uncertain future of foreign trade amidst the ongoing tariff war, slowing automotive sales, a sluggish housing market, and the effects of the United Auto Workers’ weeks-long strike against Detroit-based General Motors Co. have economists hesitant to unleash bullish prognostications for next year.

The Michigan State Senate Fiscal Agency reports the Michigan economy, as measured by inflation-adjusted personal income, is expected to grow 2 percent by the end of this year — double what it was in 2018. Growth, the agency predicts, will slow to 1.3 percent in 2020 and 1.6 percent in 2021.

National and international factors are the wild cards in any economic projection, particularly for a global manufacturing hub like Michigan, which also has significant agricultural, tourism, health care, and aerospace interests. In addition, 2020 is a presidential election year, which, as history shows, often limits growth opportunities due to business and consumer uncertainty.

The Trump administration’s tariffs on Chinese and other foreign goods may be well-intentioned as a way to attempt to balance the trade deficit, but the global response — in the form of reactionary tariffs on American products — has had the opposite effect. In fact, most everyone is impacted by global trade wars. Farmers in Michigan are feeling the pinch, while automotive OEMs, suppliers, and general manufacturers are witnessing higher prices for raw materials, parts, and components.

“The various global trade conflicts the U.S. is engaging in are having an effect on Michigan,” says Dave Girodat, regional president of Fifth Third Bank in eastern Michigan, which has its headquarters in downtown Detroit. “New orders, employment, and future business surveys have recently been weaker, suggesting the Michigan economy is slowing down, which will play through into 2020. The manufacturing and auto sectors are slowing, which disproportionately affects Michigan.”

spending infographic
Housing, insurance, health care, and pensions make up more than half of expenditures for people in the Detroit area.

From 2015 to 2018, light vehicle sales have remained steady, between 17.1 million and 17.4 million units. Edmunds, however, predicts that light vehicle sales this year will dip to 16.9 million, and AlixPartners anticipates a further decrease to 16.3 million in 2020.

“The long duration of the business cycle suggests that the odds of recession are elevated,” says Robert Dye, chief economist at Comerica Bank in Detroit. “The peak of the auto sales cycle is behind us.”

How all of that will impact a robust employment situation in the state is unknown. Currently, the Michigan unemployment rate is at 4.2 percent through September. That’s up a bit from the national U.S. rate of 3.5 percent, but it’s a huge improvement from the 10.6 percent it hit in 2011. Detroit’s unemployment rate is higher, at 5.3 percent.

“The labor markets are strong in Michigan, mirroring national trends,” Girodat says. “This is excellent news for the consumer, as consumer spending powers economic growth. The manufacturing sector has been easing, however, which is affecting the broader economy. Auto sales are off of their highs, but still relatively robust versus their long-term average.”

Dye also says Michigan’s economic growth should hold its own in 2019, and then slow through 2021. “I expect the data to show that the Michigan economy expanded moderately this year, with real gross state product growth in the vicinity of 2 percent,” he says. “The state’s manufacturing sector is under stress from both the U.S.-China trade war and the UAW/GM strike. It’s concerning to me that net job growth has stepped down this year, even before the UAW/GM strike.

“We expect the Michigan economy to cool in 2020, continuing a cooling trend in 2019,” Dye continues. “It’s my expectation that our next update (published in November) will show even cooler growth for Michigan in 2020, in the range of  1 to 1.5 percent real gross state product growth.”

Detroit area wages infographic
Oakland and Wayne county citizens earn more than the national weekly average while other area counties come in below the national average.

Matt Elliott, Midwest region executive at Bank of America Merrill Lynch in Troy, agrees.

“Two of Michigan’s three most important industries are manufacturing and agriculture, both of which are highly sensitive to the global trade environment,” Elliott says. “Given the noise and uncertainty surrounding trade-related issues, the Michigan economy performed strongly in 2019.

“Given the slowdown occurring in automotive sales and ongoing trade tensions, Michigan’s economy will likely grow at a slower pace in 2020 vs. 2019,” Elliott continues. “That said, unemployment remains low and consumer sentiment and spending remain strong, which are good signs for the economy — both nationally and in the state of Michigan.”

Patrick Anderson, principal and CEO of East Lansing’s Anderson Economic Group, says, “Michigan was doing well through the first three quarters, with unemployment at quite low levels, and strong auto sales for the past three years. Inflation was also low, and the state had successfully dealt with the Detroit bankruptcy and avoided a major trade war with Canada.”

Bill Adams, of PNC Bank, is another economist who expects Michigan’s economy to slow down next year as a result of outside influences.

Michigan’s economic growth looks set to weaken further in 2020. PNC forecasts for national real GDP to slow to 1.7 percent next year from 2.3 percent this year. Michigan will be disproportionately hit by this manufacturing-centered slowdown. — Bill Adams, PNC Bank

“Michigan’s economic growth looks set to weaken further in 2020,” Adams says. “PNC forecasts for national real GDP to slow to 1.7 percent next year from 2.3 percent this year. Michigan will be disproportionately hit by this manufacturing-centered slowdown. Michigan’s job growth has already slowed to 0.4 percent in year-over-year terms in the 12 months through August, the slowest since May 2010. Employment growth will likely slow further into next year.”

Adams says several factors may prevent Michigan’s economy from completely imploding next year, despite the outside influences beyond its control.

“First, the U.S. labor market is in excellent shape,” he says. “The unemployment rate is near a multi-decade low, there have been more job openings than unemployed job-seekers since March 2018, and wage growth is outpacing inflation. This is true in Michigan, as well, where the unemployment rate of 4.2 percent is close to the lowest since the year 2000, and where average hourly earnings have been growing 3 percent to 5 percent from a year earlier since the second quarter of 2018.”

He believes the strong job market will help buoy consumer demand in 2020, in a “virtuous cycle” of rising wages and employment, which fuel higher revenue for businesses — which, in turn, fuel higher profits, CapEx, wages, and hiring.

“Second, the Federal Reserve is cutting short-term interest rates to guard against risks of a more severe slowdown. Lower interest rates will make it easier for Americans to service debts, whether they be consumer debts or loans that fund businesses. This will free up money for businesses and consumers to spend in the real economy.”

Businesses should worry and investors should be happy. — David Girodat, Fifth Third Bank

Another boost to the state economy, according to Adams, is that millennials, born between 1981 and 1996, are entering middle age, starting families, and moving back to their hometowns to be closer to family and enjoy a lower cost of living. This is pushing U.S. population growth away from the largest cities and toward smaller, more affordable ones, like Michigan’s mid-sized cities.

“Finally,” Adams says, “lower interest rates are fueling a recovery of housing market activity, which slowed between early 2017 and late 2018 as interest rates rose and tariffs raised construction material costs. Michigan, in particular, stands to gain since the 2017 tax law raised the after-tax cost of large mortgages, which at that margin encourages Americans to live in areas with a lower cost of living.”

U.S. Expansion Also Slowing

The Michigan Senate Fiscal Agency says the U.S. gross domestic product is expected to expand by 2.3 percent at the end of 2019. It predicts next year’s growth will increase 1.8 percent, and it may expand by 1.6 percent in 2021.

“Businesses should worry and investors should be happy,” says Fifth Third Bank’s Girodat. “This will be a better year for Wall Street than Main Street. Using baseball terms, we’re still in the eighth inning of the economic expansion, but watching for the ninth. Financial market indicators are giving clues that the cycle end is near.”

Comerica Bank’s Dye says he sees continued, yet slower, nationwide economic growth for the foreseeable future. “The U.S. economy has expanded moderately since early 2017, continuing what’s now the longest U.S. economic expansion in history, at 123 months (as of September),” Dye says. “I’m expecting real GDP growth in the U.S. to slow from 2.9 percent in 2018 to 2.3 percent this year.”

The slowing economic expansion in Michigan and the United States is reflective of what appears to be a global trend.

“I expect to see cooler growth globally in 2020,” Dye says. “I don’t make an explicit forecast for global GDP, but I agree with several international organizations, including the World Bank and the OECD (Organization for Economic Cooperation and Development), which forecast slower global expansion in 2020 — in the vicinity of 2.5 percent real GDP growth. At that growth rate, some countries will be in recession. Germany appears to be on the verge of recession now. The U.K. also is at risk of recession.”

AEG’s Anderson warns, “The world is a dangerous place now. The growing trade, migration, and nationalist tensions are serious threats in many regions. The drone strike on Saudi refineries (in mid-September) should have been an alarm heard all around the world, but it fell off the front page quite soon. China’s expansionist efforts are causing other Pacific nations to respond or capitulate. Even the British can’t manage Brexit. And that’s before we think about North Korea or Iran. The world is much less stable now than a decade ago. Europe is slowing and has, arguably, worse problems than the U.S. It would be prudent to be cautious now.”

According to Adams, the global manufacturing sector entered a downturn in mid-2019 as the U.S.-China trade war, other trade policy uncertainties, tighter German auto emissions enforcement after Dieselgate, and a pullback in global auto sales weighed on demand for autos and capital goods.

Navigating Michigan

Myriad challenges face the state economy in 2020, according to experts, but there are ways legislators can encourage growth and help businesses navigate the hurdles put in place from outside the peninsulas.

“Michigan faces multiple economic headwinds next year,” Dye says. “The ongoing U.S.-China trade war continues to be disruptive. The cooling global economy is a drag on businesses with international markets. Longer term, the state’s economy is limited by weak population growth.”

Dye says Michigan’s governmental leaders can be proactive with legislation to ensure the state maintains its economic momentum.

“Michigan, like all states, must try to balance two agendas,” he says. “The first is to make the state as attractive to businesses as possible through an appropriate regulatory and tax environment. Because of Michigan’s large exposure to the auto industry, it’s important to try to attract and grow other types of businesses that will buffer the auto sector’s inherent cyclicality.

employment infographic
Manufacturing sector employment felt the biggest bite between July 2018 and July 2019 with a 1.6 percent decrease.

“The second big agenda is to make the state as attractive as possible to workers through support of schools, infrastructure, health care, and cultural organizations,” he says. “Today’s new businesses aren’t necessarily location-bound; they can locate anywhere. So the quality of the workforce is very important, and the quality of life for that workforce is very important.”

Still, the UAW/GM strike could have residual effects long after it concludes. “The strike obviously hurt earnings throughout metro Detroit and it has extended to Flint, Saginaw, Lansing, and Delta Township, as well as the counties south of there all the way to Fort Wayne, Ind., Toledo, and other parts of Ohio. Ontario has also been affected, as much of their economy is integrated with ours,” Anderson says.

“More important, we must have a competitive, productive, and reasonably flexible manner of building automobiles or we won’t be building many of them in the future,” he continues. “Some of the issues on the bargaining table were ‘just money,’ while others were more important than money, because they involve the future of this industry. We can afford a mistake on the former, but not on the latter.”

PNC Bank’s Adams agrees: “Trade policy and the global business cycle obviously affect Michigan’s economy, but there isn’t much that can be done at the state level to affect these larger trends. Michigan can focus, however, on strengthening its school systems, ensuring the supply of affordable housing, and improving the quality of its environment and natural amenities.

“The fastest-growing parts of the United States have good schools, an affordable cost of living, and natural amenities. Michigan can’t change its climate, but good schools, an adequate housing supply, and clean beaches, lakes, and rivers are within local communities’ control.”

Image sources: U.S. BLS, Consumer Expenditure Survey, Quarterly Census of Employment and Wages, Local Area Unemployment Statistics, Current Employment Statistics

The Road Ahead

Patrick Anderson, principal and CEO of Anderson Economic Group in East Lansing, assesses the prospects for further business growth in Michigan, legislative priorities, and diversifying the economy. 

DB: How do the first three years of the Trump administration compare to the first three years of previous administrations, going back to Ronald Reagan?

PA: The main accomplishment of the Trump administration is (its) tax policy, which has (generated) a significant boost to the economy, and (has pushed) companies to reinvest in the United States profits they had parked offshore. His trade policies, on the other hand, are thus far a mixed bag. The most obvious comparison is with President Obama, who came into office just as the nation was in a deep recession. This allowed him great freedom in the first two years to adopt legislation like the Affordable Care Act (now known as “Obamacare”) and to direct a huge “stimulus” program. He didn’t create the Great Recession, and his policies didn’t solve it, but he certainly was given some credit for leading the ship of state when we sailed out of (the recession).

George W. Bush, “43,” did a good job of stewarding an economy that was in quite good shape. He got credit from the electorate when he was re-elected. Clinton had amazing luck in running (during) the year in which a third-party candidate challenged a president with a decent economic record. He also had amazing skill in allowing Republicans in Congress to adopt policies that gave us our only recent balanced budget — and that helped him win re-election handily.

George H.W. Bush, “41,” inherited the roaring Reagan economy. His tenure was reasonably successful, and he probably would have been re-elected if there weren’t a third-party candidate involved (Ross Perot). Ronald Reagan attacked the “stagflation” he inherited with gusto, cutting taxes, deregulating industries, ending price controls on gas, and supporting a federal reserve policy started under President Jimmy Carter that ended the 1970s inflation. Nobody was more successful in turning the tide than Reagan.

DB: What’s your assessment of the Whitmer administration so far?

PA: Let me focus on one big job of a governor: staffing an administration that can undertake major priorities while making sure that prisons are run and schools are funded. The first job of a governor isn’t to dictate a budget — that’s the legislature’s job. As we look forward at the end of 2019, we see the priority of improving roads (wasn’t) undertaken, and (there was) a wasteful battle on the budget that was ultimately adopted by the legislature only days before the end of the fiscal year, and signed by the governor with a flurry of line-item vetoes. It wasn’t a good outcome.

We did avoid partisan rancor early in her term, which was welcome and a continuation of Gov. Rick Snyder’s approach. Such rancor, however, is now in the room. Of course, both Republicans and Democrats were involved, and there’s blame to go around. When you’re an executive in any organization — as your readers know full well — you can’t sit around blaming the economy, or your competitors, or bad weather. You have to lead.

DB: How can Michigan improve its standing on the list of best states in which to do business?  

PA: I was very pleased to be involved with the adoption of the “top 10” goal by a forward-looking group of business executives at Business Leaders for Michigan back in 2009, during the depths of Michigan’s “Lost Decade.” I recall David Brandon, then the chairman, Doug Rothwell, the president, and I meeting before a fateful board meeting. We were way out ahead of the rest of the state (in setting the top 10 goal), and itching to inject some spirit into the business community. We weren’t quite sure the board would go forward with such an aggressive goal. Then former quarterback Brandon said to me: “I’d rather get called for ‘offsides’ than ‘delay of game.’” That was a big turning point.

The leaders of the biggest firms, even in the darkest economic times, still thought we could break into the top 10 rank of states, and were willing to commit to getting us there. By 2018, we actually made it into the top 10 states in the critical business tax burden ranking. Good for us. Let’s try keeping it there. Next, we need to tackle roads and the quality of public school instruction. We’re doing badly on both.

DB: How can Michigan better diversify its economy?

Michigan’s economy has been diversifying, notably through the growth of the tech industry and the incorporation into the auto industry of numerous high-tech elements. When Anderson Economic Group first began counting high-tech workers for Oakland County, and then for Automation Alley in Troy, even we were surprised by the tremendous tech sector that we’d developed right here in the heart of the auto industry. Keeping that tech sector growing is one element of helping diversification. Improving the city of Detroit is another. …

DB: What future economic storms do you see on the horizon, short-term and long-term?

PA: I’m bullish on the auto industry, if it’s allowed to produce vehicles that consumers want, rather than what politicians think we should be driving (electric vehicles make up less than 2 percent of all vehicle sales annually). If we can get constructive labor agreements done, I don’t see why this can’t be a center of innovation for another 50 years or more.

I think we’ll get our roads fixed, with some pressure from the business community. That’s a solvable problem. The problem we haven’t addressed is the terrible shape of our K-12 public schools. Recently, we had to admit that most of our third-graders are unable to pass a reading competency test. That’s simply not acceptable as a human condition, let alone an economic one. A result that bad doesn’t come from only one cause; we’re going to need changes in the administration of schools, parental involvement, and funding. However, we’re still not talking about this effectively.

DB: Who was the biggest influence on your economic knowledge?

PA: I was very lucky to have two of the best minds of their generation as my teachers. First, I learned from the late Ned Gramlich at the University of Michigan. It was Ned who established the Gerald Ford School of Public Policy.

From there, I worked for David Littmann at the former Manufacturers Bank of Detroit. David was the dean of business economists in the U.S., and he taught me how businesses work. A man couldn’t have two better teachers.

—Tim Keenan