Special Report: 2021 Michigan Economic Forecast – Pandemic Pitfalls

The 2021 economy will be influenced by the coronavirus pandemic, the approval (or not) of a vaccine, more federal stimulus, and who wins the presidential and congressional elections.
Pandemic Pitfalls
Illustration by Alexander Shammami

Prospects for a strong economy in 2020 were dashed in the first quarter when the coronavirus became more than just China’s problem on the evening news.

It began arriving on U.S. shores in late January and, within two months, the jobs economy transformed into frontline, virtual, or nonessential positions. Michigan was hit particularly hard.

Late last year, Michigan State University’s Center for Economic Analysis projected economic growth, measured as state-level gross domestic product (gross state product), would trail the nation at 2.3 percent in 2020. But that proved unrealistic in light of the virus.

Since March 15, nearly 2.3 million certifying, potentially eligible claimants have applied for state and federal benefits, with nearly $24 billion in benefits paid to 2.2 million workers. The figures come from an early October report released by the Michigan Unemployment Insurance Agency.

But there may be a silver lining given the nature of the shutdown.

“Unlike most prior downturns, the current contraction doesn’t represent any glaring weaknesses in the economy per se, but rather the result of policies designed to contain the spread of the virus,” stated a Michigan House Fiscal Agency report in May. “As such, there may be reason for optimism that, as restrictions are relaxed, economic activity will return at a somewhat faster rate than would otherwise normally occur after prior economic contractions.”

Yet, as businesses reopen, many at reduced capacity due to continuing government mitigation policies, the economy is recovering slowly.

Accelerating the speed of the recovery and economic prospects for 2021, according to economists, depends on progress in the fight against COVID-19, including improvements in therapeutics and, of course, the approval and wide distribution of a safe and effective vaccine.

In September, the Federal Reserve Board voted to keep its benchmark interest rate unchanged, at a range of 0 to 0.25 percentage points — a level it expects to maintain until at least 2023 in order to help the economy add jobs for as long as possible.

U.S. Economy
According to the University of Michigan, the economy is expected to gain back its pandemic losses in 2021. Green is GDP, red is unemployment, and yellow is inflation. Source: University of Michigan

The Fed said it projects unemployment will fall to 7.6 percent by the end of this year and to 4 percent by 2023. Pre-COVID, the jobless rate was at a 50-year low of 3.5 percent.

There still are areas of the economy, however, that will struggle “until we get a vaccine that’s in wide use and closely trusted,” Jerome Powell, chairman of the Federal Reserve, said in September. “We’re learning to live with COVID, which still spreads.”

In order for the U.S. economy to reach its highest potential output, “we need prosperity to be broadly spread,” he added. Overall economic activity, however, remains “well below” pre-pandemic levels, and the outlook for the economy is “extraordinarily uncertain.”

Robert Dye, chief economist at Comerica Bank, which has its Michigan headquarters in Detroit, agrees with the Fed chairman about a coronavirus remedy. “A vaccine would be a big positive,” Dye says. “It would go a long way to help boost both consumer and business confidence, but my expectation is a widely distributed and effective vaccine is many months down the road.”

Patrick Anderson, principal and CEO of East Lansing’s Anderson Economic Group, says waiting for a vaccine isn’t an effective strategy. “It’s not reasonable to hang all of your hopes on a vaccine because we simply can’t afford to wait for a vaccine to be created, tested, and distributed before we grow food and make things so we can get through the winter.”

Anderson is of the opinion that Michigan’s deep COVID-19 wounds are mostly “self-inflicted” due to government policies that lumped counties less affected by the virus together with those with higher infection rates.

“The collateral damage from policies that aren’t matched to the counties is severe,” he says. “It absolutely was a crisis in March, and necessitated an emergency response by the state government and the federal government. When we get to May, June, July, August, and September, we have months of data showing cases have been declining in Michigan since April and that it varies tremendously by area. One-size-fits-all policies clearly are unfair, punitive, and unproductive.”

It simply depends on where you are, what business you’re in, and what part of the economy you’re connected to.

— Robert Dye, chief economist, Comerica Bank

What cannot be debated is that the longer COVID-19 continues to impact the lives of Americans and Michiganders, the more difficult it will be for the economy to recover. Add to that a hotly contested presidential election and the need for more federal stimulus, and the potential pitfalls for the 2021 economy are plenty.

“There are significant hurdles we have to get through for the remainder of this year,” Dye says. “My hope is that we get through the election, get another stimulus package passed, and next year we see ongoing economic recovery for Michigan and the U.S. I think it’s still going to be a mixed bag for many businesses, because this is a highly idiosyncratic economy right now.

“It simply depends on where you are, what business you’re in, and what part of the economy you’re connected to. Upper- and lower-income households are facing different challenges right now. Lower-income households are bearing the brunt of the temporary furloughs we’re experiencing. Many of those will become permanent.”

Adds Anderson: “We’re coming out of Depression-level unemployment and a dislocation of the workforce that we haven’t seen since well before the Great Recession. There are no guidelines to look at in terms of recovering from a Depression-level shock.”

Looking at the numbers, the state House Fiscal Agency report forecasts a 5.5 percent decrease in U.S. GDP in 2020, before rising 3.6 percent in 2021. Inflation is expected to decrease 0.4 percent in 2020 and increase 1.4 percent in 2021. Wage and salary employment growth is forecast to decline by 4.6 percent in 2020 before growing 3.9 percent in 2021 and 3.2 percent the following year.

In Michigan, the agency estimates wage and salary employment growth will fall by 10.2 percent in 2020 and increase 6.9 percent in 2021. The state unemployment rate is forecast to jump to 13.3 percent in 2020, before dropping to 8 percent in next year.

Personal income in the state is forecast to decrease 1.5 percent in 2020 and increase 0.8 percent in 2021, according to the House agency, while wage and salary income is projected to decline 9.9 percent in 2020 and climb 0.8 percent in 2021.

Weekly Average Wages for All Industries by County Detroit-area 4th Quarter 2019. Wayne County led Michigan counties in weekly average wages at the end of 2019. U.S. Average: $1,222 ($1,144 in 2018). Area Average: $1,225 ($1,196 in 2018). Source: U.S. Bureau of Labor Statistics

Fortunately for the Michigan economy and its prospects for 2021, the manufacturing industry was largely able to reopen its production facilities early in the pandemic.

“Our anchor industry, the auto industry, was able to get a reasonable set of regulations applied to them early in the pandemic and has been able to manufacture vehicles and parts,” Anderson notes. “That’s actually a bright spot in what has been a dismal year for Michigan. I think manufacturing is going to be leading the way out of this Depression-level recession.”

Still, while automakers can produce cars, the economy has to be healthy enough for people to be able to buy those vehicles.

“The auto industry is a major accelerator for the state economy,” Dye says. “My expectation is that next year (car sales) will come back, (and there will be) a gradual increase by the second quarter. There’s a cohort of people whose jobs haven’t been negatively affected by the virus, and (they’ll) be able to take advantage of the low interest rates and buy cars.”

Light vehicle sales are forecast to be 12.8 million units in 2020, 15.8 million units in 2021, and 16.6 million units in 2022, according to the House Fiscal Agency.

As it stands, around 70 percent of GDP is consumer spending, according to economists, and one more package of tax credits and other economic benefits may be needed.

“We’ve had several rounds of fiscal stimulus,” Dye says. “I’m hopeful that we’ll see at least a limited stimulus package that would, at the very least, focus on rounding off the cliff effects of the curtailments of unemployment benefits. That’s going to challenge the spending ability of middle- to lower-income households, and that’s a key challenge. There’s still a possibility of another round of direct payments, but that remains to be seen.”

Kevin Voigt, who leads the Detroit office of KMPG, a global audit, tax, and advisory firm, says the economic support provided to date (via the CARES Act) has been unprecedented. “However, even those measures have an expiration date,” he says. “Again, depending on what happens with COVID-19, policymakers may feel pressure to provide further stimulus, which could have a significant impact on economic growth prospects.” 

Unemployment Rates graph
Unemployment Rates: Detroit and Wayne County were the hardest hit in terms of job loss from the pandemic. Source: U.S. Bureau of Labor Statistics

Lisa Cook, professor of economics and international relations at Michigan State University in East Lansing, says one key to the economic recovery is the ability of schools to teach students in physical settings.

“With states opening and kids going back to school — and, if schools stay open — I would expect GDP in the fourth quarter (of 2020) to be higher. If schools continue to operate virtually and parents have to stay home to take care of small children, I would expect it to be lower,” she says.

“I don’t see the GDP growing systematically until the fiscal response in the form of another stimulus package is in place, the vaccine is available, and there’s more certainty about small children returning to, and staying in, school,” Cook adds.

Cutting into unemployment is another factor that will boost the economy. Between February and April, Michigan lost more than 1.3 million payroll jobs due to the pandemic, but Michael McWilliams, an economist at the University of Michigan in Ann Arbor, says the jobs picture has improved every month since then.

“By August, the state had recovered over 50 percent of the lost jobs, and we currently expect that number to rise to 70 percent by the end of the year,” McWilliams says. “We forecast the Michigan economy to continue its recovery in 2021, but at a more gradual pace. By the end of 2021, we expect roughly 80 percent of the lost jobs to be recovered. That would put the total number of payroll jobs in the state at about 4 percent below the pre-pandemic levels.”

One sector of the Michigan economy that will have a difficult time bouncing back is hospitality and tourism, which took a tremendous hit from the pandemic and likely will be the last segment of the economy to recover.

“Hospitality, tourism, restaurants, and retail were hammered by consumers’ reluctance to go places and the government’s shutdown orders that prevented them from operating at anything close to a sustainable level,” Anderson says.

“We’re forecasting a ‘two-track’ recovery, where certain sectors will be able to recover faster than others,” McWilliams says. “The ‘slower recovery’ industries consist of leisure and hospitality, retail trade, and other services. These sectors include restaurants, bars, gyms, and theaters, which were hit hard in the recession, and for which a full recovery will depend on the course of the pandemic, the availability of a vaccine and, ultimately, when consumers feel ready to re-engage with the more in-person sectors of the economy.

“How quickly will people return to previous comfort levels with restaurants, bars, gyms, and theaters? We believe those industries will gradually recover, but it will take longer than for other sectors of the economy,” he says.

By August, the state had recovered over 50 percent of the lost jobs, and we currently expect that number to rise to 70 percent by the end of the year.  — Michael McWilliams, economist, University of Michigan

Regardless of the outcome of the Nov. 3 presidential election, many economists say they don’t foresee a major change in policy that would affect an economic recovery in 2021.

“Changes in policy resulting from the election could, of course, affect the economy,” McWilliams acknowledges. “Our hope is that Congress, whether before or after the election, is able to come to an agreement on further assistance. Other things being equal, the economic recovery will proceed faster if consumers are able to keep spending money, and state and local governments have the funds they need to maintain services as well as their own payrolls.”

Daniil Manaenkov, another U-M economist, says, “Short of the election yielding federal single-party control, I don’t anticipate dramatic shifts in federal policy. At this point, our baseline projection assumes continuation of a divided government, which will likely result in modest tweaks to economic policy. A moderate fiscal stimulus is a possibility in 2021 regardless of who gets elected, but actual policy will depend on the balance of power.”

Dye adds: “In all my years studying economics, I’ve seen studies that show the effects each party has on the economy. What tends to happen is real-world events tend to overwhelm the differences. I don’t hold the view that one party is going to have a specific effect on the economy that the other party wouldn’t have.”

On the housing front, the longer the pandemic continues, the more precarious the market will become. Renters and homeowners who have lost their jobs could continue to have a difficult time paying their rent and mortgage payments. In turn, if the government prevents landlords from evicting people, those same landlords will lose the income they need to live and to maintain their buildings.

“The 2021 outlook for the housing market is highly uncertain,” Manaenkov says. “The expiration of mortgage forbearance and a run-up in rental evictions threaten the housing market next year.”

In its annual forecast of the Oakland County economy, the U-M Research Seminar in Quantitative Economics predicts the county will lose 68,000 jobs in 2020, recover 39,100 next year, and add an additional 14,300 jobs in 2022. That would put it at 14,700 jobs, or 2 percent short of 2019 levels by the end of 2022.

“We expect a full economic recovery in Oakland County to take multiple years because of the depth of the initial recession,” says Gabriel Ehrlich, director of RSQE. “Thanks to Oakland County’s strong economic fundamentals, however, we expect it to enjoy a faster recovery than the state of Michigan overall.”

Oakland County’s jobless rate, which dropped sharply in the years following the Great Recession, was 3.4 percent last year — below the U.S. mark of 3.7 percent. Researchers say the job losses forecast this year drive the rate up to an average of 9.1 percent, compared with the U.S. rate of 9.2 percent.

Detroit area employment illustration
Detroit-area Employment as of July 2020. The leisure and hospitality industries saw the biggest percentage of job loss as a result of the pandemic. Numbers are in the thousands. Change from July 2019-July 2020 represented in percentage up or percentage down. Source: U.S. Bureau of Labor Statistics

Area economists say the county is well-positioned for growth and they expect it to experience a faster job recovery than the state, owing to its educated population, high share of managerial and professional jobs, and attractive standard of living. They predict modest job growth in most high- and middle-wage service industries, with engineering services a particular bright spot as the auto industry shifts toward electric and autonomous vehicles.

According to the forecast, employment in high- and middle-wage service industries will grow by about 5.5 percent between this year and 2022, and blue-collar industries and lower-wage service sectors will see growth of about 11 percent. Part of the faster growth in those sectors stems from their greater initial job losses in the pandemic.

Business leaders, meanwhile, are somewhat bullish on a national economic recovery. In August, KPMG released the results of a survey that showed many U.S. CEOs remain confident in the growth prospects of the domestic economy and their companies, and are accelerating investments in digital transformation.

“Forty-three percent of CEOs surveyed were more confident about their growth prospects for the economy than before the pandemic,” Voigt says. “Interestingly, the CEOs surveyed see climate change as the greatest threat to their organization’s growth, aside from the global health risk. Also, 83 percent of CEOs surveyed want to lock in the sustainability and climate change gains they’ve made as a result of the crisis.”

While the pandemic has posed challenges to all businesses, the majority of CEOs responding to the KPMG survey say they’ve accelerated their digital transformation as a result of the crisis. These areas include the digitization of operations and the creation of a next-generation operating model (74 percent), as well as the creation of new digital business models and revenue streams (70 percent).

“U.S. CEOs are resilient and remain optimistic as they continue to rise to meet the challenges and opportunities resulting from the pandemic and ongoing economic uncertainty,” says Paul Knopp, chairman and CEO of KPMG in the U.S. “They’re accelerating the digital transformation of their businesses, but also see a multitude of risks apart from the pandemic — with talent risk becoming front and center in the current environment.”

According to Dye, an untold story of the future economy of Michigan is the 2020 Census. “It’s getting lost because of COVID-19,” he says. “But this is always an important issue for Michigan, because it’s a state that tends to be on the border of net in-migration and out-migration. It’s a low-population-growth state, so knowing who’s moving in and moving out has implications for political representation and government programs. The reset that comes from the 2020 Census could be good for Michigan or it might be a negative, depending on the count.”

There’s a saying that the only certain thing about Michigan’s weather is its uncertainty. The same, it seems, can be said for how quickly the state recovers from the disastrous effects of the COVID-19 pandemic.

The recovery primarily dep-ends on people’s willingness to come to work and whether the government lets them come to work and lets customers show up,” Anderson says. “We have to remind people that Americans have come through pandemics before. Americans have been through World War I, World War II, the Vietnam War, 9/11, and other crises. You cannot stop working, and stop producing the things you need to produce, and expect to survive.”