Since the first quarter of 2020, COVID-19 has been the albatross around the neck of the national economy. Now, as the world bounces back from pandemic-related problems, inflation, coupled with labor and supply shortages, are pulling markets under water.
There’s plenty of blame to go around for an economy teetering on the edge of a recession — if it’s not there already.
The Great Resignation that the pandemic inspired is making it difficult for businesses to find workers. Closing plants during the COVID-19 crisis is part of the supply chain problems, as is the increase in demand that occurred once pandemic bans were lifted.
Inflation, meanwhile, is the result of the government’s gush of some $6 trillion in pandemic relief into the economy, according to many economists. In turn, Russia’s invasion of Ukraine in February contributed to an increase in natural gas prices, which already were higher than they were the previous year. The Russian military action also put a dent in the world food market, since Ukraine is a major European supplier of agricultural products like corn, wheat, sunflowers, and barley.
According to the Foreign Agricultural Service of the U.S. Department of Agriculture, Ukraine is one of the world’s top agricultural producers. In 2021, the country’s food product exports totaled $27.8 billion, accounting for 41 percent of overall exports ($68 billion).
If a recession is defined by two quarters of negative gross domestic product, we’re there as a country. The first-quarter 2022 GDP decreased by 1.6 percent. In the second quarter, it fell 0.9 percent. That came after six consecutive quarters of growth following the COVID-19-related downturn in the second quarter of 2020.
Michigan’s GDP, on the other hand, grew 0.1 percent in the first quarter of 2022. Figures for the second quarter weren’t available at press time.
“Michigan’s actually doing very well,” says John Augustine, chief investment officer at Huntington Bank in Detroit. “Michigan is recovering employment. We’re actually recovering labor force, too, which is important because that’s our pool of customers and workers. Our unemployment rate is a little bit above the national average, but it’s still respectable at 4.2 percent.
“In general, Michigan has come out of this above the national average for economic growth the last two years. We’ve been growing better than the country. We had positive GDP growth in the first quarter, and the country was negative.”
Bill Adams, chief economist at Comerica Bank in Detroit, agrees that the Great Lakes State is in better overall economic shape than the country.
“Michigan’s economy should continue to be solid next year and the inflation that’s weighed on consumer spending power should alleviate somewhat, which will be a cushion for consumer spending,” Adams says. “The slow growth of the labor force in Michigan is going to be a headwind to the state’s growth, and the housing market is likely to cool (due to higher interest rates).
“I’m optimistic about Michigan’s economy and the prospects for the state next year. The national economy is going to be growing below trend, but Michigan has a lot going for it, especially the sustained demand for motor vehicles (from) a lot of Americans who wanted to buy vehicles but couldn’t, even with other areas of consumer spending likely to slow.”
Not all economists are bullish about Michigan’s economy. Timothy Nash, who leads economic research at Northwood University in Midland, says he expects the U.S., Michigan, and Detroit economies will be in recession for some or all of 2023.
“If you take the old principles of economics definition of recession as two negative back-to-back quarters of GDP growth, then we’re in a mild recession,” Nash says. “I believe job growth will begin to decline on a larger scale in the months ahead, as it’s already being signaled by numerous companies mentioning their intention to eliminate any new hires for the rest of the year or they have actually begun laying off existing employees.”
Still, there’s debate about using the R word. The White House website, predictably, points out that a recession is more complicated than two quarters of GDP losses.
“The National Bureau of Economic Research (NBER) Business Cycle Dating Committee — the official recession scorekeeper — defines a recession as ‘a significant decline in economic activity that is spread across the economy and that lasts more than a few months.’ ”
The variables the committee typically tracks include real personal income minus government transfers, employment, various forms of real consumer spending, and industrial production. Notably, there are no fixed rules or thresholds that trigger a determination of decline, although the committee does note that in recent decades, they’ve given more weight to real personal income, less transfers and payroll employment.
Comerica’s Adams defines a recession as two quarters of negative GDP growth, plus decreases in employment and income.
If the U.S. economy isn’t officially in a recession, when might it happen? Augustine and Adams say the odds are 50-50 that the U.S. will see a recession in 2023. Michigan may not get there, but it will be dealing with the majority of the rest of the country, which will be experiencing a recession.
A recent survey of 49 economists in the Financial Times showed that almost 70 percent of the respondents believe the NBER will declare a recession at some point in 2023, with 38 percent predicting it will come in the first half of the year. A separate CNBC survey of chief financial officers agreed, at a 68 percent clip.
Economists everywhere are polishing their crystal balls seeking insight into the future. The International Monetary Fund predicted in June that the U.S. economy is likely to slow in 2022 and 2023, but will “narrowly avoid a recession” as the Federal Reserve implements its rate-tightening plan to curb inflation.
There may be more clarity closer to home. In May, the University of Michigan’s U.S. Economic Outlook stated: “The Q4-to-Q4 growth slows markedly from 5.5 percent in 2021 to just 1.6 percent in 2023. It then rebounds to 2.2 percent in 2024, as the Fed eases policy again. A shift in demand from goods to services, persistent rent increases, and pass-through from food and energy prices keep core inflation high through 2023.”
The state’s business leaders are optimistic about their businesses, but not the economy in which they operate.
A recent survey by Business Leaders for Michigan shows 86 percent of its responders expect their businesses to increase their capital investment or keep it the same, and 90 percent anticipate maintaining or boosting their employee ranks over the next six to 12 months.
Yet, 64 percent of respondents said they expect the U.S. economy to decline, and 36 percent expect it to stay the same or improve in the next year. More than half (53 percent) expect Michigan’s economy to fade, while 46 percent expect it to hold the line or improve.
Regardless of whether the nation or state is in an official recession, inflation is making life more difficult for businesses and citizens alike.
Consumer prices in August climbed 0.1 percent compared to the month before, as food and housing costs were higher for millions of Americans, according to the U.S. Bureau of Labor Statistics.
To combat the problem, U-M economists say, “We project the Fed to raise the target range for the federal funds rate at every meeting of the FOMC (Federal Open Market Committee) this year. Consequently, the top range will reach 3 percent by early 2023 and ultimately peak at 3.5 percent.”
Other economists said they were hopeful that falling energy prices would be enough to cool inflation, but government data indicated large price increases persist on core items that make up a central part of most families’ budgets.
The bureau’s Consumer Price Index showed that prices were up 8.3 percent in August compared to 12 months earlier — higher than analysts expected. The overall figure was lower than the inflation rate notched in the previous two months, but still higher than expected, given the sharp decrease in gasoline prices in August.
“We thought we’d see inflation start to come down, and instead what we’ve seen is inflation really sort of entrenched,” says Betsey Stevenson, professor of public policy and economics at the University of Michigan and a former member of the White House Council of Economic Advisers. “If there’s no real progress, then that says, does the Fed need to take stronger action? And if the Fed needs to take stronger action, what does that mean for the risk to peoples’ livelihoods?”
Prices for food, energy, and other items in metro Detroit went down 0.5 percent during July and August, but were up 8.6 percent from a year ago, according to the Bureau of Labor Statistics’ Consumer Price Index for All Urban Consumers (CPI-U).
Over the year, food prices increased 13.9 percent, while home groceries were up 14.9 percent from a year ago. Although energy prices declined 14.1 percent in July and August, they were up 18.6 percent over the year, largely due to higher gasoline prices (21 percent). Prices paid for natural gas increased 34.8 percent, and electricity prices rose 2.8 percent during the past 12 months. The index for all items, less food and energy, rose 6.7 percent. Shelter costs, up 5.4 percent, were a major contributing factor.
“Commodity prices are a big swing factor in the inflation numbers,” says Augustine, of Huntington Bank. “There are three factors: rent, wages, and commodities. The commodities story was impacted by an event we didn’t anticipate — Russia invading Ukraine. Russia is a commodities superstore and it was shut down. Historically, it takes a couple of years for wages and rents to come back down. Gas prices are going down and consumer confidence is going up.”
According to the University of Michigan’s September Surveys of Consumers, consumer sentiment was 1.3 points above its August reading, which had risen 13 percent from July.
The one-year economic outlook continued lifting from the extremely low readings earlier in the summer, but these gains were largely offset by modest declines in the long-run outlook, says Joanne Hsu, director of the surveys at U-M.
“Personal finance components of the index, as well as buying conditions for durables, remained at similar, relatively low levels from last month,” Hsu says. “After the marked improvement in sentiment in August, consumers showed signs of uncertainty over the trajectory of the economy.”
Northwood University’s Nash says he sees inflation increasing between early fall and the end of the year, and it will begin declining on a steady basis early in 2023, due to effective Federal Reserve Bank monetary policy.
“By the end of 2023, U.S. inflation will be 4 to 4.5 percent,” he predicts. “Michigan inflation will be 4.5 to 5 percent, and Detroit will be 4.7 to 5.2 percent. Inflation and the severity of the economic downturn will be exacerbated if simultaneously excessive government spending and the desire to increase taxes are not mitigated.”
Just more than half (52 percent) of the respondents in the Business Leaders for Michigan survey expect inflation to come down in the next year. About 28 percent expect inflation to continue at the current rate, while 20 percent expect it to increase.
“The Russia-Ukraine war is definitely a big factor,” Comerica’s Adams says. “That’s going to keep the cost of heating homes high during this coming winter, with natural gas prices up nationally by about two-thirds from where they were last winter.
“A very tight job market and strong consumer demand have also been big drivers of inflation, as well as supply chain disruptions affecting the auto industry and other manufacturing industries.”
The picture going forward is mixed, Adams says, because the Russia-Ukraine war continues to be an issue for energy prices. At the same time, he’s starting to see some relief on inflation because inventories are higher than they were a year ago — and that means more retailers are discounting products, especially for non-durable manufactured goods, fast-moving consumer goods, and shelf-stable products in grocery stores.
“I think we’re going to see housing prices increasing more slowly and possibly come down a bit in some slower-growing markets,” Adams says. “That could give some relief to some Michigan households, especially renters, over the next year.”
Northwood’s Nash is one of those who believes much higher inflation over the last year is due to excessive government spending and growth in the Federal Reserve Bank’s balance sheet.
He explains the Federal Reserve Bank’s balance sheet, or U.S. money supply, was about $1 trillion in 2007 compared with a GDP of $14.5 trillion. Today the Federal Reserve’s balance sheet is $8.8 trillion, with GDP (in September) at $24.8 trillion.
“Simply stated, there’s a lot more money relative to goods and services in the economy today than there was in 2007, explaining much of the reason we have inflation at the rate it is in today’s economy,” Nash says. “Exacerbating the inflationary conditions in the United States economy over the last year and a half has been the negative effect of well-intended but excessive spending on the part of the Trump and Biden administrations to avoid a severe economic downturn and return the economy to the pace and level of economic growth pre-COVID-19.”
The Business Leaders for Michigan survey shows 84 percent of respondents expressed concerns over filling jobs due to labor shortages. While most jobs are in demand, many companies (67 percent) are finding it difficult to find suitable job applicants, especially among professional and skilled trade positions.
“There’s a strong relationship between labor shortages in Michigan and early retirements due to the pandemic, as well as issues like long COVID-19, which are increasing the number of people nationally who are out of work because of disability,” Adams says. “That’s going to disproportionately affect states with older working age populations, like Michigan.
“I think the biggest constraint on economic growth in Michigan is the growth of the labor force, and so I think Michigan needs to find ways to attract and retain workers, to keep the state a place where businesses can find employees. The state education systems and making sure Michigan retains a highly skilled workforce are keys to its long-term economic prospects.”
Nash says Michigan needs to attract more businesses while putting new initiatives in place to encourage job growth at a faster pace. To do that, he says the state should eliminate its 6 percent corporate income tax.
“We would suggest Michigan announce before the end of the year, beginning with fiscal year 2025, that the state will eliminate its corporate income tax,” Nash says. “Simultaneously, we would announce that beginning in 2027, the individual income tax would be eliminated at that point, joining Wyoming, Washington, Texas, Tennessee, Florida, Alaska, South Dakota, and Nevada as the ninth state that does not tax income.”
Northwood University’s economic research team maintains such a policy, if taken up by the Michigan Legislature, would attract new businesses and encourage existing companies to grow their presence in Michigan. The twin strategy would serve to boost Michigan’s labor force and population.
In Detroit, U-M analysts predicted job growth to increase from 3 percent in 2021 to 5.4 percent this year, then cool down to 2.7 percent in 2023. The researchers say the rate of growth should slow further as scheduled large-scale construction projects wrap up and rising interest rates cool new home construction. Other speed bumps include remote work schedules that impact retail and restaurant activity, more baby boomers reaching retirement age, and weak domestic and international migration.
Another concerning, but likely temporary, trend has emerged in the resident employment measure: While the city’s labor force recovered nearly 95 percent of its initial pandemic losses by March, it dropped by 1.4 percent through May.
“We do not believe that those declines represent a reversal in the underlying trend, but they are not what we were hoping to see,” U-M researchers wrote in a recent study.
The forecast calls for Detroit to add 11,300 payroll jobs this year and 6,100 in 2023, the year in which the city is expected to recover to its pre-pandemic level. Job growth is forecast to continue — but at a slower pace — through 2027, and blue-collar industries should lead the way in the recovery during that time with projects like the Gordie Howe International Bridge, Stellantis’ Mack Assembly complex, and General Motors’ Factory Zero coming online.
While some supply chain issues are easing in the aftermath of the pandemic, many materials, components, and products still are difficult to come by.
The Michigan House Fiscal Agency says forced COVID-19-related lockdowns in China in recent months and other pandemic-related issues continue to aggravate global supply chains. While it is anticipated that supply chain conditions should continue to improve, new or prolonged issues in the supply chain present a downside risk to the forecast.
“Supply chains are still disrupted,” says Huntington Bank’s Augustine. “Every business tells us there’s something they can’t get because supply chains mostly start in China, and they’re still shut down.”
On metro Detroit’s housing front, buyers are seeing some relief with home sales slowing and median home prices dropping for the past two months, says Jeanette Schneider, president of RE/MAX of Southeastern Michigan in Troy.
Still, “interest rates continue to be a factor buyers are watching, but often more important to buyers is whether they have the needed down payment and whether they can afford the monthly payment,” Schneider says. “And although the shift we’re seeing in the market favors buyers, sellers are still in a good position to sell their home quickly.”
Overall, Augustine says there’s a shortage of housing in the U.S. and Michigan. “Builders are not building what millennials want,” he says. “They want starter homes like we had in the ’80s, and (home builders are) building McMansions.”
Economists also have their fingers in the political wind, waiting to see if Republicans take over Congress in the new year. Conventional wisdom says a red wave in November will lead to a more business-friendly environment.
“If Republicans gain control of the U.S. House and Senate … the regulatory climate (will) be more business friendly (and) the ability of President Biden to reverse the Trump tax cuts would undoubtedly be thwarted by Congress,” Nash says. “I also believe that a Republican Congress will slow down what seems like a meteoric pace in the United States toward electrification of the motor vehicle industry. A more multipronged approach to fighting climate change is exactly what this country needs.”
Augustine says he thinks neither Republicans nor Democrats will have a large enough majority in Congress to make significant change happen.
“One of the things that concerns us for next year is there are no growth policies,” he notes. “Central banks are pulling back support. The fiscal programs are pretty much done. There’s only fiscal support going on in the world right now in China. We worry about the lack of fiscal support next year.”
As long as there are so many economic factors in flux going into next year, economists admit to having a difficult time predicting how things will play out. “The 2023 economy is going to be a mystery,” Augustine says. “We have things swirling around that we haven’t seen since the ’70s and ’80s. We haven’t had a recession with growing employment since 1974.”
Nash says inflation will be the cause of economic decline he predicts for 2023.
“What we’re experiencing today is an over-expansion of the economy due to improper monetary and fiscal policy,” Nash says. “It’s what many economists would describe as the malinvestment theory of the business cycle. We’ve overstimulated the economy with excessive government spending and expansionary monetary policy.”
Augustine says the key to Michigan’s economic future is greater access to vehicle microchip production, preferably from domestic or local sources, and continued diversification.
“For Michigan, we have to get those chips,” he says. “We’ve got to get the cars out of the fields and parking lots, and we’ve got to continue to diversify, which we are. We’ve done a great job diversifying our economy away from just the auto industry.”
Adams, Comerica’s chief economist, sees a situation where the Michigan economy is outperforming the nation’s economy. “We’re really living in a different world now,” he says. “The last two recessions hit Michigan much harder than the rest of the country. Now, it looks like the auto industry is likely to be recovering in 2023, with the rest of the U.S. economy going a bit slower.
“That’s going to be a different type of economy for Michigan to navigate through. I think it makes it better for Michigan, with products from the state’s pillar industry holding up better than the rest of the economy.”
What the Economists are Saying
Patrick L. Anderson – Anderson, a nationally recognized expert in business economics, founded Anderson Economic Group in 1996 and serves as the company’s principal and CEO.
David L. Littmann – A frequent contributor to DBusiness, Littmann is a senior economist with the Mackinac Center for Public Policy in Midland. Previously, he had a 35-year career as senior vice president and chief economist at Comerica Bank in Detroit.
Mehmet E. Yaya – Yaya is a professor and head of the Department of Economics at Eastern Michigan University in Ypsilanti.
Five Forcesthat Will Impact Michigan in 2023
Americans have faced unprecedented economic challenges since 2020. Some are behind us now, but five will continue to shape Michigan’s 2023 economy.
1. Most would call our economic slowdown a “recession.” Anderson Economic Group began warning of a recession in spring 2022. Since then, consumers have lost real income and we incurred a second straight quarter of negative growth.
Whether 2022 is officially declared a recession year or not, financial security dropped, inflation soared, job growth slowed, and retirement savings plunged with the stock market. That spells “recession” for Michigan consumers.
2. Inflation and high interest rates will co-exist in 2023. Consumers’ earnings don’t go as far as they did last year. While aggressive monetary tightening should slow inflation, it won’t do so quickly. Amid rising interest rates and expensive borrowing, auto and housing markets will likely face customer resistance on monthly payments.
3. Electric vehicle promises will be tested. The EV transition poses risks, including a dearth of entry-level options; insufficient charging infrastructure; limited range; and reliance upon materials sourced from Africa and China. Yet automakers have made huge bets on EV adoption, as have the federal government, the State of Michigan, and many cities and townships. Despite ambitious targets, EV penetration barely broke 5 percent in 2022. The year ahead will test EVs, and they won’t be the only challenge.
We continue to the face automotive sourcing problems that were identified in February 2020. Many buyers remain on waiting lists for new cars, and vehicle inventories are still remarkably low. These factors are driving up new vehicle prices, which were 10 percent higher in August 2022 than in August 2021.
4. Extra federal funds should address lasting pandemic damages. Many early pandemic efforts, including the speed of vaccine development and the unflagging work of medical staff, saved countless lives. We owe thanks to them, and to those who kept lights on, food available, communications running, and products manufactured.
Now, we must acknowledge policy mistakes and address the most serious problems, beginning with the loss of in-class learning. Next, we must face the consequences caused by the continuing neglect of our roads and the fact that so many small businesses were forced to close their doors. The choice of whether to use federal dollars to address Michigan’s problems, or to reward favored constituencies, will impact our future.
5. Economic burdens fall unevenly. Pundits often look at aggregate earnings or a market basket of prices, ignoring the fact that the economy is made up of people, and people are rarely average.
The 2021-2022 spikes in used car prices are illustrative. When new vehicles became scarce, used car prices rose an astounding 30 percent. Many consumers were able to postpone a purchase, but others found the lack of affordable transportation threatening their employment, education, and families.
Adding high interest rates to higher prices will subject working-class families to a double-whammy of economic hardship in 2023.
Conclusion: Michigan’s businesses, their employees, and their investors should plan for a stormy year.
– Patrick L. Anderson
Michigan Facing Economic Retreat in 2023
Sixty-five years of tracking and comparing Michigan’s economic fortunes with those of the nation have revealed three dominant factors influencing timing and the movement of Michigan’s economy versus the U.S. Here’s how 2023’s forecast shapes up.
First, Michigan outperforms national growth when interest rates are low and not ratcheting up — no surprise, considering the state’s largely industrial base. Second, Michigan prospers most when U.S. worker productivity accelerates and this occurs in conjunction with rising optimism, which is itself a reflection of the third forecasting variable: greater purchasing power and employment prospects.
Historically, this trifecta of favorable events — low and stable prices and interest rates, rising output per worker, and continuous gains in real, after-tax (disposable) household incomes — has fueled impressive motor vehicle financing, sales, and exports to other states and the world. Housing starts and overall construction activity expands consistently under these conditions.
In contrast, rapidly rising interest rates mirror inflation, thereby impairing the financial positions of firms and individuals. The destabilization of transaction prices — on transportation, food, clothing, housing, taxes, utilities — creates uncertainty and fear within business establishments and households, thereby diminishing public confidence and the capacity to save or spend.
Emotionally, an era of inflation stares down people’s willingness to invest in the future to gain the advantages that are naturally bestowed on a competitive, free, and innovative population. Our economic system — but particularly in Michigan — is at its finest from advances in technology, education, and the ability to engage in rational, long-term planning.
Michigan now faces economic retreat. Stunning surges of inflation — coupled with interest rate costs and the prospect of larger public sector deficit spending, taxes, and regulatory burdens — already have incited swift declines in both consumer and business confidence. These economic and financial hits are disproportionately damaging to Michigan’s growth. The timing couldn’t be much worse.
Year-to-year growth in Michigan’s economy as of midyear 2022 exceeded the national average in many income and employment categories, especially in engineering, technology, health care, and manufacturing. Indeed, the state had just pulled ahead of some pre-COVID-19 activity levels. Unfortunately, the U.S. economic scene between midyear 2022 and 2023 will thwart improvement in housing or auto sales, and dampen hiring and expansion plans.
What might have been a consistent Michigan rebound into 2024 now has been converted into a likely loss in business activity of 2 percent to 3 percent (midyear 2022-23). Relative stagnation is a distinct probability in the last half of 2023. Given the yet-to-be solved economic uncertainties still afflicting Michigan, this outlook is consistent with historical experience.
– David L. Littmann
Federal Reserve, Ukraine Will Impact 2023 Economic Outlook
Without any doubt, the COVID-19 pandemic adversely affected the world economy.
Impacted by forces ranging from work stoppages to stay-at-home orders, and from nonpharmaceutical interventions to transitioning to new home offices, economies around the world suffered from high unemployment rates.
In order to stimulate their respective economies, numerous governments and central banks opted for expansionary monetary and fiscal policies, making domestic currencies abundantly available and keeping interest rates low while expanding government expenditures for pandemic mitigation services such as virus testing and vaccination clinics.
As the impact of the pandemic has subsided, economies worldwide have slowly started to return to normalcy, especially starting this past summer.
As employees returned to work, many realized that the supply-chain disruptions during the pandemic made manufactured goods more expensive. Coupled with the supply-chain disruptions, easy and accessible money with low interest rates led to higher inflation rates. Unfortunately, the war in Ukraine and concerns about natural resources and energy supplies exacerbated inflation in many economies, including the United States. For instance, the price of a gallon of gasoline in the U.S. was $1.93 during the initial stages of the pandemic in April 2020, and increased to $3.87 in September 2022. During the same time period, the inflation rates skyrocketed to 8.2 percent from 1.2 percent in the United States.
The 2023 economic expectations for the U.S., and especially Michigan, largely depend on the response of the Federal Reserve and uncertainty in Ukraine. In response to the high inflation rates, and achieving the target inflation rates around 2 percent, the FED started increasing FED funds to 3.25 percent from zero in September 2022, signaling a tightening monetary policy will continue until inflation rates start converging to the FED’s long-run target rates. Economists are in general agreement that these macroeconomic forces — uncertainty in Ukraine and related energy prices, high inflation rates, and the FED’s robust interest rate hikes — are likely to push the U.S. economy into a brief recession, possibly in 2023.
One silver lining among all of these looming conditions is the low unemployment rate, which briefly reached 14.7 percent during the stay-at-home orders of the pandemic, rapidly decreased to 3.7 percent in August 2022 in the U.S., and was slightly higher in Michigan, sitting at 4.1 percent in the same period.
The fundamental question that remains for households, firms, and policymakers is how to behave now in order to be prepared for whatever comes in these unprecedented times.
For households and firms, it’s important to concentrate on bolstering savings. On the other hand, policymakers should diligently continue educating and informing the market players about their policy changes and potential consequences, so these players can position themselves well.
– Mehmet E. Yaya
