By Jacob Burton, Gabriel Ehrlich, and Michael McWilliams, originally featured in SBAM’s FOCUS on Business magazine
Research Seminar in Quantitative Economics, University of Michigan
etween February and April of 2020, Michigan lost over a million payroll jobs and, as COVID-19 took hold of the state, the unemployment rate skyrocketed from 3.6 percent to 24 percent. The aggressive public health and fiscal policy response during the critical first months of the pandemic helped to limit the economic damage and contributed to the strong early recovery that we saw last spring and summer.
Unfortunately, the recovery stalled over the fall and winter as federal assistance waned and COVID-19 cases surged. Michigan began to see renewed job losses even before the state’s “Pause to Save Lives” emergency order took effect on November 18, 2020. As of last December, the state had recovered only half of the payroll jobs that were lost between February and April, with 500,000 jobs still outstanding. There is no mistaking that this winter was a very challenging one for Michigan’s economy.
Thankfully, we expect a robust recovery to resume this spring for several reasons. First, the most important determinant of the economic recovery will continue to be the virus itself. Although we expect progress against the COVID-19 pandemic to proceed irregularly, our baseline expectation is for the public health situation to allow economic activity to return largely to normal by this summer and fall.
Our view continues to be that the economy of 2019 was fundamentally a healthy one, without the key structural weaknesses that contributed to the slow recovery from the Great Recession. With the pandemic under control, we expect those fundamentals to reassert themselves.
Our second reason for optimism is the continued aggressive economic policy response to the recession. We expect the $1.9 trillion spending package in the American Rescue Plan, signed by President Biden this past March, along with the additional $900 billion fiscal relief package that Congress passed last December, to help jumpstart the recovery as the public health situation improves. As the economy reopens, the fiscal relief should lead to a surge in consumer spending and rapid job gains.
In addition, we expect government payrolls to rebound considerably this fall due to the substantial aid provided to state and local governments and the widespread return of in-person education. Finally, we expect a more accommodative monetary policy response following the COVID-19 recession than we saw after the Great Recession.
For those reasons, we expect the economic news to improve rapidly this year. After the sluggishness of the fall and winter, we are forecasting 230,000 total job gains in Michigan from the second through fourth quarters of 2021. We expect another 124,000 job gains from the end of 2021 to the end of 2022. Still, our forecast leaves the state’s total payroll job count at the end of 2022 nearly 90,000 jobs, or two percent, lower than its pre-pandemic reading in the first quarter of 2020.
Part of the reason that a full recovery in Michigan will likely take longer than two years is that we continue to expect very different trajectories for different parts of the state’s economy. In our recent forecasts, we have split the state’s industries into two groups, which we have named “fast recovery industries” and “slow recovery industries.”
The slow recovery industries comprise leisure and hospitality, other services, retail trade, and government sectors, while the fast recovery industries include the remainder of the state’s industries. The pandemic has taken a harder toll on the slow recovery industries, which generally require much more in-person customer interaction than the fast recovery sectors.
The fast recovery industries lost 201,600 jobs in 2020, or 7.3 percent of their 2019 level, while the slow recovery industries lost 222,000 jobs, or 13.2 percent of their 2019 level. We are forecasting that the fast recovery industries as a whole will pull back to roughly their 2019 employment level by 2022. Although the slow recovery industries will also recover some jobs, we project total employment in those industries to remain 113,500 jobs lower in 2022 than in 2019.
One reason for the relatively slow recovery we are forecasting in those industries is that we expect business failures to constrain the pace of recovery even after the public health situation has largely normalized. The slow recovery industries also face the potential for persistent changes in behavior, such as reduced business travel and increased online shopping, as well as ongoing public health concerns related to activities such as concerts and major sporting events.
We forecast total wage and salary income in Michigan to recover to its pre-pandemic level by this summer, but the uneven jobs picture complicates that story. The slow recovery industries in our forecast generally feature lower wages than the fast recovery industries. The relatively weak recovery in lower-wage industries will leave a disproportionately large number of lower-educational attainment and lower-skilled workers facing long-term job loss.
The unbalanced job recovery is likely to exacerbate income inequality in Michigan (and undoubtedly the U.S. as a whole), which was already a significant problem in Michigan before the COVID-19 recession. We are encouraged that the ongoing federal income support does so much to cushion the recession’s impact on lower-income households in light of the uneven nature of the job losses.
Michigan’s unemployment rate averaged 6.8 percent in the final quarter of 2020. We expect that the jobless rate in Michigan will continue to decline as consumers regain confidence in the public health situation. We forecast that the state’s unemployment rate will average 4.7 percent in the fourth quarter of 2022, or 0.8 percentage points above its pre-pandemic level.
More generally, Michigan’s labor force recovery faces two key hurdles in the coming years. In the short term, the public health situation must improve to the point that high-risk and vulnerable workers feel confident returning to work. In the mid-term and beyond, Michigan’s aging populace will increasingly drag down the state’s labor force. We expect the latter problem to become a major constraint more quickly than many people currently realize.
At the beginning of the pandemic, the labor force participation rate in Michigan fell from 61.8 percent in February 2020 to 57.4 percent in April and fluctuated in the 60–61 percent range for the rest of the year. We forecast Michigan’s labor force participation rate to improve to 61.2 percent by the fourth quarter of 2021 as efforts to contain the pandemic continue to bear fruit. As the number of prime working age residents in Michigan continues to dwindle, however, we expect the participation rate to reverse course in 2022, ending the year at 60.6 percent.
Although we expect Michigan’s recovery to be vigorous over the next two years, it is important to bear in mind that the state’s economy remains in a deep hole from the pandemic. Still, our nation’s economic policymakers appear to be united in their commitment to a rapid return to full employment. They have powerful tools at their disposal and are willing to use them. We suspect many people will be surprised by the strength of the economic recovery after the COVID-19 pandemic subsides.
The economic forecast discussed in this article was released by the University of Michigan’s Research Seminar in Quantitative Economics (RSQE) on 2/26/2021 and does not incorporate the most recent employment data available for the state. An updated forecast will be produced by RSQE in late May with an executive summary available at: https://lsa.umich.edu/econ/rsqe/forecasts/michigan-forecast.html
Dr. Gabriel M. Ehrlich is an economic forecaster at the University of Michigan, where he is the director of the University’s Research Seminar in Quantitative Economics (RSQE).
Michael McWilliams is the Michigan Forecasting Specialist at RSQE. He earned his Ph.D. in economics from the University of Michigan, and he has also received an M.Sc. in economics from the London School of Economics and Political Science.
Jacob Burton is an economic forecaster at RSQE. He earned his master’s degree in applied economics from Eastern Michigan University.