The Michigan economy is intrinsically tied to the fate of the United States and the economists at the 71st Annual Economic Outlook Conference released a good sailing report for the state, barring any massive waves.
While the state sailed into good economic weather, the University of Michigan Research Seminar in Quantitative Economics report pointed to three areas that could be construed as dark clouds: Resurgence of inflation, a national recession and geopolitical instability. U-M Flint Economics Professor Chris Douglas agreed with the risks and conclusion in the report.
“I think we hope that forecast comes true, because that’s kind of like a best-case scenario for the economy over the next two years, that the economy keeps trucking along and we continue getting a ‘soft landing’ post-COVID,” Douglas said.
With the baseline of the report being: two years of slow healthy economic growth, it represented a revision from the 2022 report, considering that the economic indicators seem to have stabilized.
“Overall, we are pleased with our errors from last year’s forecast given the economic uncertainty that clouded the outlook one year ago,” the report stated.
While the report didn’t contain the 4.1% bump in unemployment U of M economists predicted would result from the auto union and other strikes, its impact is expected to be relatively minor.
“The damage will move through the Michigan economy pretty quickly,” Douglas said.
Douglas did point to the federal funds rate, which is used to set much of the monetary policy across the United States, being set at 5.25% to 5.5%. He said the reserve is expected to stop raising rates to see if inflation falls back to the 2% target. Michigan yearly inflation was calculated at 5.6%.
“If home inventories are restricted for the next several years and mortgage rates stay elevated, that represents a huge jump in the monthly payment on a home,” Douglas said.
He pointed to the fact that starter houses weren’t the same price as the Boomer generation paid in the 1970s.
Outside of interest rates that aren’t expected to come down any time soon, Douglas said the geopolitical instability was still a danger to the state’s economy. If the Israel-Hamas war were to spill over into the larger Middle East, it could cause a shock to oil prices.
“The ’73 to ’75 oil shock was a product of the OPEC oil embargo to retaliate against the United States for it’s support of Israel during the Yom Kippur War,” he said.
He also pointed to the ongoing Russian-Ukrainian war that had already put a ding on oil prices.
There are also still rumblings around the United States about a possible national recession, which was tied to a spiraling wage-inflation cycle that was indicative of the 1970s.
“The 1970s inflation was remedied by a massive recession in ’82-’83, and I think that’s what has people on edge, but I think there are some differences in the sense of the 1970s inflation continuing on for a long time,” he said.
He said this was what led to the cycle, because people would demand a pay increase, because inflation was sitting around 10%, but there isn’t a sense that inflation would continue at the current rate for much longer.
Indeed, the RSQE report forecasts the inflation rate to drop to 2.6% by 2025.
“We hope that Michigan’s newfound economic resilience signals that the state has turned the corner from the boom-and-bust economy of the past. We are excited to see what the next chapter holds for the state,” the report concluded.
Article courtesy MIRS News for SBAM’s Lansing Watchdog newsletter
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