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Published in Economic Development

As manufacturing slows, other sectors to drive Michigan’s projected economic growth

BY Sunday, June 11, 2017 08:00pm

Economists expect Michigan’s economy to grow through 2017, although at a little slower pace as automotive sales dip and the state’s manufacturing employment follows suit.

Outlooks generally project that the state’s other sectors will pick up the slack and drive the economy and job growth, even as manufacturing employment moves lower, a symptom of the auto industry coming off of historic highs.

“If there are any concerns out there, we would say ‘it’s been a great run,’ but we are beginning to see a slowdown in auto beginning to filter through to the overall manufacturing sector,” said economist Mitch Stapley, chief investment officer at ClearArc Capital Inc. in Grand Rapids. “It’s going to have a modest impact on the state, and we don’t expect to see a major slowdown. But 2017 is not going to be as good as 2016 was for sales. If anything, it might be a case of people breathe a little sigh of relief.”

Stapley’s view echoes those of other economists tracking the state of Michigan.

According to an updated University of Michigan outlook issued in late May, job growth in the state slowed to 1 percent in the first quarter, down from 3 percent in the prior three-month period. University economists expect Michigan’s job growth to moderate to 0.8 percent for the full year and reach 1.1 percent in 2018.

That equates to gains of 33,700 jobs in Michigan in 2017 and 42,200 in 2018, according to the U-M report.

“Those are smaller job additions than we’ve seen recently, consistent with a tighter local labor market and a slowdown in Detroit Three vehicle sales,” U-M economists wrote in their outlook.

Economists at U-M’s Research Seminar in Quantitative Economics expect 2017 North American light vehicle sales to reach 17.2 million units this year and dip to 17.1 million in 2018, down from a record 17.5 million units in 2016.

Comerica Inc. Chief Economist Robert Dye agrees with U-M’s 2017 auto sales projections but expects the industry to experience a steeper decline in 2018 to 16.5 million units.

MANUFACTURING TO SLIDE

As vehicle production eases, economic sectors other than manufacturing will have to drive the state’s economic growth through this year and into 2018, Dye wrote in a May outlook for Michigan. Manufacturing employment was “barely positive” as of March, and Dye expects it to dip during the year, although he projects Michigan’s economy to remain positive.

“The Michigan economy is at a crossroads. The economic recovery fueled by the rebounding auto sector has been a tremendous positive for the state, but that is largely played out,” Dye wrote. “Looking ahead, we expect manufacturing industries to gradually shed jobs in the state as auto production eases and new technology drives productivity growth.”

Dye projects real GDP growth of 2.1 percent for the state in 2017 and 1.8 percent next year.

Top job producers for this year and next are professional and business services, construction, private education and health services, and leisure and hospitality, according to U-M economic forecasters.

Stapley cites tourism, health care, information technology and agriculture as areas “that maybe have been under the radar screen the last 10 years but over the last couple years have really started to come to the front, and they’re doing really well.”

‘ORDERLY’ DECLINE

In West Michigan, economist Brian Long’s index based on the results of monthly surveys with industrial purchasing managers “remains fairly positive, even though concerns have been raised about falling auto sales.”

Easing auto sales will affect West Michigan, although Long emphasized in his most recent report for May that the industry is only “one piece” of the region’s economy. 

“Unlike automotive, there is no sign of an inventory bulge in the office furniture business, and many of our local firms expect the second half of 2017 to be nearly as good as the first half,” wrote Long, the director of Supply Management Research in the Seidman College of Business at Grand Valley State University. “For many months, we have been concerned that the automotive ‘bubble’ might break, but the backtracking in auto sales has so far been fairly orderly. We are also not seeing any other industries that are having trouble at this time, but slower auto sales will result in slowing the West Michigan economy.”

MAINTAINING FULL EMPLOYMENT

Despite the modest job losses in manufacturing that are predicted, Michigan’s unemployment rate should move even lower for the rest of 2017 and in 2018 as other areas of the economy add jobs.

Comerica predicts a statewide unemployment rate of 4.7 percent for all of 2017 — with a rate of 4.5 percent for the third quarter and 4.3 percent in the fourth quarter. The institution expects unemployment to continue its declines in 2018, reaching 3.9 percent and further tightening a labor market where many employers are already having difficulty finding qualified workers.

“We are effectively at full employment in the state, for all intents and purposes,” Stapley said.

Amid expectations for slower economic growth for the state, surveys show business executives remain quite hopeful.

Sixty-three percent of the members at Business Leaders for Michigan said they were optimistic about the state’s prospects for economic growth in the next six months, a result that’s consistent with prior quarterly surveys. Nearly two-thirds expect Michigan’s economy to improve over the next 18 months.

Among survey respondents, 65 percent expect to increase capital investments and employment during the rest of 2017.

“These numbers bode well for Michigan’s ability to continue growing the overall economy well into 2018,” said BLM President and CEO Doug Rothwell.

BOOSTED EXPECTATIONS

Meanwhile, a semi-annual PNC Bank survey found that more than six out of 10 small and mid-sized business owners in Michigan said they expect higher sales in the next six months and 93 percent felt optimistic about their company’s prospects. That compares with 45 percent who a year ago said they expected higher sales and 85 percent who were optimistic about the future.

The spring 2017 results are the best since PNC started the survey in 2012 and reflect the continued strong performance of Michigan’s economy, said PNC Economist Kurt Rankin.

“The results align with reality because the state’s economy is doing very well,” said Rankin, noting Michigan’s unemployment rate was doing “exceptionally well.”

Forty-six percent of respondents also expect increased profits, which is comparable to last spring but up from 38 percent last fall. Nearly two in 10 expect to increase full-time hiring, down from 24 percent in the fall.

Job gains in Michigan are coming from across the economy, including business services, transportation, leisure and hospitality, and construction, Rankin said. That growth has boosted consumer confidence and spending, which should hold up even as the auto industry begins to slow, he said.

LOCAL, NATIONAL OPTIMISM

Elsewhere in the PNC survey for Michigan, 85 percent of small and mid-sized business owners said they were optimistic about their local economy and 87 percent felt that way about U.S. economic performance over the next six months. Both are significantly higher than 12 months ago.

Rankin attributes the rise in optimism to the election of President Donald Trump in November and his campaign promises to lower the federal corporate tax rate, ease the regulatory burden, enact a massive infrastructure-spending program, and repeal and replace the Affordable Care Act.

The optimism is sustainable “so long as some of the campaign promises by the Trump administration are followed through with,” Rankin told MiBiz.

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