Comerica Inc. Chief Economist Robert Dye sees Michigan’s economy performing in the second half of 2018 much as it has in the first half, with continued growth but at a decidedly slower rate than in past years.
In what Dye calls a “pivotal year” for Michigan, two big factors — the easing of light vehicle sales, which will deliver a “little hit” to the state’s economy, as well as the ultimate fate of the North American Free Trade Agreement — will influence the state’s annual economic performance.
President Trump’s trade policies, tariffs, and renegotiation of NAFTA generate uncertainty and pose potential risks for Michigan.
“There’s a lot in play for Michigan this year,” Dye said. “Canada and Mexico have proved, as they should, to be good negotiators, and they have their points, and it’s going to be a while before those agreements shape up,” he said. “We’re hoping that that is going to be a net positive for Michigan.”
Dye’s latest economic outlook for Michigan predicts slower economic growth for the state for the remainder of 2018 and into next year. Following a 2.1 percent growth rate to start 2018 and an expected 2.9 percent growth rate in the second quarter, Dye forecasts state GDP growth to decelerate to 1.6 percent in the third quarter and 1.5 percent in the fourth quarter.
Michigan’s economic growth will ease further into 2019. Comerica projects state GDP growth of 0.9 percent during the first three months of next year, followed by 0.5 percent a year from now and 0.4 percent in 2019’s third quarter.
Driving the lower growth rates are light vehicle sales that are tapering off from the historic highs of recent years. Comerica predicts light vehicle sales will decline from an annualized rate of 17.2 million units in North America for the first quarter to 16.6 million units by year’s end.
That’s “not a drastic decline,” Dye wrote in a May economic briefing for Michigan, although it will filter through the state’s economy and contribute to slower growth.
“I think this will be a good year for Michigan, but going forward as we get into next year, we’re going to see less growth ahead for the state as we go through the auto cycle,” Dye told MiBiz.
Economists at PNC Bank offer a slightly better outlook for auto sales, projecting 17.1 million units in 2018 and 16.9 million in 2019. Meanwhile, the newest University of Michigan outlook sees light vehicle sales of 17 million units in 2018 and 16.9 million in 2019.
U-M economists expect growth in Michigan’s economy “to take a bit of a breather over the next couple of quarters before settling in at a pace of about 1 percent per year.”
The projected economic growth that will occur will translate into 51,900 new jobs this year and 43,100 jobs in 2019, which is “consistent with the gradual trend toward slower growth in Michigan’s labor market,” according to the U-M outlook.
Two-thirds of the jobs this year and next will come in four economic sectors: professional and business services; construction; trade, transportation, and utilities; and leisure and hospitality. The manufacturing sector only is expected to add 4,100 jobs as light vehicle sales “stay roughly flat,” especially for Detroit-based automakers, Health of Michigan’s economy depends on auto sales, NAFTA renegotiation economists from U-M’s Research Seminar in Quantitative Economics wrote in their outlook issued at the end of May.
Sectors away from the automotive industry will fare much better, Comerica’s Dye said. He projects strong job and income growth in the service sector with low unemployment rates.
However, a lack of population growth in Michigan limits those sectors as well. Employers across the economy report difficulty finding help in a tight labor market.
That problem will not go away anytime soon, Dye said. He expects net out-migration to return in 2019, after “slightly positive” population growth of late.
“You’re going to have a healthy service sector, but I’m not expecting vigorous growth because the demographic profile simply won’t support it,” he said. “That’s going to continue to be felt in Michigan for some time to come.”
Even with the limits on Michigan’s economic growth, recent outlooks project that unemployment rates will inch lower.
Comerica projects a statewide unemployment rate of 4.5 percent for all of 2018, followed by 4.1 percent in 2019. U-M expects unemployment to average 4.6 percent this year and 4.3 percent next year.
At the same time, U-M economists also project income growth to accelerate to 4.4 percent this year and 4.6 percent in 2019, buoyed by the tightening labor market and the contribution of rising interest rates on property income. They expect real disposable income to grow 2.7 percent this year and next, well above the average growth rate of 1.6 percent between 1970 and 2017.