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Published in Economic Development

Economists predict gradual economic recovery, though slower for some sectors

BY Sunday, August 30, 2020 05:31pm

Economic conditions for Michigan and across the U.S. should keep improving through 2020 and into 2021, according to recent outlooks.

However, some economists anticipate a “two-track” recovery with some industries recovering jobs faster than others, while unknowns related to a potential second wave of COVID-19 infections and federal relief add uncertainty to the equation.

Banks, universities and state budget officials in recent weeks have released economic data tracking how Michigan is recovering from the pandemic-induced recession and where the state and country are headed with Real GDP and unemployment.

University of Michigan economists predict Real GDP for the U.S. to rebound to an annualized rate of 20.9 percent for the third quarter as consumer spending, aided by federal stimulus funds, recovers to pre-pandemic levels.

That level of GDP growth for the July-to-September period would follow a record 32.9-percent decline in the second quarter when the COVID-19 pandemic shut down much of the economy.

Given the depth of the second quarter plunge, U-M economists predict full-year Real GDP to decline 4.9 percent for 2020.

Daniil Manaenkov, a U.S. forecasting specialist with U-M’s Research Seminar in Quantitative Economics, called the third quarter outlook “optimistic, looking at some of the other forecasts that are out there.”

U-M researchers expect Real GDP to then grow 3.6 percent in 2021 and 2.4 percent in 2022.

The outlook assumes the issuance of few localized stay-at-home orders and closures of nonessential businesses because of a spike in COVID-19 cases. Recent outbreaks in Sunbelt states suggest that with modest restrictions, increased capacity at health care providers and better coordination in treating patients, “It is possible to go through a peak without severe restrictions on business and personal activity,” Manaenkov said.

“This makes us hopeful that if we get further spikes this fall and winter, those will be managed without getting back to very severe restrictions we have seen earlier this spring,” Manaenkov said during a recent revenue sharing conference before the state House Appropriations Committee.

Modest restrictions will likely stay in place until a coronavirus vaccine is introduced and widely distributed, probably in mid-2021, Manaenkov said.

The U-M outlook also presumes the continuation of higher unemployment benefits through 2020 and into 2021, and that Congress will approve another round of stimulus payments and some sort of aid to state and local governments that face large budget deficits, Manaenkov said.

U-M expects unemployment nationally to end 2020 at 9.2 percent for the full year. Unemployment gradually declines to 8.1 percent for 2021 and 6.9 percent for 2022, according to the university’s national outlook.

Banks: Economy will emerge from shadows

In other economic forecasts, PNC Bank and Comerica Inc. each predict national Real GDP to rebound by around 15 percent in the third quarter, followed by smaller growth of less than 8 percent in the fourth quarter. The banks both predict modest GDP growth to start 2021 at between 2-6 percent.

“The amount of uncertainty surrounding any economic forecast is huge at this time,” Comerica economists wrote in the monthly outlook issued Aug. 11. “However, there is one very important concept that we are certain about. We are certain that the U.S. economy will emerge from the shadow of the coronavirus pandemic and it will remain the global center for innovation and capital deployment.”

Similar to U-M’s outlook, Comerica expects unemployment nationally to remain high at 8.9 percent for all of 2020 and 9.2 percent in 2021. The bank’s outlook says the “U.S. economy will be saddled with a lingering high unemployment rate as it digests the after-effects of the coronavirus catastrophe.”

In Michigan, the economy fell further than the nation as a whole in the second quarter and could take three years to return to the peak of late 2019, according to Comerica’s statewide outlook.

Comerica estimates Michigan’s economy declined at a nearly 41 percent annualized rate from April to June. Next year, Comerica’s outlook predicts 2.3 percent economic growth for the state for all of 2021.

“Michigan and all other states face ongoing uncertainties about the path of the coronavirus pandemic, school closures, fiscal stimulus and the policy ramifications of the upcoming presidential election,” Comerica’s Michigan outlook states. “Our third quarter forecast shows an ongoing economic recovery beginning in Q3, but it is a slow recovery requiring more than three years to recapture peak GDP from 2019 Q4.”

After a “quick partial reabsorption of furloughed workers this year,” Comerica expects Michigan’s “labor uptake to slow significantly in 2021,” keeping unemployment high at least through next year.

Comerica predicts the state’s unemployment rate will steadily decline from 20 percent for the second quarter of 2020 to 13.3 percent by the end of 2021.

U-M economists predict that by the end of the year Michigan will recover about 530,000 of the 840,000 payroll jobs lost during the pandemic, then another 120,000 by the end of 2021 and 70,000 in 2022.

‘Two-track recovery’

Meanwhile, some industries will recover jobs at a faster rate than others, with retail, leisure and hospitality sectors recovering the slowest, said Gabe Ehrlich, director of U-M’s Research Seminar in Quantitative Economics.

“We’re really forecasting a two-track recovery,” Ehrlich said.

The manufacturing sector, which is key to Michigan’s economy, has come back “more smoothly” than previously expected following the reopening of auto plants earlier this summer, he said.

Ehrlich said the state’s unemployment rate — which ballooned to 19.9 percent — should drop below 9 percent by the end of the year. He expects unemployment to decline “more slowly” to 7.2 percent by the end of 2021 and 6.1 percent at the end of 2022. U-M’s outlook for Michigan also assumes federal assistance for states, which has been a major source of contention between Democrats and Republicans.

Sime Curkovic, a professor of management at Western Michigan University’s Haworth College of Business, points to survey results this summer as evidence that the manufacturing sector has been recovering well.

“What I’m seeing is that manufacturing is roaring back,” Curkovic said. “If we get a handle on COVID, there is every indication that we are going to be fully fine and back to normal.”

However, some industries may never return to pre-COVID days, Curkovic said, and workers who lost their jobs may have to retrain or move to higher-growth sectors.

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