Published in Economic Development

Improving auto sales should prop up Michigan economy, hold employment steady

BY Monday, December 26, 2022 12:11pm

The auto industry that historically led Michigan’s economy to fall further than the U.S. in national recessions may actually aid the state during a national economic downturn that many economists predict for 2023.

Despite higher interest rates that are intended to tame high inflation, the University of Michigan and other economic outlooks predict stronger new vehicle sales next year from pent-up demand. That could provide the state an economic tailwind as the U.S. economy cools and, as some economists predict, moves into a mild recession at some point in the year.

When it does, “we do think auto sales will hold up fairly well,” said Don Grimes, a regional economic specialist at the University of Michigan Research Seminar in Quantitative Economics.

“This is going to kind of hold up the Michigan economy better than the national economy,” Grimes said. “The national economy, we expect to see job declines in some months in the middle or the end of next year, but in Michigan we’re not going to be forecasting any months of a job decline.”

The relatively optimistic outlook for the state results from pent-up demand that will drive auto sales upward. That “backlog of demand may prove to be a silver lining as the (U.S.) economy cools,” according to the university’s recent outlook.

University of Michigan projects U.S. auto sales to grow from an estimated 13.9 million units in 2022, a level held down by parts shortages, to 15.1 million units in 2023. Economic forecasters wrote in their outlook “that lingering supply chain problems, low inventories, and high prices are holding back sales from making a stronger recovery.”

“The global and domestic economic slowdown that we are forecasting will hinder the recovery of sales through 2023, but we expect that pent-up demand will keep sales, production, and employment from slipping into reverse,” according to their outlook. “We are hoping that continued strength in the automotive sector will shield Michigan from the brunt of the recession.”

Other forecasters expect similar or better growth for the U.S. auto industry. Economists who submitted outlooks to the Federal Reserve Bank of Chicago project median light vehicle sales of 14.6 million units in 2023. In its most recent economic outlook, Comerica Inc. was more optimistic, projecting car and truck sales of 17.1 million units in 2023 and 17.6 million in 2024.

In an outlook issued a month ago, Wells Fargo predicted light vehicle sales of 15.9 million units next year.

The optimism for the U.S. auto industry hinges on the continued easing of parts shortages, especially computer chips that remain in short supply and led automakers to curtail production and trimmed sales during the pandemic, said Tyler Theile, chief operating officer and director of public policy and economic analysis at East Lansing-based Anderson Economic Group LLC.

“There’s very high demand right now for vehicles that can’t be fulfilled. There are backlogs of vehicles that have been ordered or sold that are waiting for chips and folks that have just stopped looking because it’s so hard to find a new vehicle right now,” Theile said. “The demand is definitely there. Americans want new cars right now. We would probably be seeing really great sales for the OEMs if those vehicles were available and being put to market the way the demand is. If they can catch up, if we can overcome chip shortages, we certainly could see great growth in 2023. But right now, what we’re seeing is the manufacturers not being able to get vehicles to market in line with demand.”

Normalcy returns in 2024

Metrics that Anderson Economic Group tracks indicate Michigan’s economy is “a little bit stagnant, but holding” as 2023 approaches, with a solid recovery from the pandemic, Theile said. Some indicators are “not to where they were” prior to the pandemic, and “some are way above,” such as personal income, weekly deposit rates and manufacturing, she said.

Should the U.S. dip into recession, “we’ll feel it in some areas, but we won’t in others, and we’ll definitely be able to weather the storm differently than we did in 2008, I think,” Theile said.

Despite some contraction in recent quarters, “the trendline is solidly above where it had been before the dip of the pandemic” for Michigan’s manufacturing sector, Theile said. 

Overall, Michigan “will enjoy at least two more years of moderate economic growth,” although job growth will slow to 1 percent annually for 2023 and 2024, from an estimated 3.4 percent for 2022, University of Michigan economists wrote. The state should add 9,200 jobs a quarter.

“Our forecast calls for continued growth in Michigan’s blue-collar industries, which have now recovered to their pre-pandemic employment level. The state’s construction and non-automotive manufacturing industries face a challenging environment with rising interest rates, a strong dollar, and weak national growth,” according to the outlook.

Jobs in Michigan are not expected to return to pre-COVID levels until the second half of 2024, as the state is “climbing out of a very deep hole” with the loss of 1.1 million jobs early in the pandemic, Grimes said. By October this year, jobs in Michigan were about 2 percent below pre-pandemic levels, he said during a recent economic outlook hosted by The Right Place Inc. in Grand Rapids.

“We’ve done well. Not as good as the country, but the scale of the hole that we’ve had to dig out of was extraordinary,” Grimes said. “By the end of 2024, we believe we will have roughly the same number of wage and salary jobs in the state that we had before COVID. … We’ll get back to normal by the end of 2024.”

Higher labor force participation will drive a “slight uptick” in the state’s unemployment rate during 2023 to about 4.7 percent by early 2024, and then it will begin to decline again, Grimes said. The unemployment rate stood at 3.7 percent for October, the most recent data available. 

‘Slowly soften’

In West Michigan, economist Brian Long’s most recent report on the region’s industrial economy remained “marginally negative” in November, “although there are still no signs of an impending economic Armageddon.”

“As we have now noted for several months, we predict that the West Michigan economy will continue to slowly soften,” Long, director of supply chain management research at the Grand Valley State University Seidman School of Business, wrote in his monthly report. 

Long expects a mild or “uneven” U.S. recession.

His November survey of industrial purchasing managers in Kalamazoo and Grand Rapids generated improvements in four key activity indexes, although two remained in negative territory. Both the sales and purchasing indexes improved from negative 12 to negative 2. The employment index moved into positive territory, from negative 2 to 20, while the production index improved two points to 7.

The short-term three- to six-month outlook for industrial purchasing managers continued to decline, from negative 14 in October to negative 22 in November.

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