As U.S. economic growth slows, so too does Michigan’s economy.
Both the state and the nation are clearly experiencing slower growth that will last at least into 2020, according to economists.
“Michigan in many ways mirrors the nation these days,” said Jeff Korzenik, chief investment strategist and senior vice president at Fifth Third Bank. “The overall U.S. is doing OK. We’re just shifting into a lower gear, so we are going slower and that’s got its dangers.”
The manufacturing sector in particular has been easing, which is affecting the broader economy, Korzenik said. The auto industry has been slowing as well, which disproportionately affects Michigan, he said.
Should the U.S. economy slip into a downturn in the next year or two, Michigan could follow “and possibly even lead it,” he said.
In West Michigan, economist Brian Long’s most recent industrial activity index turned negative for the first time in several months.
Key individual indices for new orders, production, purchases and employment all went from positive to negative for July, an indication that uncertainty over the trade war with China is taking a toll on business confidence and “catching up with the West Michigan economy,” said Long, director of supply chain management research at Grand Valley State University’s Seidman College of Business.
Long bases the monthly index on surveys with industrial purchasing managers in Grand Rapids and Kalamazoo. His August report on July’s survey noted that “many firms are starting to feel less certain about the future.”
Even so, both the short- and long-term business outlooks in Long’s latest report remained positive. The three- to five-year long-term outlook even improved from June. His next report should come out this week.
Comerica Inc.’s most recent outlook projects that Real GDP growth in Michigan will ease through the second half of 2019 and into 2020.
After coming in at 2.6 percent and 2.1 percent, respectively, in the first and second quarters of this year, state Real GDP growth should move back to 2.5 percent for the third quarter and then dip to 2 percent for the fourth, according to Comerica economists.
2020 will begin with 1.9 percent Real GDP growth for Michigan in the first quarter, according to Comerica’s outlook issued in August. The state’s Real GDP growth will then ease further to 1 percent by the fourth quarter of 2020, Comerica projects.
“For the Michigan economy, we’re expecting to see growth continue, but at a fairly slow rate over the next couple of years,” Comerica Chief Economist Robert Dye said. “There are some headwinds out there.”
Those headwinds stem from slower economic growth globally and a tight labor market that limits the ability of businesses to expand. On top of that, there are tariffs and the trade war with China “that is making it difficult for businesses to plan and to manage around their supply chains and pricing strategies and inventory strategy and all those related things,” Dye said.
The resulting uncertainty about the future leads to lower business confidence, resulting in less investment, according to Korzenik.
“Business confidence has gone down. When business confidence goes down, businesses are unwilling to make the long-term commitment to capital investment,” he said.
Nationally, Korzenik projects Real GDP growth for the U.S. to drop from 2.5 percent to “sub 2 percent” for 2019. He projects national Real GDP growth in the “1.5 percent-ish range” for 2020.
“We can sustain that for some period,” Korzenik said, citing productivity gains as an economic positive.
Contributing to Korzenik’s present outlook is the U.S. economy’s record expansion that in July surpassed 10 years. Using a baseball analogy, Korzenik described the U.S. economy as being in “not the ninth inning, but we can sense it from here.”
“We’re saying (it’s) the bottom of the eighth with two outs,” he said. “We’re very late in this economic cycle.”
Any recession after the record U.S. economic expansion could come in the latter half of 2021, Korzenik said. He puts the odds of that happening at “better than 50 percent.”
Play offense or defense?
Comerica’s Dye expects 1.9 percent Real GDP growth nationally for the third quarter of 2019 and 2.2 percent for the fourth quarter, with full-year growth of 2.3 percent. He forecasts 2 percent Real GDP growth nationally for all of 2020, “and if we were to push the forecast out beyond that, I’d bring it down even lower,” Dye said.
“There’s a very important question right now for businesses. Do they want to continue to play offense and make the kind of capital investment needed to keep their markets growing, or are they going to start playing defense with all the sense of uncertainty out there?” Dye said. “This fall is going to be a very telling time for the U.S. economy as to how that balance plays out.”
The odds of a recession within the next year or so remain below 50 percent, “but they’re creeping up,” Dye said.
“We have to take that seriously,” he said.
The Federal Reserve has already lowered interest rates once in response to a potential economic downturn, and Dye anticipates further decreases. The 0.25-percent cut in the federal funds rate at the end of July “is not going to be enough to really stimulate business investment or a resurgence in the housing market or a pick up in auto sales,” he said.
“If they want to make a significant impact on the economy, they’re going to have to keep lowering,” he said. “The Fed still has some more work to do.”
The Federal Open Market Committee meets again Sept. 17 and 18. Dye presently expects one more interest rate cut this year and two in 2020.
If the U.S. economy were to dip into a recession, Dye expects that “we’re much more likely to see something that looks like” 2001, rather than “a real off-the-cliff type of scenario” of 2008 and 2009.
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