Michigan economy will continue to grow in the next two years

ANN ARBOR—While Michigan’s economy will continue to expand over the next two years, employment growth will be tempered by the expected loss of nearly 26,000 manufacturing jobs during that time, according to a University of Michigan economic forecast.

“After declining by 1.1 percent this year, manufacturing employment is forecast to slide more rapidly in 2001, at a pace of 1.9 percent,” says U-M economist George A. Fulton. “The deteriorating situation reflects a softening of the auto market from its record pace of 1999 and early 2000, and a corresponding decline in vehicle production for next year. A modest improvement in auto production slows the decline in manufacturing jobs to 0.8 percent for 2002.”

Most of the losses, he adds, will be in durable goods, split 40/60 between automobiles and the rest of durables, respectively.

In their annual forecast of the Michigan economy, Fulton and fellow U-M economists Joan P. Crary and Saul H. Hymans predict that overall employment in the state, in both manufacturing and non-manufacturing, will increase by a modest 0.5 percent for 2001. Projected total job gains of just over 23,000 for next year represent slightly more than half of the gains—nearly 44,000—registered this year, they say.

However, upward movement of employment growth is expected for 2002, with job additions of more than 38,000 (a rate of growth of 0.8 percent), the researchers say.

“Despite the small improvement over 2001, the projected job growth for 2002 is among the weakest of all calendar years since 1982, surpassing only 2001 and the downturn in 1991,” Crary says.

Overall, the forecast calls for Michigan’s unemployment rate to rise from 3.4 percent this year—the state’s lowest rate in at least 30 years and the sixth straight record-setting year for low unemployment—to 4 percent next year and 4.1 percent in 2002.

While private non-manufacturing job gains are expected to be relatively constant over the next two years, the projected 1.4 percent rate of growth (or 40,000 jobs per year) in this sector is relatively weak by historical standards, with only three weaker years since 1982, according to the report.

“In part, employment growth in this sector has been constrained in the past few years by shortages of labor, a situation that does not promise to improve any time soon,” Fulton says. “Five out of six new jobs created in this sector from 2000 to 2002 will be in services and retail trade.

“The recent opening of the Greektown Casino will give a small boost to service employment for 2001, and the acceleration of work on a few special projects, such as the football stadium for the Detroit Lions and the expansion of Detroit Metro Airport, will aid construction. Otherwise, growth in construction is impeded by rising interest rates.”

In addition to predicting overall moderate job growth, the U-M forecast indicates that local consumer price inflation, which rose from 2.6 percent last year to 3.5 percent this year due to a surge in oil prices, will fall slightly to 3.1 percent in 2001 and then drift upward to 3.4 percent in 2002.

Further, growth in personal income will decrease from a healthy rate of 6.2 percent for 2000 to 4.6 percent next year and then rebound to 5.4 percent in 2002, the report shows.

“The strength in 2000 is aided by more rapid growth in interest income, and the retreat in 2001 reflects a weakening labor market, especially in the higher-wage manufacturing sector, and some continuing retrenchment in manufacturing overtime hours,” Crary says. “The improvement in 2002 is supported by some pick-up in the labor market, including its higher-wage component.”

Finally, growth in real disposable income, or consumer purchasing power, will slip from 1.9 percent in 2000 to 1.6 percent next year before rising to 2.4 percent in 2002, as the effects of increasing inflation are countered by stronger income growth and slower growth of federal tax collections.

In all, while the U-M economists, historically, have been accurate in forecasting Michigan’s economic outlook, they acknowledge the existence of concerns and uncertainties that may affect the accuracy of any forecast. This year, these include the sensitivity of Michigan’s economy to federal monetary policy and interest rates (because of the state’s large concentration of automotive and other durable goods industries) and risks associated with overcapacity of facilities in the auto sector and with overall labor shortages in the state.