ANN ARBOR—Like the rest of the nation, Michigan’s economy is now in the throes of recession, but it should begin to rebound by the middle of next year and grow at a moderate pace through 2003, according to a University of Michigan economic forecast.

“After nine consecutive calendar years of growth in wage and salary employment, the Michigan economy’s longest expansion in the past 50 years has run its course,” says U-M economist Joan P. Crary. “The state economy started shedding jobs around the beginning of this year, and as the national economy has fallen into recession, Michigan has continued to retrench, losing jobs in the current quarter at a faster rate than any other time this year.

“We expect the national economy to improve early next year, but job gains will lag behind as firms meet renewed demand first with increased hours for current employees and only later with new hires. By the middle of next year, employment prospects in Michigan should be much brighter.”

In their annual forecast of the Michigan economy, Crary and colleagues George A. Fulton and Saul H. Hymans predict that the state will end up losing 53,000 jobs from the end of last year to the end of this year. This will be followed by a modest gain of 19,000 jobs during 2002, before an additional 62,000 jobs are created during 2003.

Manufacturing employment is forecast to decline by about 55,000 jobs (a drop of 5.7 percent) this year and nearly 15,000 jobs (a 1.6 percent slide) next year, before breaking even in 2003.

“The slowdown in the loss of manufacturing jobs next year, compared with this year, reflects a much smaller decline in motor vehicle production in 2002 and our anticipation of smaller reductions in force among the white-collar ranks,” Crary says. “The situation improves further for 2003 as vehicle production is forecast to rise, accompanied by an increase in the workweek.”

Following small losses in the current year, job growth in the private non-manufacturing sector is expected to turn positive, adding 22,000 jobs during 2002, the forecast shows. This sector picks up in 2003, creating an additional 50,000 jobs.

“The job additions in the private non-manufacturing sector are modest, compared with the average gains of 75,000 between 1991 and 2000, but a considerable improvement over 2002,” Fulton says. “The upward movement for 2003 is dominated by the service industry, which contributes three out of four of the net new jobs created, with gains concentrated in business services.”

Overall, the U-M economists say that Michigan’s unemployment rate, which jumped from 3.6 percent last year to 5 percent this year, will continue to rise to 6.2 percent in 2002, before edging down slightly to 6.1 percent in 2003. The last time the state’s unemployment rate averaged in the 6-percent range for a calendar year was back in 1994.

While local consumer price inflation is expected to slip from 2.9 percent in 2001 to 2.3 percent next year, the improvement is tempered by the end of a three-year freeze on residential rates for natural gas in southeast Michigan, the researchers say. Local inflation is projected to move upward again in 2003 to 3 percent—in step with the improving prospects for the economy.

Like inflation, growth in personal income slows from an already-moderate rate of 2.9 percent this year to 2.3 percent for 2002, but then shoots up to 4.5 percent for 2003, they say.

“The retreat in 2002 reflects the weaker labor market and less rapid growth in interest income,” Fulton says. “The renewed strength in 2003 is supported by the pickup in the labor market, including some of its higher-wage components, a resurgence in the manufacturing workweek and more rapid growth in interest income.”

The forecast also shows that growth in real disposable income, or purchasing power, rises moderately from 0.7 percent for 2001 to 1 percent next year and to 1.2 percent for 2003—as the rise in income growth dominates higher inflation and smaller incremental tax savings from the federal tax cut.

“Set against the backdrop of the past several years, this is not a very upbeat forecast—the first recession in over a decade followed by two years of job growth that is sub-par, compared with the prior four years,” Crary says. “But a comparison to our last experience with recession—the 1990-91 period—puts things in a different light.

“That experience was a relatively mild recession, compared with its two predecessors, the recessions of the mid-’70s and early ’80s. Yet, if our forecast holds true, the ’01-’02 recession will prove even less severe than the early ’90s.”

According to Crary and colleagues, job loss in the current recession is less severe, and while the manufacturing sector is harder hit this time than it was a decade ago, the automobile sector, in particular, is not as severely affected in the current period—with output declining by 15.6 percent, compared with nearly 30 percent in 1990-91.

Despite the relatively poorer performance of the manufacturing sector in the current recession, the overall employment picture is more positive because manufacturing is now “a smaller slice of the pie” and employment in private non-manufacturing holds up better in the current period, the economists say.

In all, while their forecasts, historically, have been accurate in predicting Michigan’s economic outlook, the economists acknowledge the existence of concerns and uncertainties that may affect the accuracy of any forecast. This year, these include risks associated with the aftermath of the Sept. 11 terrorist attack, with the national economic outlook, and with the auto sector.

Joan P. CraryGeorge A. Fulton