The North American International Auto Show in Detroit on Sept. 14, 2022. (Andrew Roth | Michigan Advance)
Economists from the University of Michigan say the U.S. will likely avoid a recession over the next two years, while Michigan’s economy will continue to see growth.
Those are the main takeaways from the economic outlook released Thursday by the University of Michigan Research Seminar in Quantitative Economics (RSQE).
“Our forecast highlights the improving resilience of Michigan’s economy,” said the state forecast. “The state has mounted a vigorous comeback from the pandemic recession in the face of severe supply chain shortages, high inflation, rising interest rates, and now a major strike in its marquee industry. We expect that the next two years should feature steady growth and declining inflation. We would classify that as a positive outlook for the Great Lakes State.”
As to the national outlook, U of M economists Gabriel M. Ehrlich, Jacob T. Burton, Donald R. Grimes and Michael R. McWilliams said that despite slowing growth of economic activity, the U.S. economy’s relatively healthy starting point led them to believe that it would “avoid a recession over the next two years.” However, they tempered that forecast by noting that overall, “the state of the economy remains noisy and challenging to interpret,” and thus “economic uncertainty remains high.”
One issue that was mentioned in both the national and state forecasts was the strike by the United Auto Workers, in which tentative contracts have been reached and are still being voted on by union members at Ford and Stellantis. UAW General Motors members narrowly approved the four-year deal with results finalized on Thursday.
“Despite the heated rhetoric surrounding the strike, its economic fallout could have been far more severe,” said the economists. “If the strike had continued through the end of November, income losses would have reached over $1 billion, and job losses would have been significantly larger, especially if the UAW had announced further additions to the strike. While the strike was painful to those who were directly involved, its resolution spared the economy from the larger spillover effects of a longer-lasting dispute.”
The report credited the UAW’s strategy of starting with a limited number of strike targets, as opposed to an across-the-board walkout, as limiting the “spillover effects” on the broader economy, which it said was generally strong.
“If the tentative agreements are ratified as expected, the signing bonuses and higher wages should more than offset the loss of personal income due to the strike,” they concluded, adding that the strike’s likely resolution “comes as Michigan’s economy is nearing a complete recovery from the pandemic recession.”
The report estimated a total of 66,400 UAW workers are employed at Detroit Three manufacturing facilities in Michigan, which is nearly half of the national total and more than in any other state by a wide margin.
“Therefore, Michigan’s economic fortunes hinge more closely on the outcomes of the contract negotiations than any other state’s,” said the RSQE. “Over the course of this year’s work stoppage, roughly 17,600 UAW workers in Michigan joined the strike. Kentucky and Ohio had the next highest numbers of striking workers, with 8,700 and 5,300, respectively. It is therefore not surprising that Michigan was the most impacted state in our analysis.”
They specified that the economic gains from the strike for autoworkers were “inputs” for their forecasting model.
“The tentative contract agreements, if ratified, will result in signing bonuses for full-time workers and temporary workers with at least 90 days of service of $5,000 at Ford, GM, and Stellantis,” said the report. “At each of the Detroit Three automakers, workers are designated to receive a general wage increase (GWI) of 11 percent upon ratification, a GWI of 3 percent in each of 2024-26, and a GWI of 5 percent in 2027.”
The forecast said that month-end inventory levels at the Detroit Three automakers remained relatively stable in September and October despite the UAW strike, while the rest of the industry was able to boost inventory by 11 percent in October.
That, combined with the hopeful end of the ongoing supply chain disruptions, provided optimism for future sales.
“We expect the pace of light vehicle sales to make a gradual recovery, growing from October’s 15.5-million-unit pace to 16.2 million units in the second half of 2024,” they predicted. “As economic growth gains momentum in the latter part of 2024 and interest rates begin to fall, vehicle sales accelerate, reaching 16.5 million units in 2025.”
That growth, however, could be held back by “high unit prices, a soft patch in the national economy, and high vehicle financing rates.”
Overall, the report said that economic news has surprisingly tended to be more positive than negative, with the rapid decline in core inflation more of a factor than real GDP growth like that seen in the third quarter of this year.
“If the recent disinflation persists as we expect, it will allow the Fed to switch gears to a less restrictive monetary policy,” it noted. “As a result, we believe the Fed has reached the terminal rate for this tightening cycle and envision the first rate cut late in 2024.”
Interestingly, the economists concluded that the lack of unity among Republicans in charge of the House of Representatives was actually a positive input for their forecast.
“On the fiscal side, the turmoil in the House following the previous stopgap funding bill exposed the inability of the slim current majority to reach internal consensus,” they said. “We believe the disunity makes further high-stakes fiscal standoffs less likely, reducing the risk of an abrupt tightening of fiscal policy. That assessment provides a slight boost to our near-term baseline outlook.”
However, that disunity also meant there was little chance of reaching a compromise on the spiraling growth of federal interest payments, which the RSQE predicted would exceed defense consumption and gross investment combined for the first time since statistics were published in 1929.
“With stark divisions in Congress, and even inside the GOP, the prospects of any fiscal adjustment look minimal,” they concluded.
Another area of interest in the forecast was the new residential construction market, about which they were “cautiously optimistic,” predicting that the pace of single-family housing construction “will continue to climb after a small near-term correction in response to mortgage rates rising toward 7.5 percent.”
However, they were less optimistic about home affordability, which they said had “cratered amid resilient prices and high mortgage rates,” and was likely to feel continued pressure as more potential sellers get locked in by low mortgage rates, further shrinking the inventory of homes for sale.
The report concluded with a review of those factors that were “risks” to the accuracy of their forecast, chief among them that they could be misreading the economy’s current strength and momentum, but also uncertainty about inflation, monetary policy, commercial real estate, banking, and a “quite volatile” geopolitical situation.
“One major downside risk is that the current war between Israel and Hamas might escalate into a broader regional conflict,” they said. “A broader war would almost certainly constrain global oil supply at least temporarily and would likely disrupt popular trade routes, creating supply chain stress, and putting upward pressure on inflation.”
However, the authors consider the balance of risks “to be broadly neutral because of our judgment that the Federal Reserve has ample space to loosen monetary policy to offset many of the potential negative shocks we have described.”
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