The U.S. economy, which has grown even in spite of high inflation and higher interest rates, is expected to continue avoiding a recession over the next two years, according to a new outlook released Thursday by University of Michigan economists.
And Michigan’s economy is forecast to continue growing as well, according to the forecast from the University of Michigan Research Seminar in Quantitative Economics.
“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,” wrote U-M economists Gabriel M. Ehrlich, Jacob T. Burton, Donald R. Grimes and Michael R. McWilliams.
Michigan’s economy is nearing a complete recovery from the pandemic recession, according to the economists, which stands in “welcome contrast to its experience following the dot-com recession and Great Recession, from which it still has not recovered.”
How UAW strike could have hurt economy much more
Michigan found itself in the national spotlight beginning Sept. 15 with the start of the UAW’s Stand Up Strike against the Detroit Three automakers.
The economic fallout from the strike in the auto industry, which included layoffs, could have been more severe, the economists said.
But the U.S. economy has been resilient, the UAW’s strike activity focused initially on a limited number of factories, and tentative agreements with Ford Motor, Stellantis and General Motors ultimately were reached by late October. Autoworkers who were on strike returned to their jobs as ratification voting continued.
The economists estimate that 66,400 UAW workers are employed at Detroit Three manufacturing facilities in Michigan, 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,” the economists wrote.
Voting has been ongoing. Final votes from GM locals are due to the UAW by 4 p.m. Thursday, according to a person familiar with the union’s voting process. Ratification totals at Ford are expected by Saturday. The Stellantis totals are expected early next week.
This week, concern has grown after some big UAW locals, particularly those at GM, have voted down the contract. Even so, some still expect the deal to get done.
“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,” the U-M economists wrote.
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The U-M economists estimated that the strike reduced personal income in the United States by $485 million over six weeks. If the strike had continued through the end of November, as some feared could happen, the U-M economists said the income losses would have reached over $1 billion.
As for job losses, the economists said the strike reduced total U.S. employment by 141,000 jobs, including 47,300 striking UAW workers and 93,700 spillover jobs. Job losses would have continued to build if the strike targets expanded and the strike went on four more weeks.
“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 economists wrote.
Economic risks remain but the economy is likely to keep growing
The economic outlook overall is positive, perhaps in contrast to consumers who remain upset about paying higher prices for many goods and consumers who continue to be unable to afford a home, thanks to higher interest rates and the lack of supply.
As for Michigan, the economists said, three major risks to the forecast over the next two years are a national recession, a resurgence of inflation, and rising geopolitical tensions.
“Stubbornly high inflation remains one of the largest risks to our outlook,” the economists wrote. “Although we do not expect to see a wage-price spiral similar to what developed during the 1970s, wehave been surprised by the extent to which inflation has risen and persisted. We expect local inflation tocool from 5.9% this year to 2.6% by 2025.”
More:Many consumers fear a recession in 2024 but economists don’t see big storm clouds ahead
Housing and the lack of affordability for many younger consumers remains a concern.
“The existing home market is in a weird spot,” the economists wrote. The U.S. outlook was written by Burton, Ehrlich, Kyle W. Henson, Owen Kay, Daniil Manaenkov, and Yinuo Zhang.
“Housing affordability has cratered amid resilient prices and high mortgage rates. But as more potential sellers get locked in by their low mortgage rates, the inventory of homes for sale shrinks, fueling further upward pressure on prices.”
The U-M economists said they remain cautiously optimistic about the new residential construction market. “As the inventory drought in the existing home market persists, 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%.”
Make no mistake, the U-M outlook, like other economic forecasts, is somewhat tempered as economists warn that we should not expect to see a repeat of the robust growth of recent months.
Manaenkov, who presented the U.S. forecast at the economic outlook conference Thursday, told the group that a mild recession continues to be possible. “Uncertainty is pretty high,” said Manaenkov, who is lead research specialist for the U-M Research Seminar in Quantitative Economics.
More consumers are running through their savings that built up during pandemic. And higher interest rates are driving others to avoid big purchases, which puts a bite into overall consumption growth, according to the U-M economics forecasting team.
Real GDP — an inflation-adjusted measure that reflects the value of all goods and services produced by an economy — surged to 4.9% at a seasonally adjusted annualized rate in the third quarter of 2023, up from 2.1% in the second quarter. The third-quarter gain was the fastest growth rate since late 2021.
The pace of growth is expected to slow sharply in the fourth quarter to 1.5%, according to the forecast from the University of Michigan Research Seminar in Quantitative Economics. And growth is likely to remain slow for most of 2024.
The forecast projects that real GDP will expand by 2.4% this year, 1.7% in 2024 and 2% in 2025.
A year ago, University of Michigan economists had predicted that a mild recession was likely ahead in 2023, as the Federal Reserve continued to raise interest rates to try to cool down inflation. The forecast was similar to others. But the economy remained far more resilient than most expected, perhaps due to stimulus money still in the pipeline, evening out of troubles in the supply chain, and other reasons.
Going forward, the U-M economists hedged their U.S. forecast by noting that the higher interest rates have led to sharp increases in rates for consumers, which could limit spending. In addition, student loan repayments resumed recently after a long hiatus and the country faces the renewed possibility of a federalgovernment shutdown in November. All are risks to growth.
“Perhaps the broadest-based risk to our forecast is that we have significantly overestimated the economy’s current momentum,” the economists wrote.
Other items of note from the U-M forecast:
- Interest rates are likely to decline in 2024. “By late 2024, with inflation solidly on its way down to the 2% target and the unemployment rate inching up, the Fed will start cutting its policy rate.”
- Auto sales should get a slight boost. “The annualized pace of light vehicle sales is expected to recover slowly from October’s 15.5-million-unit pace to 16.2 million in the second half of 2024, as the soft patch in the broader economy and high vehicle loan interest rates dampen growth.”
- 2025 might be better for car sales. “As interest rates fall and economic growth starts reaccelerating late in 2024, vehicle sales rev up, reaching 16.5 million in 2025.”
- Michigan’s unemployment rate to hover just above 4% in the next two years. The labor market remains tight. “Michigan’s aging workforce and limited population growth will act as speed limits to job growth,” the economists noted.
Contact personal finance columnist Susan Tompor: stompor@freepress.com. Follow her on X (Twitter) @tompor.
