Crystal Ball Economic Development GVSU’s Paul Isely: Slow and steady wins the race in 2011
Order Reprints
Follow @MiBiz
By Paul Isely
Chair of Economics
Grand Valley State University
During the second half of 2010 Michigan’s economy finally started to improve, albeit slowly, by virtually all measures. Despite efforts to diversify the Michigan economy away from automotive, the recovery in Michigan has been driven to a large extent by the auto industry. As a result, the manufacturing sector added jobs for the first time in over a decade in May 2010 compared to a year earlier. After weathering an entire decade of economic decreases in Michigan, many question if this improvement will extend into 2011 and beyond.
For Michigan’s recovery to continue, people need to purchase more of the goods produced in Michigan. Therefore, more employment anywhere in the United States is good for Michigan. Luckily, U.S. employment has been increasing. My estimate is that this will continue next year with U.S. unemployment ending the year close to 9 percent, which would mean around 1.5 million more people with jobs by the end of 2011. Unfortunately, this is a slow improvement for those that are currently unemployed. The silver lining in the slow recovery is that the job growth is unlikely to be fast enough to facilitate high inflation rates in the near term, so widespread inflation should remain under control until job growth picks up.
There are some areas of the economy where price increases are expected — such as in gasoline. Although it is still early, my model is predicting that Midwest regular gasoline prices will average between $3 and $3.25 per gallon this summer, provided hurricanes do minimal damage and oil exporting nations remain stable. The biggest risk to this prediction is the exchange rate, since decreases in the value of the dollar can increase oil and gasoline prices. The price per gallon will increase another $0.15 if the U.S. dollar devalues 15 percent more than currently expected in the markets.
The price of gas is even more important to Michigan because Michigan’s automotive companies are still more dependent on the sale of light trucks, which use more gasoline. Therefore, lower gasoline prices will help sales of these types of vehicles. Although the prediction results in a 10- to 15-percent increase in gasoline prices from the summer of 2010, it is probably not a big enough increase to short circuit the current upward trend in light truck sales because new models offset the higher prices with better fuel economy.
As the U.S. economy improves next year, an increase in production in Michigan means more workers will be needed. These workers will spend money, which generates jobs for others. The net increase in Michigan jobs is predicted to drive the unemployment rate down to around 11.5 percent by the end of 2011. In some areas of the state, like the Grand Rapids area, it is likely that the unemployment rate will drop far enough to be comparable to the national unemployment rate for the first time since 2002.
Falling unemployment will help to continue to shore up the housing market in Michigan in two ways. First, as employment increases, more people will be able to buy a house, increasing the demand for houses. Second, current homeowners will be less likely to face foreclosure, decreasing the supply of low-cost houses. In fact, residential housing prices in both Detroit and Grand Rapids have been stable since April 2009, once the temporary effects of the two housing tax incentives phased out. This is supported by the fact that the number of Michigan homeowners falling behind 90 days or more on their mortgage during the third quarter has largely stabilized and is actually improving in a large number of counties.
The largest danger to this story of slow-but-steady growth is uncertainty. The federal and state governments have increased the uncertainty for individuals and businesses with regards to healthcare costs, financial regulations, state business taxes, income taxes, exchange rates and government spending. This uncertainty makes it harder to plan for the future, so individuals and businesses need to keep a larger cushion to avoid negative surprises. The result is people and businesses taking fewer risks — like expanding a business, lending money or buying a house. This results in slower job growth that will dampen the recovery.
The faster this uncertainty is removed by clarifying policies and resolving political differences, the faster the economy will grow.