Crystal Ball Finance Comerica’s Dana Johnson: Recovery to motor on
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By Dana Johnson, Chief Economist
Comerica Bank
A slow-moving U.S. recovery looks likely to accelerate modestly in 2011, as financial wounds gradually heal and the Federal Reserve refuels monetary accommodation.
I expect GDP growth to pick up to 3½ percent on average during 2011 from around 2½ percent in the second half of 2010. That modest acceleration of growth should allow the unemployment rate to edge down to around 9 percent by year-end 2011 — but still slack labor markets will leave many underemployed workers frustrated and spending cautiously.
This forecast for somewhat speedier growth is rooted in my belief that healing in the household and business sectors is gradually eroding the imbalances that have inhibited recovery. Households are repairing their balance sheets, allowing them to spend more freely. Corporate profits are rebounding, allowing businesses to resume investing and hiring. And banks are beginning to relax lending standards, facilitating economic expansion. As these growth impediments continue to fade, the economy should become increasingly better positioned to grow in a healthy and sustained fashion.
Corporate profits have already rebounded to their pre-recession level. The resulting cash cushions have positioned businesses to reverse the drastic investment cutbacks that caused about half of GDP’s recent decline. Improved profits should also facilitate stronger hiring as companies exhaust the scope of post-recession productivity gains.
More critically, households are slowly rebuilding wealth and deleveraging. They have boosted savings, trimming household leverage from its bubble-induced high and restoring the saving rate to a more sustainable level near 6 percent. Households also have pared debts and refinanced mortgages. These efforts have reduced consumers’ financial obligation costs to a 10-year low share of income, freeing up funds for current consumption.
Rising or stabilizing asset prices also are improving household balance sheets. Equities, which make up 65 percent of household assets, have recovered about 80 percent of their recession losses. And declines in home prices have slowed sharply amid fitfully dwindling unsold inventories. A recent decline in new mortgage delinquencies lays the groundwork for an eventual decline in foreclosures that would further ease downward pressures on home prices. Finally, the universe of potential homebuyers looks likely to expand next year. First, job creation looks likely to accelerate in 2011, boosting the number and spending power of potential buyers. Second, the lagged drag on home demand from expiring homebuyer tax credits will slowly fade next year.
For its part, the Federal Reserve appears determined to sustain the expansion. Monetary authorities have resumed quantitative easing. That move has buoyed stock prices and dampened the dollar. Both developments should re-invigorate growth.
Michigan has already benefited from the national economic rebound, and those benefits should expand along with U.S. growth next year. The state’s relatively large factory sector already profited from the early phase of the U.S. bounce back, which was led by manufacturing. Looking forward, the factory sector looks likely to remain buoyed by stronger business capital spending and a pick up in household purchases of consumer durables. A weaker dollar also should support stronger exports of manufactured goods.
In particular, Michigan’s economy has benefited from a turnaround in the auto sector. Financial healing coupled with stronger national hiring this year fueled the first double-digit bounce in total motor vehicle sales in a quarter of a century.
Equally important for Michigan, the painful restructuring of the Detroit 3 automakers successfully stabilized their market share. The Detroit 3’s domestic labels have grabbed about 45 percent of vehicle sales so far this year, up fractionally from 2009. In contrast, their market share skidded to 44 percent in 2009 from 72 percent in 1995. This turnaround flipped the Big 3’s sales to a gain of about 11.5 percent this year from back-to-back 20 percent losses.
Looking forward, further gains in auto sales look likely to reinforce the recent improvement in Michigan’s fortunes. Additional national job gains, continued financial healing and a further modest loosening of bank lending standards look likely to fuel another double-digit gain in vehicle sales next year to around 13.3 million.
To date, the turnaround in Michigan’s manufacturing sector has not been sufficient to end the state’s underperformance of the national economy. However, the gap has narrowed. I estimate Michigan’s GDP growth likely trailed national growth by one percentage point in 2010, down from three percentage point shortfalls in each of the two prior years.
Hiring patterns are signaling a further narrowing in Michigan’s underperformance in 2011. In the 12 months ended December 2009, Michigan employment slumped 6.1 percent, 1.9 percentage points more than the national job loss. But in the nine months ended October 2010, that hiring shortfall fell by half.
The bottom line is that Michigan’s darkest days appear to be over, supplanted by a period of modestly brighter growth.