Crystal Ball Finance PNC’s Kurt Rankin: 2011 sets foundation for future growth
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Kurt Rankin
Economist
The PNC Financial Services Group
Michigan’s economy will begin its turnaround in earnest in 2011.
The state’s unemployment rate peaked at 14.5 percent in late 2009 — well above the national and Midwest regional rates of just over 10 percent. Joblessness in Michigan has only slowly abated since then. New auto-related production in the state’s economic centers of Detroit and West Michigan has led the uneven recovery to date. Inventories had to be rebuilt after production was slashed throughout the recession. The nationwide Cash-for-Clunkers program helped to install a floor under auto demand, and production responded to fill the inventory void.
Auto sales through the tail end of 2010 have shown signs of life, and so Michigan’s economy is likely to see the seeds of job growth sprout as 2011 progresses. There is no mistaking, however, that whatever recovery Michigan enjoys in the coming year, the state’s economy faces a long road toward regaining its pre-recession level of economic activity.
Michigan’s income base was hit hard through the recession. Incomes were slashed as auto industry layoffs mounted. Declines were more severe in the Detroit area than they were in West Michigan. Regional differences were linked directly to each economic center’s dependence upon the auto industry. While West Michigan hosts its share of auto-related manufacturing, its economy is balanced by the stabilizing economic presence of the state capital, Michigan State University, and several large healthcare providers. In all, incomes in West Michigan declined less dramatically than the state as a whole thanks to its more diversified economic base. That region’s recovery was also slightly stronger than the state average through the first half of 2010.
As Michigan finds its economic footing going into 2011, Detroit’s contribution to statewide income growth should grow. The domestic auto industry is pushing hard to return to health as the U.S. consumer base ventures back into a spending mood. Given continued weakness in housing markets, big-ticket spending is likely to be highly concentrated toward vehicles. Renewed auto demand will lead to renewed production in Detroit, and by extension a return to income growth in the coming year.
Home values fell dramatically in Michigan as demand seized up throughout the recession. The state’s own price bubble burst in concert with the national housing market crisis, as well, compounding the state’s housing market decline. The state’s economy will only begin on its long path to recovery in 2011, and so housing demand will remain weak and unsupportive of house price gains.
The depth of the recession in Michigan, particularly, will also contribute to continued housing market weakness throughout the state in 2011. Excess housing supply will remain a damper on house prices for the coming year. Once the pace of foreclosures can stabilize and foreclosures themselves can work through the system, only then will Michigan’s housing market reach its own bottom.
Looking outside of the more industrially developed centers of Detroit and West Michigan, the state’s northern half faces a complex set of economic influences. Northern Michigan is heavily reliant upon tourism and supporting local service industries.
The Michigan Legislature recently voted to partially fund the state’s Pure Michigan tourism ad campaign that business owners and political supporters point to as necessary to put the region’s attractions in the minds of potential tourists. However, funding for the year-round campaign faces an uphill climb. A significant decrease of advertising funding threatens to undermine the region’s economic health through the coming year.
Statewide, Michigan’s economy will be in transition in 2011, from overwhelming recession to stability and a foundation for future growth. Economic conditions will be improved from the past two years, but the pace of growth will not be at full steam even by year’s end. The state’s economic tale for 2011 will be one of optimism regarding growth prospects going forward after finally hitting bottom, not of substantial gains in the here and now.