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Published in Economic Development

Economists forecast ‘solid ground’ won’t return until 2022

BY Thursday, January 14, 2021 12:37pm

Michigan’s economy that has already rebounded well from the depths of the spring dive should take another year or more before returning to “solid ground.”

That’s the view of Grand Valley State University’s Paul Isely, who predicts the state’s economy overall to perform well this year, despite the continued deep pain that persists for certain hard-hit sectors such as restaurants and hospitality.

Paul Isely COURTESY PHOTO

Michigan’s economy rebounded “very, very quickly,” although unevenly, and has mostly recovered from the “crash” last spring that resulted from state-ordered restrictions in response to the pandemic, said Isely, a professor of economics and associate dean for undergraduate programs at GVSU’s Seidman College of Business.

The state’s economic recovery has continued into 2021, even as the pandemic persists and cases surged in the fall and early winter before beginning to ease again in recent weeks. That has set up the Michigan economy for growth in the new year, Isely said.

“Over the summer many things healed and we started to know the winners and losers in many industries like the restaurant industry, and we know that this is going to be a strong year no matter how you look at it,” Isely said. “There’s going to be a lot of economic activity in 2021 and we’re going to see growth like we haven’t seen in recent times.”

Isely presented his 2021 economic outlook Thursday morning during the annual West Michigan Economic & Commercial Real Estate Forecast hosted by Colliers West Michigan and held virtually this year. The forecast is based on surveys conducted in November and December with executives and business leaders at 155 businesses and organizations in Kent, Ottawa, Muskegon and Allegan counties.

Growth predicted

Looking ahead, Isely said data on the pandemic’s status matters more than economic data.

“The first thing we need to worry about is getting rid of fear of the virus, and if we are lucky and we stay on track it’s really looking like we might have a shot for that as we get into the summer,” he said.

Isely’s outlook predicts employment growth in the region of 2.3 percent to 3.9 percent in 2021, “a strong improvement over the end of 2020.” The employment growth is projected “provided there are enough people willing to work,” and includes wide variances among survey respondents, according to his outlook.

Nearly half of the responding firms expect regional job growth of more than 3 percent this year, and more than one in five project employment to shrink, Isely said.

That variance in responses “is also consistent with the 42 percent of firms that see themselves returning to pre-COVID sales by July 2021 and the 22 percent of firms that do not see themselves reaching that point during 2021,” Isely wrote in his outlook.

“So, we have a story of the haves and the have-nots,” Isely said in today’s presentation. “There are certain sides of the economy that are running along just fine, and there are certain sides that are halting and having problems.

“We have firms that are doing really, really well, and firms that are doing relatively poorly.”

The business confidence index from his survey was 72.7 percent coming out of 2020, higher than the previous two recessions. A forecast confidence index of 72.7 reflects “improved expectations for 2021,” according to Isely’s outlook.

Full recovery to take time

Despite his projection for a solid year economically in Michigan, the state still has a ways to go before fully recovering from the economic fallout from the pandemic and state restrictions to mitigate spread of the coronavirus.

“The U.S. and Michigan economies have already scaled most of the way out of the hole, but it will be 12 to 18 months before we feel like we’re on solid ground again,” he said. “So, be looking at the middle of 2022 and you’ll start to see where the new land is lying.”

The recovery has been uneven across sectors. Some industries “are already out of the hole, however, not everybody,” said Isely, adding that residential real estate “never really went in the hole” and “really continued to tick along without a lot of problem.”

Manufacturing has led the state’s recovery and continues to do well, although supply chain issues persist, Isely said. Manufacturing ended 2019 “in a shallow recession” and picked up at the start of 2020 before the pandemic hit and the shutdowns occurred, resulting in a “massive drop” for new orders. The sector recovered in the last half of 2020 with strong order rates through the fall and into 2021, he said.

“We’re starting to hear some anecdotal evidence that at the end of December things slowed down a little more than they expected,” Isely said. “We’re still waiting to see if everybody collapsed at the end of the year and took a breather, or if that’s the industry re-setting.”

Industrial holding steady, hospitality struggling

West Michigan’s industrial economy “clearly ended 2020 on a positive note,” GVSU economist Brian Long wrote in his monthly report on surveys with industrial purchasing managers in Grand Rapids and Kalamazoo. Key activity indexes recorded strong improvements in December over November.

Indexes for short- and long-term outlooks by survey respondents improved as well, Long said.

“So far, the resurgence of COVID-19 cases has not dampened the industrial economy in West Michigan,” Long, director of supply chain management research at the Seidman College of Business, wrote in his recent report on his December survey. “By mandating face masks, dividing work areas for social distancing, and devoting cleanup crews to perpetual cleaning, many of our local firms have resumed near-normal operations.”

The service sector nationally and in Michigan started to fall off again in December as COVID-19 cases surged and “really started to take a grip again on the economy” as states reimposed restrictions, according to Isely.

In Michigan, restaurants still cannot provide indoor dining at least until Feb. 1. Gov. Gretchen Whitmer said Wednesday she hopes the state can lift the restrictions that have been in place since November.

“Restaurants are still in the hole and any service provider who is customer-facing is facing this,” Isely said.

During the spring shutdown, 40 percent of restaurants in Michigan were closed and others provided some sort of carry-out service, Isely said. In the summer, 18 percent to 20 percent of local restaurants were closed, excluding chains, and 30 percent remain closed today, he said.

Isely estimates that 20 percent to 25 percent are closed permanently.

Nationally, an updated economic outlook that Comerica Inc. issued this week projects 1.7 percent Real GDP for the first quarter, followed by 3.2 percent in the second. U.S. Real GDP more than doubles to 6.6 percent in the third quarter before settling back to 4.2 percent in the fourth, according to Comerica.

Comerica economists wrote that the development of vaccines “reduced tail risk from the coronavirus pandemic, but it did not eliminate it.”

“The slower-than-expected rollout of the vaccines, combined with only partial uptake by populations, in the presence of a mutating virus, suggests that there will be an opportunity for the virus to continue mutating, elevating the risk of long-term economic drag from the pandemic,” Comerica economists said.

Democrats controlling the U.S. Senate following last week’s two wins in Georgia “increases the likelihood of additional significant fiscal stimulus early this year,” although “that increases the hangover risk associated with ballooning federal debt, and it may increase the risk of inflation later,” Comerica economists wrote in the U.S. outlook.

U.S. unemployment will remain above post-pandemic levels, but should ease during 2021 from a projected 6.8 percent in the first quarter to 6.3 percent in the fourth, according to Comerica’s updated outlook.

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