Michigan State University Economic Forecast Model Releases

2018 Michigan, Detroit and Lansing-East Lansing Forecasts

The 2018 MSU Economic Forecast and write-up coincides with Congressional debate on the Republican-sponsored tax bill that puts forth the first comprehensive tax legislation since the Reagan Administration. This is a contentious bill with two sides claiming polar opposite propositions about who will and will not benefit from this tax bill. It is our contention that the bill largely favors business profits, small and large, but largely will have marginal impact on business growth. As taxes represent an expense of doing business, and tax concessions would improve business profits, our reasoning is based on existing businesses’ hoarding of cash and their apparent disinterest in spending that cash to expand production. Add to this the potential sunset provisions of the tax cuts, should the deficit increase (as it is expected to do), and this tax bill adds as much uncertainty to businesses as it does tax relief.

However, investors have made it evident that they favor this tax bill by bidding up stock prices, where the S&P 500 index has risen by nearly 17 percent year over year. When the stock market is doing well, household wealth increases, driving consumer purchases. This has led some analysts to predict a robust Christmas shopping season this year. However, as with retail and other sectors of the economy, productivity is king. Traditional big-box retailers continue to lose ground to online retail shopping, and industrial productivity is at an all-time high, with the adoption of automating technologies. Employment growth will not keep pace with economic growth.

Globally, the prospects of economic growth are improving according to the World Bank. Commodity prices remain subdued and growth in global trade remains positive. The World Bank also sees significant recovery and growth in investment, especially within emerging economies. We expect this solid bill of health in the global economy will push the U.S. economy along, where recent concerns center on overheating the U.S economy.

The U.S. economy is in the midst of one of its longest or the longest expansion in history. The big question, is how long can it last? Goldman Sachs recently announced that U.S. stock market valuations are at a 100 year high, leading to fears of a stock bubble that may or may not come crashing down. The eight in one-half years of growth since the end of the Great Recession has not been experienced by all, and despite employment growth, wage growth has remained mostly absent during this expansion. With all the talk of an overheated U.S. economy, wage growth, which precedes employment growth bounds, remains subdued. Additionally, capacity utilizations remains around 76 percent – below what most economists see as restrictive to future growth. In all, it is hard to see evidence of growth constraints in the economic data. If a growth disruption should occur in 2018, it is likely to be caused by external or political forces.

With these uncertainties, we set out to make our best projections in 2018. From which, we anticipate robust growth in nominal gross domestic product (GDP: measure of the total income earned by domestic producers and households) of 4.3 percent. Once accounting for inflation, the real growth in GDP is expected to be just over 2.5 percent. We’re projecting labor productivity in 2017 to grow by 1.24 percent year over year, and by another 1.7 percent in 2018. However, 2018 employment growth will trail 2017 projections of 1.45 percent growth by tacking on just under one percent growth year over year.



Updated December 1, 2017

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