MSU Economic Forecast Model
Michigan 2021 Economic Outlook
Let’s just say it – 2020 was a terrible year. Surely 2021 promises to return us to some semblance of normality and reprieve from the psychological, political, and economic tensions of 2020. Unfortunately, the first part of 2021 does not appear to provide a reprieve of the economic grip of COVID-19 thought the second half of the year poses some promise of improvement. But first, we must contend with limited availability of COVID-19 vaccines, though we can be rest-assured that plenty will be available over time. Hence, the actual and virtual lockdowns are expected to continue through the first part of 2021, and we expect that while there is a great deal of pent up demand for shopping and services, consumers may self-restrain some activities until they feel comfortable that a safe normal is reached. We look at the economic side of 2021 here, but risks arising from non-economic factors may be crucial to the economic fortunes of 2021. Before going there, we should look back at how we got here.
2020 in review.
Last year started out pretty normal. Risks of recession that plagued most of 2019 had subsided. We were heading into an election and had three years of government-fueled expansion under the Trump administration. In fact, it looked as if the longest economic expansion in U.S. history was largely prolonged by expansionary fiscal policies, including tax breaks for corporations and those in the highest tax brackets, increased expenditures on federal programs like the whopping $750 billion proposed defense budget for fiscal year 2020. Fiscal expansion occurs when the federal government spends in excess of what it brings in in tax revenues. As government expenditures make up about 37% of the U.S. economy, expansionary fiscal policy can be an important component of economic growth – generally accounting for about a third of the observed change in gross domestic product.
COVID-19 became a U.S. problem in February of 2020, when the Trump Administration declared a public health emergency. By March, it was apparent that COVID-19 would be disruptive to the U.S. economy. Consumers and investors acted in kind. Consumers, fearing a widespread lockdown went on a buying spree – hording shelf-stable and freezable food items and interesting enough, toilet paper. Investors quickly sold off stocks, also fearing a lockdown and its impact on the economy. While consumers’ hoarding was more disruptive to the flow of goods than the actual COVID pandemic and policy response to it, the growing COVID-19 pandemic already established clear winners and losers in the economy, and the agri-food industry, from farms to retail and restaurant, looked poised to shoulder a significant share of the economic costs. Much of this disruption occurred because of shifts in value chains, as agri-food production is usually designed to serve one of two markets – food at home and food away from home. Switching from one value chain to another is not very easy and entails significant costs. The food away from home sectors like restaurants, hotels, and amusement venues largely have government-mandated shutdowns – thereby idling those value chains for the foreseeable future.
Consumers both curtailed expenditures and expanded them. Overall, consumers have increased household savings by reducing expenditures on travel and entertainment. Though they also increased purchases of other goods and reaped benefits from unprecedentedly low interest rates. However, on net, consumer expenditures are down and net savings is up. This has led to wide-spread impacts on all industries, though some sectors were more impacted than others. Other sectors that have suffered include people transportation sectors (Airline, cruise ships, rail, bus, and ride-hail services) which were largely shut down or curtailed throughout 2020. Alternatively, some goods transportation segments experienced a boost in activities because of COVID-19 while others experienced slumps. Those benefiting specialized in the transport of shelf-stable food. Other sectors, like manufacturing required new fixed investment in personal protection equipment and fixtures. For most sectors, COVID-19 represented added costs and changes to processes, but otherwise business as usual.
A few sectors saw meteoric rise in 2020 with COVID-19. These include online retailers and telecommunications tech companies. Understanding the differential effects of COVID-19 on these industries is key to understanding why the stock market has continue to add value in light of this unstable economy. Those tech sectors benefiting from COVID-19 are over-represented in the U.S. stock indices commonly used to gauge the value of U.S. businesses. However, stock indices are not representative of the makeup of U.S. businesses and business interest. Not only are key sectors absent from those indices, but also most U.S. businesses, both corporate-owned and privately-owned, are not included in the three common stock indices.
2021 Economic Projections
So, we hate to sound like a broken record, but risks once again is driving our economic forecast. Despite the promise of reprieve with the rollout of the first two approved COVID-19 vaccines, it remains to be seen how consumers and businesses transition to the post COVID-19 economy. We also have a change in administration, while the Congressional question will remain unanswered until after the Georgia runoff election. It is difficult to overstate the importance of this runoff election on the politico-economic environment because, while Democrats firmly have reigns on the House of Representatives, Republicans have a fleeting control of the Senate, and the runoff election can tilt the Senate balance to the Democrats.
Trump is not making the transition any easier than it has to be. For the Trump Administration, no effort is too mundane to reverse the will of the voters. This is a shame as his efforts to impede the transition will only delay the Biden Administration’s COVID-19 response – adding more uncertainty to the economic and social recovery.
The National Bureau of Economic Research (NBER) determines when the U.S. is in a recession versus a recovery based on statistics and expert consensus, indicates that the U.S. currently remains in a recession since February 2020. While there is not tried and true definition of a recession, the general rule of thumb is that the U.S. is in a recession if real economic growth declines in two consecutive quarters. Based on preliminary data, the first quarter of 2020 saw national gross domestic product decline by 5 percent and the second quarter (April to June) declined by a whopping 31.4 percent. The third quarter saw a reversal -gaining 33.4 percent, while fourth quarter estimates will not be available until will after the start of 2021. It is possible that once the fourth quarter numbers are released, the NBER will reclassify the economy from a recession to a recovery and that that may be assigned retroactively to start in the third quarter of 2020.
After nine-months under some degree of lock-up, consumers are breaking out of their savings mode. Many economists anticipate that consumers have a pent-up need to spend and that these expenditures will be targeted to the purchases of goods. Consumer services may have to wait until the later part of 2021 before it sees wide-spread recovery. Boosting the recovery is low interest rates. The pace of mortgage refinancing in 2020 was unprecedented, and those that refinanced while rates are low will have greater spending power in 2021 and beyond. Low interest rates also benefit the housing market and the markets for durable goods. In total expect the goods producing sectors to lead the recovery.
Labor markets are expected to remain relatively week. Employers resisted layoffs and those that were forced to restructure, are looking to build labor efficiencies. Overall, 2021 will see job growth, but most of this growth will be to make up for job losses in 2020. So, even though we may see large quarter over quarter job gains, for many industries actual job growth relative to 2019 will be negative through 2021.
The accompanying tables provides our detailed economic forecast for Michigan and the metropolitan areas of Lansing-East Lansing and Detroit-Warren-Dearborn. New in this year’s forecast and a projection of occupational needs at the state and metropolitan areas. These occupational breakouts are based on occupational employment by industry and hence, historical numbers are estimates based on industry employment while projections are forecasts and subject to all risks associated with economic forecasts.
Updated December 28, 2020