MSU Economic Forecast Model

Michigan 2019 Economic Outlook

Economic Situation

The MSU Economic Forecast Model is painting a rosier picture for 2019 than we perceive amongst the many mixed signals on the state of the national and regional economies. Much of the recent news stories tends to point to an eminent economic downturn. In 2018, economists largely foretold of an impending 2020 economic downturn. We, at the MSU Product Center, Center for Economic Analysis, are more pessimistic about the timing of the next economic downturn. While the economic forecast model predicts stable, yet tepid economic growth for Michigan, discontinuity in international markets, especially in the financial sectors and growing international trade tensions, market signals, political climate and the general mood of economists is that a recession is approaching. The situation warrants caution as we enter the 114th month of this second longest lasting economic expansion. Though the former chair of the Federal Reserve, Janet Yelling, once said expansions do not die of old age, it is increasingly apparent that this expansion is nearing the end of its life.

The stock market is experiencing significant swings, relaying investors’ sentiment about the direction of the economy. While, the stock market is a poor predictor of the direction of the economy, its volatility speaks magnitudes about how jittery investors have become about the direction of the U.S. economy. A better predictor is the bond market, where the yield curve recently inverted, suggesting that bond investors, who usually see long-term investments as more risky than short-term investments, have reversed this perception. That is, they see short-term risks (less than one year) as being more daunting than long term risks. Historically, the yield curve has shown to be a strong predictor of economic reversals and this recent inversion, along with news coming from Michigan auto makers places a dark cloud over Michigan’s economy.

Generally, we expect Michigan’s economy to somewhat mirror that of the U.S. economy. However, Michigan’s economy has a tendency to lead the nation because its industry mix is made up of sectors like automobiles and industrial machinery, whose fortunes tend to precede national swings. In light of recent announcements by GM and Ford to restructure their operations against the backdrop of other signals of a weakening economy, Michigan may experience a double hit.

The day after Thanksgiving, GM announced it will lay off some 14,000 employees, including a significant swath of middle management jobs. Its goal is to better align itself with the changing marketplace, dropping less profitable sedans and focusing more on being a leader in automotive technologies. Along with this restructure, GM plans to shutter five North American Plants, in Michigan, Ohio, Maryland and Ontario. The two Michigan plants slated to close in 2019 include the Detroit-Hamtramck and Warren Transmission Operations. While Ford has not put specifics to its plan, its restructuring can be more disruptive than that announced by GM. Ford signaled that it plans to all but abandon the U.S. car market, preferring to focus on its pickup truck and SUV lines. Even in the absence of a national recession, these announcements suggests a significant disruption for the Michigan economy.

With these issues in mind, we present the 2019 economic outlook of the MSU Forecast Model. The model does predict some slowing of employment growth and we suspect the model projections of unemployment may be a bit overly optimistic. The model is statistically estimated via some 437 equations that track co-movements of key employment, personal income and output of the state economy, along with that of the Detroit and Lansing metropolitan areas. Like other economic forecasting models, this model cannot account for policy-driven shocks to the economy, like trade wars, that are less related to economic trends and more related to political processes. Nor is it capable of predicting the external business decisions for restructuring like those announced by GM and Ford. That is, the restructuring of key sectors of the economy constitutes breaks from long-term trends that drive forecast models like this one. These outside factors are called risks to the forecast, and for 2019, these risks are important considerations for Michigan’s 2019 outlook, which by any other account continues to exhume confidence.

Updated December 19, 2018

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