An economic activity index from economists at Comerica Bank fell 4.6% annualized in the three months through January and was down 0.4% from a year ago, according to a Friday release that noted only three of the index’s nine components increased in January.
Highlights included a strong labor market, with employment in the state increasing by 12,000 jobs in January and continuing claims for unemployment insurance falling. Comerica’s economists also found that U.S. auto and light truck assemblies rebounded to a seasonally adjusted annualized pace of more than 10 million units in the first month of the year.
The rebound in vehicle assemblies over the last several months, they said, indicates that supply-chain issues that have dogged the industry since the early days of the coronavirus pandemic “have largely abated.”
Overall, the state’s economy grew by 1.8% last year, below the national average of 2.1%.
“Michigan’s economy will likely slow along with the national economy in 2023,” they wrote. “High interest rates will slow output and sales in credit-intensive sectors, such as housing and commercial real estate investment. The auto industry will likely outperform other sectors of durable consumer goods manufacturing as car dealers restock inventories, but even it is not impervious to the effects of high interest rates and inflation on consumer demand.”
More Interest Rate Hikes Coming
A key index of underlying inflation that is closely followed by the Federal Reserve remained elevated in March, keeping the Fed on track to raise interest rates this week for the 10th time since March of last year.
The index, which excludes volatile food and energy costs to capture “core” prices, rose 0.3% from February to March and 4.6% from a year earlier — still far above the Fed’s 2% target rate. Some Fed officials are concerned that core inflation hasn’t declined much since reaching 4.7% in July.
Overall prices ticked up just 0.1% from February to March, the smallest monthly rise since last July and down from a 0.3% increase from January to February, Friday’s Commerce Department report showed. Compared with a year ago, inflation slowed to just 4.2% from 5% in February, though much of that decline reflected lower gas prices. That is the lowest year-over-year overall inflation figure in nearly two years.
“The acceleration in the quarterly data on core inflation measures is worrisome, as it suggests that underlying inflation is getting sticky,” KPMG Chief Economist Diane Swonk wrote. “Moreover, much of the deceleration that we saw in March is likely to be reversed because it was concentrated in fees on financial services, which have likely bounced back with overall financial market conditions.”
Auto Sector Likely to Hold Up
Last week, Stellantis NV announced it was offering voluntary buyouts to more than 33,500 hourly and salaried employees. The maker of Jeep SUVs and Ram trucks said the move was in response to an increasingly competitive auto market and the costly shift to electrification. The automaker also is temporarily idling hundreds of autoworkers until as far out as September amid ongoing efficiency assessments at numerous sites in the United States and Canada.
General Motors Co. last month said about 5,000 employees had accepted buyouts. And Ford Motor Co. last year offered buyouts to eliminate 2,000 salaried jobs and 1,000 contract jobs.
“I think it does reflect something. But it’s not layoffs,” Gabriel Ehrlich, an economic forecaster at the University of Michigan, said of the job reductions.
His team’s baseline forecast is for a mild recession late this year or early next year, but Ehrlich cautioned that one could still be avoided — and noted that some parts of the economy that most directly affect people, such as the labor market, are holding up. His team’s most recent forecast, which will be updated soon with revised data, projects that payroll job additions in Michigan will fall to 51,000 this year from about 147,000 last year.
“In general, the history is that when the national economy enters a recession, Michigan has really suffered,” Ehrlich said. “We are cautiously optimistic that Michigan can avoid the worst of a national slowdown this time through.”
That’s because consumer demand in the auto sector remains strong following years-long supply-chain issues that constrained production.
“There are headwinds to the U.S. economy, but if there is a recession this year, I think it’s going to be less painful for Michigan than the last couple of U.S. downturns have been,” Comerica’s Adams said. The manufacturing sector already is taking a hit as consumers redirect their spending from goods to services, he added, but autos are well-positioned to outperform the sector.
“The first quarter’s GDP report had some really good news for Michigan,” Adams said. “The very strong auto sales in the first quarter were one of the big drivers of economic growth. There was mild weather across much of the country in January and February, and that helped car sales. And also, domestic production has been picking up with the chip shortage (being) less of an obstacle, and so there’s more inventories on dealer lots. That’s very good news for Michigan’s economy.”
Charles Ballard, economics professor emeritus at Michigan State University, noted that the auto sector makes up a smaller part of Michigan’s economy than it used to, insulating the state from significant hits from boom-and-bust cycles.
“But we are still way more dependent on autos than any other state,” he said. “Less than 1% of the national economy is motor vehicles and parts. So, we’re still an outlier. And that means that if there’s a recession, it probably would still have disproportionate effects on Michigan.”
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