State Outlook 'Encouraging'

April 24, 2006
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GRAND RAPIDS — Employment in Michigan is forecast to slow moderately and remain below the national average, but National City Corp. economists see the state climbing out of what has been its chronic residence in job-loss territory, moving into positive territory later in 2006 and beginning to post gains in 2007.

“After a difficult five-year downturn, I think we should be encouraged by the prospect of that happening, despite what’s going on in the state’s auto sector,” said National City Chief Economist Richard DeKaser in a recent Michigan Economic Outlook telecast.

“More layoffs are for sure, but not to a significant extent greater than what we’ve seen in past years. When we get through this, other sectors should provide job gains to offset the losses.”

DeKaser said the single most important factor in determining Michigan’s economic performance is the national economy. Industry mix weighs heavily on the state’s economic performance. It’s the durable goods manufacturing sector, including autos, that is big in Michigan. The state’s industrial structure, he said, presents something of a liability.

Between Ford Motor Co. and General Motors Corp., there have been 6,318 “officially notified” job cuts, DeKaser pointed out, but there are markets where closures are going to occur but have not yet been announced. Using a combination of rumors and observed ratios of actual layoff announcements, National City economists believe the total impact on Michigan will be about 10,500 jobs. On top of that, there is a very deep complex of supplying industries that produce parts and materials for the auto sector.

“The intensity of this conglomeration of economic activity is really very striking,” DeKaser remarked. “Within our seven-state region, for every job announcement in the auto sector, another seven occur in the various supplying industries. We’re probably looking at 10 times that quantified number of initial layoffs, which would put job losses up in the vicinity of 100,000.”

That’s about 2 percent of the current existing job base in the state, he pointed out, but it will not happen simultaneously. The state has been seeing some of the pain in the supplying industries for many, many years, most significantly with the bankruptcies of Delphi Corp., Tower Automotive Inc. and Collins & Aikman Corp., all since 2005.

“Most likely, I think we’re going to see that 2 percent spread out over about a five-year period,” DeKaser said.

Economist Robert Reed said that according to National City’s survey of 2,500 small business owners in the bank’s seven-state market, business confidence climbed in March, with 72 percent of respondents reporting “favorable sentiments” during the month.

“Small businesses in Michigan are showing optimism in regard to their future,” Reed observed. “Over the 15-month history of this index, we have collected more than 10,000 responses from businesses within Michigan. With a 67.6 percent rating of optimism in March, we feel that the confidence ratings back up our forecast for continued growth in Michigan for the foreseeable future.”

Now in its fifth year of expansion, the U.S. economy is basically back to where economists want to see it. That’s good, but it also means that prospects for future growth are limited.

“When the economy is underperforming its potential by a significant degree, as was the case a few years ago, there’s an opportunity to grow at a very quick pace. We are at full employment in my estimation. And in a perfect world, the economy will continue to grow, but at a pace that is consistent with that long-term potential,” DeKaser said.

He predicts 3.6 percent GDP growth this year and a slowing in the second half to about 2.5 percent. DeKaser sees that most sectors are showing mild atrophy and are not particularly ripe for decline, with the exception of housing. That sector is just beginning what is expected to be a fairly significant downturn.

“We do think housing is going to be the principal contributor to the economic slowdown in our forecast. Why? Simply because actual sales of single family homes — which peaked in the summer of 2005 — has fallen quite precipitously since that time.”

He noted that there’s a dramatic increase in inventories of new homes for sale, with record levels more than 20 percent over the previous high. Home price appreciation, which was so robust in 2004 and 2005, is reverting back to longer-term norms. But the risk of declining home prices is quite low in Michigan compared to other markets, he said. With demand slowing, the nation will likely see a decline in construction activity, and that will have the greatest impact in terms of economic activity.    

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