Michigan Economic Update

This article continues our annual summer tradition of evaluating the health of the Michigan economy. In this article, we will cover (1) the labor market, (2) the auto industry, and (3) home prices. Last year, we wrote about the robust recovery underway in the labor market, projected stability in the auto industry, and accelerating home prices. These trends evolved in unexpected ways over the past year, and we are excited to provide this update for 2022.

This article follows two important conferences which address the outlook for Michigan.

In mid-May, the state government’s House Fiscal Agency hosted the Consensus Revenue Estimating Conference. The unimaginative name belies the excellent information and forecasts provided by economists and auto industry experts. These forecasts help Michigan’s lawmakers establish the state budget and provide useful information to investment managers like Greenleaf Trust.

In January, the Detroit Branch of the Chicago Federal Reserve Bank hosted the Automotive Insights Symposium. Economists from Cox Automotive and various industry research groups provided near-term outlooks for auto sales, production, and supply chain issues.

Let us begin with an update on the labor market.

Michigan’s Labor Market

Heading into the pandemic, the unemployment rate in Michigan reached a low of 3.7%. This was the lowest level since the late 1990s. 4.45 million Michiganders were employed.

In three months, from March to May 2020, employment fell to 3.40 million, a 24% reduction in jobs. The statewide unemployment rate peaked at 23.6%.

Today, we remain on the journey toward a full recovery. Over the past 12 months, the unemployment rate is down in nearly every county in the state. Employment has increased in every industry category except one (mining, logging, and construction). Total nonfarm employment is up to 4.33 million.

The state unemployment rate stands at 4.3%, higher than the national average of 3.6%, but lower than the 6.3% state unemployment rate registered a year ago.

The total number of jobs remains 2.8%, or 125,600, below the pre-pandemic peak. Three industries explain 97% of the decrease. Leisure & hospitality, education & health services, and government jobs are all down more than 5% from their pre-pandemic levels. This is attributable to retirements, industry-switchers, and people leaving the labor market.

Across the state, the vast majority of counties have seen lower unemployment rates over the past twelve months. However, unemployment remains higher than 2019 levels for now.

Consistent with the strong national labor market, we see evidence of strong labor demand in Michigan as well. Layoff announcements in the state have been very low throughout 2022.

 

In summary, there is a robust recovery underway in Michigan’s labor market. We have been surprised by the rapidity of progress and are hopeful that it can continue into 2023. Auto manufacturers noted challenges finding available labor supply in this year’s Automotive Insights Symposium and with that, we will turn to the outlook for the auto industry.

The Auto Industry

Supply chain issues dominated the discussion at this year’s Automotive Insights Symposium. Industry participants continued to note strong demand but an inability to produce enough vehicles to satisfy customers. As a result, auto prices have continued their significant rise. The CPI Index for New Vehicles is up 11.4% year-over-year and Used Cars and Trucks are up 7.1% for the year ended June, 2022.

Unlike a year ago, optimism about supply chain issues has waned. The Consensus Revenue Estimating Conference produced below-trend auto sales forecasts through 2023.

Pre-pandemic US light vehicle sales were typically 17.5-18.0 million units. Projections now show that it will take until 2024 to return to a 17.0 million rate. In addition, the Big 3 (Ford, GM, and Fiat Chrysler) market share, which in the 1990s topped 70% of the domestic market, is expected to be stable around 37-39%.

Looking forward, there is a possibility for strong recovery for the auto industry, but it will depend on repairing disrupted supply chains. There is room for manufacturing job gains if auto demand remains strong while production shortages normalize. Supply chain issues are also impacting the housing market, leading to rapid price increases over the past year and with that, let’s examine Michigan’s housing market.

Michigan’s Housing Market

Home prices across the state increased by 15% over the past 12 months. The Grand Rapids MSA remains the state’s most valuable residential real estate market, followed closely by Ann Arbor and Muskegon. Zillow lists the median home value in Michigan at $236,980, up from $206,727 a year ago.

Every region of the state saw double-digit home price increases, with the Muskegon region appreciating the most, up 21% over the past 12 months. For our clients in the Kalamazoo region, home prices were up 19%.

Home prices are now elevated compared to rents and incomes, so we expect prices to flatten out from here. Some of the catalysts for rising real estate prices may be behind us. Mortgage rates in 2021 averaged a range 2.8%-3.2%. Today, they are around 5%, which reduces prospective homeowners’ buying power.

We do not, however, see the types of catalysts that precipitated home value declines during the financial crisis of 2008-2009. Vacancies are remarkably low. Inventories are low. Mortgage loans are being made to creditworthy borrowers and delinquencies are near record lows. We think the most likely path forward is for more muted appreciation, but not for home price declines.

Conclusion

Michigan’s economy has made a lot of progress over the past twelve months. Further progress could be in store if the auto industry overcomes its production challenges. Above-trend growth in auto manufacturing could be a positive catalyst for the state. Overall, the state’s economy remains slightly weaker than pre-COVID, but the rapidity of the recovery has been a positive surprise thus far.

Looking ahead, we will be watching, and hoping, for the state to make a full recovery to pre-pandemic strength. Along the way, Greenleaf Trust will be here to serve our Michigan communities and to help our clients achieve their financial goals.

Sources:

Auto Sales: Bureau of Economic Analysis

Unemployment: Bureau of Labor Statistics Local Area Unemployment Statistics
– https://www.bls.gov/lau/

Michigan Consensus Revenue Estimating Conference
– http://www.house.mi.gov/hfa/Consensus.asp

Chicago Fed Automotive Outlook Symposium
– https://www.chicagofed.org/events/2019/automotive-outlook-symposium

Layoffs: State of Michigan Workforce Development Agency
– https://www.michigan.gov/wda/0,5303,7-304-64178_64179—,00.html

Home Prices: Zillow & Federal Housing Finance Agency Home Price Indexes
– https://www.fhfa.gov/DataTools/Downloads/Pages/House-Price-Index.aspx