(Source: MIRS.news, Published 01/13/2023) Personal income is on the rise and projected to be nearly 30% higher by 2025, but inflation will reduce actual growth to near nothing, according to projections by Gabriel Ehrlich and Daniil Manaenkov during Friday’s Consensus Revenue Estimating Conference.
The University of Michigan duo presented during their Research Seminar in Quantitative Economics that personal income will continue to rise through 2025, after a brief stagnant period in 2021 and 2022 that Ehrlich likened to “treading water.”
They said by 2025, personal income will be much higher than pre-pandemic levels, from an average of around $50,000 to $64,000.
But real disposable income, which is calculated by subtracting taxes from income with an adjustment for inflation, will remain much flatter, despite Michiganders making more.
Ehrlich said the calculation is a good way to track individual living standards.
Despite relatively stagnant personal income numbers in 2021 and 2022, real disposable income was in decline by 10% in the last year, Ehrlich said.
He said it’s a “tough thing to explain to people” that the state isn’t currently in a recession when they have felt their purchasing power fall so much.
But he added that Michigan is expected to avoid the brunt of the federal recession that’s coming, though Michiganders also won’t see any growth.
In 2023, personal income will rise, but “inflation is going to eat away almost all of those gains,” Ehrlich said.
The end result in 2025 is a much higher personal income level, but a real disposable income level approximately 1.6% higher than pre-pandemic levels in 2019.
Employment And Unemployment Both On The Rise
A large portion of Ehrlich’s presentation was focused on the state’s employment outlook and the post-pandemic recovery that he likened to “climbing out of a deep jobs hole.”
Ehrlich said the U.S. lost approximately 14% of payroll jobs during 2020, but was able to return to normal numbers by August 2022.
Michigan, however, experienced a much deeper economic downturn than the national average, losing nearly 20%, and the state has still not entirely recovered, he said.
“Historically, when the economy catches a cold, Michigan catches a flu,” Ehrlich said.
Though Michigan recovered close to 98% of job losses through Nov. 2022, the most recent Michigan data set, job growth is set to slow down, and won’t reach pre-pandemic levels until early 2024.
In 2025, it will still be 3.5% below the all-time employment peak in 2000.
But despite the slow growth rate, Michigan will continue job growth because of the strength of blue collar industries, which Ehrlich said is the only one of three labor groups to make a full recovery, with higher education and lower education positions still lagging behind.
By 2025, blue collar jobs will grow by about 4% in Michigan, while lower education positions, which lost the most jobs during the pandemic, will take the longest to recover.
In 2025, they will recover to approximately 0.5% below pre-pandemic levels.
For the auto industry specifically, Ehrlich said jobs will continue to grow despite a likely federal recession, with the exception of a potential fall stoppage due to auto industry contract negotiations.
But vehicle sales will have a slow and choppy recovery due to supply chain shortages and high prices.
On the flipside to job growth, Ehrlich forecasted the unemployment rate will rise temporarily in 2024 before falling back down the following year.
He anticipated a peak of around 4.7% in mid-2024, before the rate falls back to around 3.9% by the end of 2025.
Tax Revenues
Following the boom of state tax revenues in 2021 and 2022, the anticipated revenue stream into the General Fund and School Aid Fund is expected to decline by $2.6 billion in Fiscal Year 2023.
In 2021 and 2022, the General Fund and School Aid Fund both increased, in part due to a pandemic-era shift from spending on services to goods, which supported sales tax collections.
Ehrlich said as the slow shift back to spending on services, along with lower gas prices, will result in a tax revenue decline in 2023.
But even with the forecasted revenue contraction, he said revenues will still remain higher than pre-pandemic trends.
In 2024, the state is expected to see modest growth, with more substantial growth in 2025.
Looking Forward To 2050
Looking past 2025 and into the long-term future, Ehrlich presented an outlook that focuses on the complex relationship between employment and population.
He forecasted that after a fall-off in the population due to the pandemic, slow growth will start again in 2023.
Michigan’s population will peak in the mid-2040s, likely 2046, and then will decline slowly through 2050.
At the same time, Michigan’s employment numbers will go through a healthy recovery period in the 2030s with slow growth in the 2040s, but Ehrlich said a slowdown in population growth also puts a speed limit on job growth.
As more Michigan counties lose their population, both to deaths and out-migration, employment numbers will act as a mirror.
Ehrlich said the trends are concerning, but not new news.
“One nice thing about forecasting demographics, as opposed to the economy, is that people actually do get one year older every year,” he said. “You can get that one right.”
