The report from RSQE Director Gabriel Ehrlich is forecasting a mild recession in 2023 with minimal job loss and a 4.7% unemployment peak by early 2024. The report predicts a plateau of personal income in 2023 with growth in 2024 and inflation coming down to 4.5% in 2023 and 2.5% in 2024.
“If there's a genie who says you can either make this forecast reality or just take your chances with how things play out, I will take that forecast in a heartbeat,” Chris Douglas, a U-M Flint economics professor on the Mackinac Center for Public Policy’s Board of Scholars, said.
Tim Nash, vice president, emeritus, director of the McNair Center for the Advancement of Free Enterprise and Entrepreneurship, said the government waited too long to start raising interest rates to control inflation, which would be necessary to keep the economy improving.
Douglas said the RSQE report was more in line with the Federal Reserve sticking a “soft landing” with the economy than an actual recession. The Federal Reserve raises interest rates to lower interest in consumer goods, which can cause the pull back on inflation, but if rates are raised too much a recession is caused.
Douglas agreed a recession is imminent, but said he is projecting it could be deeper than the “slowdown” that Ehrlich is forecasting, because recessions are hard to predict.
“The one thing that seems to be the case for the U.S. economy is that we don’t have mild recessions,” he said.
He said going from 4% unemployment to 7% unemployment would be considered a moderate recession, and he thinks if there is a recession it could push the unemployment rate to 8% to 9%.
The RSQE report states the reason for the 0.6% unemployment rise as being the pent-up demand and bottleneck backlog in the Michigan auto manufacturing industry.
“Auto sales are not recovering. I cry baloney,” Nash said.
Douglas said he could see the idea behind the RSQE report but said it would come down to whether or not consumers would actually spend the money during talk of a recession.
The RSQE report also pointed to the electrification of the national vehicle fleet and the large capital investments that have been poured into parts and battery manufacturing.
“It's going to be a tougher sell for people in the Midwest to buy EVs versus buying a gasoline powered car with a range,” Douglas said. “So, if you look at these, you’re talking about 1% of the auto market.”
One area that the three economists came together was that housing and other blue-collar industries could be hit harder.
“We’re talking about a prolonged difficult period in the housing market,” Nash said.
The difficulties for the housing market come because of the rise in interest rates from the federal government. The lower the interest rates the more a person can spend on their home, but as those go up, so to does the amount you have to spend to buy a home.
The RSQE report projects personal income to rise in the state despite being negated by inflation in 2023. The 2024 personal income is projected to hit $61,500, which is nearly 25% higher than 2019.
The standard-of-living measurement, or real disposable income per capita, while falling by 10% in 2022, was projected to rebound by 2024 to just above the 2019 average of $46,100, which equates to a zero percent growth on living standards over five years.
All the federal government is doing is to try to bring inflation under control, which was caused by an excess amount of money being injected into the economy from stimulus dollars along with an increase in demand for goods by people coming out of the COVID-19 pandemic lockdowns.
The RSQE report is calling for inflation to be completely under control by 2024.
“Note that we are not forecasting deflation – consumers should expect most prices to remain well above their pre-pandemic levels going forward,” the report states.
Nash said to get inflation under control they have to raise interest rates to above inflation, which he said will be around 6%.
Nash said one thing the report did not address was the national debt and how much interest rates, as they rise from the federal reserve, could impact continuing inflation.
“Although we believe that inflation, autos, and housing are the most important risks to our forecast, others certainly exist. We think the risks to the forecast are skewed to the downside, but there are upside risks as well, particularly if inflation falls more rapidly than we anticipate,” the report stated.
Michigan Budget Impact
The RSQE report is projecting a combined General Fund and School Aid Fund revenue for Michigan to be at nearly $8 billion above 2019. The numbers are still coming in for the fiscal year that ended on Sept. 30.
“We can say conclusively that fiscal 2022 was another bumper year for state tax revenue,” the report stated.
The stimulus that is one reason for inflation has also been a reason for the massive tax revenue, which hasn’t gone down as expected. Those taxable consumer goods could start cooling as interest rates rise and inflation comes down.
The RSQE report mentioned the midterm elections and single-party control of the government giving Gov. Gretchen WHITMER carte-blanche to repeal the income tax on retirement income. This could impact how much money comes in.
“We will adjust our revenue forecast as necessary when new legislation is signed into law. In keeping with our traditional practice, our forecast of Michigan revenues reflects the state’s current tax code,” the report states.
The changes for revenue in the state would come from a nearly 8% drop in personal income tax and 24.4% drop in business taxes in 2023. The return from the recession in 2024 would see those numbers rise slightly.
“Looking beyond our normal forecast horizon, we project that job growth in Michigan will slow down considerably over the next few decades. Michigan’s economic future faces a major hurdle in the form of a slow-growing and aging population. Addressing those demographic challenges will be a key task in establishing the foundation for Michigan’s future prosperity,” the report ended.
