University of Michigan economists believe a “mild” U.S. recession is coming — but they say Michigan could be insulated from the worst effects thanks to the strength of its automotive sector.
Those are some of the takeaways from annual forecasts on the U.S. and state economies released Thursday at the university’s 70th annual Economic Outlook Conference.
“We expect monthly inflation to tick back up in the next few months,” the researchers wrote. “As a result, we judge that the Fed will have to keep raising the federal funds rate through mid-2023, and it will likely take a mild recession to drive inflation down for good.”
Inflation — which the Fed is attempting to tamp down with aggressive interest rate hikes — was one of the primary factors in the authors’ U.S. Economic Outlook report. If a recent slowdown in inflation has staying power, the authors believe the Fed still has the chance to deliver a “soft landing.” They expect the nation’s central bank to hold its federal funds rate flat during the second half of 2023, and to begin cutting rates again by early 2024. In the meantime, the Fed’s rate hikes are expected to destabilize the U.S. labor market.
The report also addresses the weakening of the U.S. housing market amid rising mortgage rates, concluding that the “deep shock” is unlikely to reverse until mortgage rates peak and existing home prices stop falling. The authors, citing Fed data, also note “other signs of worry” in the U.S. economy, including tightening lending standards for commercial and industrial loans.
Still, the labor market remains strong, with “robust” employment growth and low jobless claims, the economists wrote. They expect job growth to gradually slow down in the coming months.
“We think the current momentum in the labor market and consumption spending is strong enough to keep the economy from turning over for a few quarters,” said Daniil Manaenkov, U.S. forecast lead at UM’s Research Seminar in Quantitative Economics. “But as the housing market contracts, businesses turn cautious due to deteriorating economic projections, banks tighten credit further and households increase their savings, the economy’s momentum will fade.”
UM economists pointed to the auto sector, which accounts for some 20% of Michigan’s workforce. The authors noted that sales and the pace of auto production have improved in recent months following widespread production and supply-chain disruptions during the earlier days of the coronavirus pandemic. Rising inventory-to-sales ratios are likely to help meet pent-up consumer demand and could help tamp down price increases, the report states.
That pent-up demand could “prove to be a silver lining (for Michigan) as the economy cools,” the researchers said. However, they note that the strength of the dollar and high mortgage rates could be detrimental to other sectors of the state economy, including residential construction.
“Nonetheless, if the auto industry is able to avoid major potholes ahead, it could end up towing the state’s labor market forward along with it,” the authors wrote.
If their forecast of a mild recession is borne out, UM economists expect the state’s jobless rate to climb from 4.1% this past summer to 4.7% in early 2024.
“We are forecasting continued job growth here in Michigan, even as the national economy slips into a mild recession,” said Gabriel Ehrlich, director of RSQE. “Experienced observers of the state economy know that is not the typical pattern.”
jgrzelewski@detroitnews.com
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