Detroit economy overcoming pandemic challenges, faces recession fears, UM report says
Posted By: The Detroit News on August 25, 2022. For more information, please click here to read the source article.
The city’s economy is expected to recover from pandemic-related challenges faster than Michigan or the United States overall, even as new recession threats loom, University of Michigan researchers predict.
The Detroit Economic Outlook for 2021-27 notes that long-planned development projects and strong consumer demand for new vehicles should help the city better withstand the upcoming slowdown.
The report, which was released Thursday, acknowledges that “most measures of real economic activity, especially in the labor market, have remained strong through the second quarter of the year.”
“The incoming data continues to point to an ongoing recovery in Detroit’s economy. We are projecting local growth to continue despite a slowing national economy in part because of pent-up demand in the auto industry,” said Gabriel Ehrlich, director of UM’s Research Seminar in Quantitative Economics and lead author of the forecast.
Detroit’s unemployment rate dropped to 10.6% in May, a significant decline from a high of nearly 40% in the early days of the pandemic, compared with jobless peaks of 23% for the state and 15% for the nation.
Despite that drop, researchers note the rate this past spring was 2.5 percentage points above its pre-pandemic level.
Jobs at establishments within city boundaries are projected to surpass pre-COVID pandemic numbers by the end of 2023.
Researchers predicted job growth to increase from 3% in 2021 to 5.4% this year, then cool down to 2.7% in 2023. The rate of growth should slow further to the end of the forecast period, as scheduled projects wrap up, the researchers say.
Other speed bumps include the challenges of remote work and the state’s broader labor market running into a demographic speed limit as the Baby Boom generation continues to reach retirement age while domestic and international migration remains weak, according to the report.
Payroll employment (jobs in the city) had recovered about two-thirds of its initial pandemic losses through last September and researchers say its recovery has been continuing steadily.
A concerning but likely temporary trend has emerged in the resident employment measure: While it had recovered nearly 95% of its initial pandemic losses by March, it dropped by 1.4% through May.
“We do not believe that those declines represent a reversal in the underlying trend, but they are not what we were hoping to see,” the researchers wrote.
The forecast calls for the city to add 11,300 payroll jobs this year and 6,100 in 2023.
Job growth is forecast to continue but at a slower pace through 2027, and blue-collar industries should lead the way in the recovery during that time with work on such projects as the Gordie Howe International Bridge, Stellantis’ Mack Assembly complex and General Motors’ Factory Zero.
Wage growth
Persistent inflation also is likely to take a bite of how much workers make in the city: Wages are projected to rise by 6.6% this year but the gains will be outpaced by a 7.7% rate of inflation. The wage growth is expected to run about even with inflation for the next few years.
The economists are watching a couple of scenarios they say could trigger a recession.
The first is an escalation of Russia’s war in Ukraine: If Russia completely cuts off natural gas supplies to Europe, researchers say, the ensuing global supply chain stress could force Detroit’s three automakers to halt production.
A second scenario is the possibility that the Federal Reserve goes too far in its efforts to control inflation. The economists recall the early-’90s recession, which included an oil-price spike and monetary tightening.
If that were to happen again, researchers say Detroit’s resident employment could fall by about 6,600 people. Still, any recession along these lines would likely be brief, with recovery beginning as the Fed eases up once inflation is under control.
The economists say they remain “cautiously optimistic” neither such scenario becomes reality, the national economy experiences moderate but sustainable growth, and Detroit’s economy “has room to prosper.”
“The Detroit economy, despite the tests posed by the pandemic and its consequences, remains steady and has supported consecutive years of balanced budgets for the City since exiting bankruptcy in 2014,” said Jay Rising, the city’s chief financial officer. “We will continue our careful efforts in using growth and opportunity strategies to further stabilize the City’s recovering economy.”
The forecast is prepared by the City of Detroit University Economic Analysis Partnership, which is a collaboration of economic researchers at the city, Wayne State University, Michigan State University and the Research Seminar in Quantitative Economics at the University of Michigan.