Michigan won’t bounce back from COVID-19 recession until after 2022

Small businesses hit hardest, jobless rate rose to 22%

Jason Kempin/Getty Images

The recession caused by the COVID-19 outbreak in Michigan is “as bad or worse than” the Great Recession from 2007 to 2009, according to state Budget Director Chris Kolb, but Michigan will be able to weather the storm with sufficient support from the federal government.

State fiscal analysts and top economists from the University of Michigan presented their economic findings and projections to lawmakers Friday as part of the state’s biannual Consensus Revenue Estimating Conference (CREC), which determines how much money the state has.

In January, economists painted a somewhat lackluster economic picture, but that was before COVID-19 hit the state. Now the bulk of the economic outlook for the next few years now depends largely on public health and epidemiology assumptions about COVID-19 and how the pandemic will continue to play out.

The COVID-19 pandemic has hit Michigan especially hard, which has done substantial enough economic damage to set that progress back for some time.

Michigan’s economy in 2020: Could be better, could be worse

General economic trends

“We have seen some pickup in economic activity already, and we expect that to continue, but at a measured pace this spring and summer,” said Gabriel Ehrlich, director of U of M’s Research Seminar in Quantitative Economics (RSQE).

But an important part of that forecast is the assumption that there will not be a major “second wave” of COVID-19, or at least not a second wave that causes the same level of economic disruption as the first.

RSQE models estimate that assuming ongoing resumption of economic activity throughout May and June, there are still more than one million expected payroll job losses in the second quarter of 2020.

Dr. Daniil Manaenkov, a U.S. forecasting specialist for RSQE, said he hopes RSQE’s models turn out to be pessimistic.

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“Some businesses should not expect to rebound anytime soon,” Manaenkov said. That timeline may be a year from now, if a vaccine for COVID-19 becomes widely available by then, or even later for certain businesses.

RSQE models also show that small businesses, and those who rely heavily on foot traffic for revenue (like movie theaters, bars, hotels and shopping malls) have taken a larger economic hit from the pandemic.

Jobs and unemployment

Michigan is now past its peak of state-imposed restrictions on businesses, although many still remain to protect against a second wave of COVID-19. At the point where those restrictions were the strictest, economics say about half of the state’s businesses closed.

That led to a huge peak in weekly unemployment insurance claims in Michigan, which dwarfs that during the Great Recession.

Weekly unemployment insurance claims | U of M’s Research Seminar in Quantitative Economics (RSQE)

Ehrlich says Michigan’s high rate of unemployment, which peaked at about 22% (compared to the national peak of 17.4%) can be attributed largely to Michigan’s more cyclical economy — which is due to the presence of Detroit’s “Big Three” automakers — as well as Michigan’s relatively heavy burden of the COVID-19 outbreak.

“When the unemployment rate rises nationally, Michigan’s unemployment rate also rises, but by more,” Ehrlich said.

That record-high unemployment rate will likely not return to pre-2020 unemployment rate levels until after 2022.

Unemployment rate | U of M’s Research Seminar in Quantitative Economics (RSQE)

Ehrlich estimates that about 70% of Michigan workers, with about 33% working remotely, were able to return to their jobs in April. However: “An additional 550,000 workers were out of work because of the decline in demand,” he said.

As for Michigan’s overall pace of economic recovery, MSQE models show that Michigan will likely recover about 90% of this quarter’s job losses by the end of 2022 — but this, again, is based on somewhat optimistic assumptions.

Auto industry

Overall, the auto industry has experienced a sharp drop in consumer demand due to fewer people using and purchasing cars during the pandemic.

In Michigan, vehicle sales from Detroit’s biggest automakers were already on a slow decline before COVID-19. Those auto sales experienced an even sharper decline in 2020 with 13.3 million unit sales.

Those numbers are down from about 16.9 million in 2019, and are not expected to bounce back to 2019 levels until after 2022 – but are still about three million more units sold than in 2009.

Annual light vehicle sales | U of M’s Research Seminar in Quantitative Economics (RSQE)

National outlook

Going forward, future COVID-19 trends will continue to play a large role in determining public policy and economic shifts across the county — though predicting those trends are extremely uncertain and difficult to predict.

The national unemployment rate is expected to peak at 17.4% during the second quarter of 2020, which is much higher than the almost 10% reached at the height of the last recession.

However, that number is projected to jump back down quickly. Ehrlich said this is because most of the recent layoffs have been temporary in nature, meaning that many workers can expect to get their jobs back once it becomes safe to lift more business restrictions.

U.S. unemployment and labor force rates | U of M’s Research Seminar in Quantitative Economics (RSQE)

The RSQE assumes that restrictions on businesses across the country will be eased gradually, with new safety strategies put into place to help prevent a “second wave” of COVID-19.

Otherwise, service industries with the highest perceived risk of infection (e.g. eat-in restaurants, air travel, public transportation, concerts and sporting events) will take longer to rebound. The RSQE estimates the time for these industries to fully recover to be mid-2021.