By Brian C. Paul
MCUL Relationship Management Director
Most of the major challenges facing the Michigan economy still center around the beleaguered domestic auto industry. Both auto sales and Big Three market share are down. This has led to the highest state unemployment rate in the nation, falling home values, high foreclosure rates and negative economic growth. Some people are leaving Michigan to seek prosperity elsewhere. The state’s fiscal issues are enormous. As a result, Michigan’s image has suffered.
For the past half century, auto industry-driven prosperity made Michigan a great place to work. Now, however, the situation is changing. The Big Three automakers have lost much of their previous dominance. Their market share is trending down toward 50 percent, compared to better than 71 percent just 10 years ago. In addition, the entire U.S. auto market remains under pressure due to high fuel prices, slumping housing and economic concerns. In September, there were an annualized 16.23 million units sold compared to 16.60 million a year ago. Many expect that the Big Three share will bottom out at somewhere near 50 percent. They also predict that 2008 will be a weak year for auto sales.
According to the Department of Labor, the August unemployment rate for Michigan was 7.4 percent, the highest in the nation and a 14-year high. Michigan has lost 96,000 jobs since August of 2006, with losses in auto jobs leading the way. In fact, in the five-year period ending in August, state auto-related jobs have fallen 34 percent from 275,200 to 181,100. Some 20,000 auto jobs have disappeared in the past year alone. Of course, the state average is not always indicative of local economic realities. Unemployment is currently below the state average in such places as Ann Arbor, Kalamazoo, Lansing and Grand Rapids, and is above the state average in Metro Detroit, Flint and Jackson.
Most see a long road ahead for real improvement in the Michigan unemployment rate. Many autoworkers will continue to take buyouts. U of M forecasts predict that the state will lose another 40,000 jobs over the next two years, boosting the unemployment rate to nearly 8 percent in 2008. The nonpartisan House Fiscal Agency predicts that unemployment could average about 7.8 percent in 2008. Similarly, the Senate Fiscal Agency suggests the rate could average 7.7 percent next year. According to Gary Wolfram, an economist at Hillsdale College, “We are at the bottom right now and people need to understand for the rest of America, it’s not that way.” The national unemployment rate is significantly lower.
The state jobless data indicate that some people are dealing with the poor employment market by leaving the state. The Michigan Labor Department calculates that 16,000 workers left the state in August alone, and that some 81,000 (1.6 percent) have left over the past 12 months. Data released from United Van Lines shows that 66 percent of moves in 2006 took households out of the state. This is the 2nd worst rate of outbound moves in the nation. Further, experts worry that many of those who are leaving are the young and well-educated workers. A 2006 Detroit News analysis revealed that the state ranked 49th in the nation in retaining young adults between 2000 and 2005.
State job losses have lowered wages in many households. A new report from the U.S. Census Bureau reveals that household incomes in Michigan fell by 0.8 percent last year, compared with a gain of 1.4 percent for the rest of the nation. In real or inflation-adjusted dollars, the median household income in Michigan fell to $47,182 from $47,558 in 2005, placing Michigan 24th in the nation. The 2006 national household income was $48,451.
This year, much like 2006, is proving to be very difficult for the Michigan housing market. According to the Michigan Association of Realtors (MAR), the average Michigan home price has declined 8.6 percent from $153,300 in 2005 to $140,100 in July 2007. These values actually understate the true extent of the weakness since some sellers refuse to sell below a certain price or are paying closing costs or making other concessions. Prices will not actually bottom out until there is a closer equilibrium between buyer and seller expectations and this may take several more years. The MAR also reports that this statewide figure masks the most painful local declines, like a 30 percent year-to-date (through July) drop in Detroit and a 21 percent drop in the eastern Upper Peninsula.
The Michigan housing market weakness can be most clearly observed with foreclosures and home loan delinquencies. According to the Mortgage Bankers Association (MBA), Michigan led the nation during the 2nd quarter of this year with a full 1 percent of all mortgages falling into foreclosure. The MBA also report that Michigan has the second worst delinquency rate in the nation, with 7.55 percent of all home loans in the state past due. Only hurricane-ravaged Mississippi is worse, at 9.33 percent. Finally, Michigan also ranks 3rd worst in the nation for homes already in the months-long foreclosure process. RealtyTrac reports that Metro Detroit has the 2nd highest foreclosure rate of any city in the nation, at 1 in 29 households, through the first half of the year. A large portion of the state delinquencies and foreclosures are concentrated in sub-prime mortgages. Fortunately, most Michigan credit unions have largely bypassed this riskier product and its resulting difficulties.
Falling incomes and lost jobs have definitely impacted the Michigan economy. According to the U.S. Bureau of Economic Analysis, Michigan was the only state with negative economic growth in 2006. Meanwhile, the more diversified national economy continues to perform quite well despite the weak housing market. Gross national product (GDP) has been surprisingly strong, unemployment remains low, exports are strong, and the stock market has approached new highs. Nevertheless, concerns over weakness in the housing sector have recently prompted the Federal Reserve to cut interest rates.
National unemployment remains at a historically low level of 4.6 percent in August and 4.7 percent in September. The general view is that unemployment will remain low but might inch up toward 5 percent in late 2007 and into 2008. This would still be below the 5.7 percent average rate of the 1990s.
According to the National Association of Realtors (NAR), the U.S. housing market is still very weak. In August, new home sales dropped 8.3 percent while existing home sales fell 4.3 percent, the slowest pace in five years. There is a 10-month supply of homes on the market, twice the supply of two years ago. Foreclosures have increased in many areas. A recent Wall Street Journal survey of economists does not project an upturn in the overall housing market until 2009.
The housing industry continues to work through an adjustment following the recent boom. The boom was caused by a combination of the lowest mortgage rates in four decades and a speculative frenzy from real estate investors. In addition, economists are now concerned that rising defaults in sub-prime mortgages, those offered to borrowers with weak credit, has triggered tighter lending standards. Further, many borrowers will face higher monthly payments in the next couple of years as their adjustable rate mortgages “reset” to higher rates from their introductory rates. As borrowers default on their mortgages, they will dump more houses onto an already depressed market.
A pleasant surprise for the national economy has been exports. The weakness in the U.S. dollar has made our goods more affordable abroad. As a result, exports were up 11.6 percent in the first half of this year compared to the first half of 2006. Many economists are delighted with this development, especially since exports, which account for 10 percent of GDP, are helping to counterbalance the housing weakness, which accounts for about 5 percent of GDP.
The Federal Reserve, citing concerns over the housing slump and softening economic growth, cut the fed funds rate from 5.25 to 4.75 percent in September. The Fed will also assess future data to decide whether more cuts are necessary. Some foresee more rate cuts over the next six months. Inflation is now less of a concern to the Fed. Core inflation, which excludes volatile food and energy prices, has been running near the preferred range of 1-2 percent.
Spurred by the recent Fed interest rate cuts and resilient consumer and business spending, the stock market has performed very well through the 3rd quarter of 2007. The Dow Jones Industrial Average is up 11.5 percent, the S&P 500 is up 7.6 percent and the NASDAQ is up 11.8 percent for the year. These gains have helped to prop up the consumer “wealth effect” that has been buffeted by falling home prices. The wealth effect is a feeling of financial well-being that helps to drive consumer spending.
There will be no easy solutions to improve the weak Michigan economy. Michigan must seek ways to improve on a poor image as exemplified by a recent Wall Street Journal article “Hail to the Taxers” (Oct. 2, 2007) in which the recent income tax and sales tax increases were criticized as a poor remedy for the state’s problems. It is indeed true that significant budget reforms in state expenditures and entitlements are still necessary. It is also true that personal taxes are already high. The Tax Foundation ranks the state 14th highest in the nation in local and state tax burden as a percentage of state income. With personal income declining, people leaving the state, real estate values falling and unemployment high, state tax revenues will continue to disappoint, despite the recent tax increases. In addition, Michigan must do a better job in attracting and retaining employers.
Michigan has much to offer in terms of untapped tourism potential. Current efforts to increase the state tourism promotion budget may be a wise investment. Despite all that this beautiful state has to offer, Michigan’s tourism budget of only $5.7 million ranks 42nd lowest among the 50 states. The Detroit Metro Convention & Visitors Bureau asserts that studies have demonstrated that every $1 invested in tourism promotion generates $2-3 in new sales tax revenues.
A recent development that should help Michigan and the upper Midwest region is that the Big Three automakers have achieved labor agreements which will close the wage gap with foreign rivals and institute other changes which should serve to make the companies smaller but more competitive in the future.
Many workers will be caught in the transition as the auto industry becomes leaner and more competitive. These workers will need job retraining. While the auto sector has lost jobs, healthcare and social assistance employment has added more that 71,000 new jobs, an increase of 11.5 percent. Healthcare employment is estimated by some to double in the next several decades. Displaced autoworkers and those pursuing careers will need education and training in the projected growth areas of healthcare, accommodations, food service, finance/insurance and information technology. Effective retraining may help slow the loss of Michigan residents and could eventually help bolster real estate values as new jobs are filled with capable candidates.
A more detailed Economic report for Fall 2007 can be found at www.mcul.org.