By Brian C. Paul
MCUL Relationship Management Director
Contrasting the period of general prosperity across most of the country, the Michigan economy will continue to be poor well into the future. In addition to high unemployment and a poor housing market, Michigan’s economy suffers from a variety of difficult issues. Strong leadership from the business community and lawmakers will be crucial.
For most of the 20th century, Michigan was the model of economic prosperity. The auto industry made our state a magnet for hard-working Americans. While economic downturns were often steep and painful, the state bounced back vigorously with every economic expansion. Now, however, the situation is different. The Big Three automakers have lost much of their previous dominance. Detroit has lost market share at an average rate of 1 percent a year since 1970. In fact, market share is now nearly 50 percent.
Michigan has experienced a dramatic decrease in good-paying manufacturing jobs — nearly 30 percent over the past decade. There were 893,000 such jobs in 1998. Now there are an estimated 637,200.
The Michigan jobless rate, while showing recent improvement, is still much worse than the national average of 4.4 percent in March 2007. Michigan’s unemployment rate dropped in March 2007 to 6.5 percent, the lowest since October 2005. The December 2006 rate was 7.1 percent.
Most see a long road ahead for real improvement in the Michigan unemployment rate. Many auto-workers will continue to take buyouts. University of Michigan forecasts predict that the state will lose another 40,000 jobs in the next two years, boosting the unemployment rate to 7.5 percent in 2007 and nearly 8 percent in 2008.
These job losses have lowered wages in many households. According to the U.S. government statistics, Michigan’s per capital income as a percentage of the U.S. average fell to 95 percent in 2005, compared to 102 percent in 1995. The lowest percent on record — 93 percent — came in 1933, during the lowest point of the Great Depression.
Both the Michigan and U.S. housing markets, however, shared the same pain in 2006. U.S. home sales declined and housing prices grew very modestly. The National Association of Realtors reports that existing home sales fell 8.4 percent, the largest annual decline since 1989. By region, sales declined 15.5 percent in the West, 7.1 percent in the South, 5.8 percent in the Midwest and 5.5 percent in the Northeast.
The median U.S. sale price rose 1.4 percent in 2006 — a far cry from the double-digit price increases of 12 percent in 2004 and 13 percent in 2005. In Michigan, 2006 existing home sales declined 12.3 percent. The Detroit/ Warren/Livonia area led the nation’s metropolitan areas with the worst decline in home prices, falling 7.4 percent. The Lansing-East Lansing area saw a more modest 3.2 percent price decline, as did Grand Rapids with a 2.4 percent decline. According to the Michigan Association of Realtors, the average Michigan home price has declined since 2005. Michigan builders are expected to keep home construction to a minimum until the excess home inventory starts are absorbed.
Both the nation and Michigan have also been hit by an increase in home foreclosures. According the Mortgage Bankers Association, the percentage of U.S. mortgages that started the foreclosure process in the fourth quarter of 2006 rose to 0.54 percent, a record high.
The previous high of 0.50 percent occurred in the second quarter of 2002 as the economy was recovering from the 2001 recession. Michigan was the third highest in the nation at a 2.39 percent foreclosure rate. Only neighboring states Ohio (3.38 percent) and Indiana (2.97 percent) were higher. According to RealtyTrac, nearly half of all Michigan foreclosures in 2006 were in Metro Detroit. In fact, the southeast Michigan region led the nation in fore-closures, with one of every 21 home mortgages going bad. Statewide, one of every 52 households entered foreclosure, ranking fifth in the nation. The national average was one of every 92 households.
Looking forward, most experts predict more difficulties for real estate. Many believe U.S. sales will fall again this year as 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, will trigger tighter lending standards. This will make it harder for new borrowers to qualify for loans.
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. Both Fannie Mae and the National Association of Realtors expect sales will continue to fall in 2007. Many also predict a 2007 decline in home prices. A December 2006 Wall Street Journal survey of 49 economists indicated that home prices will fall by 0.5 percent this year. This would represent the first decline for an entire year in home prices since the Depression of the 1930s. However, about two out of three economists feel that the worst of the national housing slump is behind us.
The correlation between housing and the economy remains a key question for Federal Reserve policymakers and other economists. The Fed expects the housing slump to offset strength in other areas of the economy just enough to keep inflation in the moderate range. That, in turn, would allow the Fed to hold interest rates steady.
Falling incomes and lost jobs have definitely impacted the Michigan economy. The following table shows the growth (with rankings) for some of the best and worst states in 2005. Michigan ranked 48th (Michigan also ranked 48th in the period 1997-2004). Early estimates of 2006 Michigan economic growth by Loomis Sayles economist David Sowerby pegs the growth rate at a very slow 1 percent. Sowerby asserts that the state is not technically in a recession. The national economy grew 3.2 percent in 2005 and 3.3 percent in 2006.
Michigan Economic Growth - 2005
Sources: U.S. Bureau Economic Analysis, Detroit News
A controversial topic in Michigan has been the tax burden on its businesses and citizens. Business taxes are being discussed extensively in Lansing now that the much-maligned Single Business Tax (SBT) is about to be eliminated. The SBT was complicated and it required some companies to pay high taxes even when losing money. Most business tax rankings generally put Michigan in the upper-middle among the 50 states. However, regardless of where business taxes rank, the fact that can’t be ignored is that Michigan’s private sector is contracting compared to the expanding tax bases of almost every other state. In fact, last September Forbes ranked Michigan 45th overall in a list of the best states for business.
With personal income declining, real estate values falling and unemployment high, state tax revenues are falling. In order to attract and retain new and existing businesses and industries, Michigan must adopt a business tax that is fair, simple and comparatively low.
Consumer spending drives most economic activity, and businesses may be reluctant to set up shop or expand in a state with a high tax burden. As the following table shows, Michigan residents pay higher than average state and local taxes. According to the Tax Foundation, Michiganians have the 14th highest state and local combined tax burden.
Michigan Tax Burden – Individuals
Combined State and Local Taxes
(Rank Among States)
| • 2000:
| • 2007:
Source: Tax Foundation
Michigan also faces demographic challenges. As jobs and opportunities disappear, people are moving out of the state. Data released from United Van Lines shows that in 2006 66 percent of moves took households out of the state. This was the second-highest rate of outbound moves in the nation. Further, according to Southeast Michigan Council of Governments (SEMCOG), the seven-county Metro Detroit area will lose an estimated 25,000 people per year over the next nine years. Most of these will move out of state. 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. Economist William Frey asserts that there is evidence that the loss is especially heavy among college graduates and those entering college. Many have dubbed this a “brain drain.”
There will be no easy solutions to improve the weak Michigan economy although a number of measures might serve to get the state back on track. First, the state budget must be balanced through as much spending restraint as possible. Tax increases should be a last resort. Tax and spending increases will only further damage the state’s tax base, its financially strapped citizens and prospects for new industries. It is essential that actions be taken to expand the overall tax base and the level of economic activity in Michigan.
Second, Michigan’s economy must be diversified. Incentives are sometimes necessary to attract employers from diverse industries. Also, job retraining will be important in order to transition factory workers to other industries. For example, according to SEMCOG, opportunities in health care and related fields will soar, as an aging population demands medical services. This sector will add more than 100,000 new jobs in the Metro Detroit region over the next decade, dwarfing the number of manufacturing jobs by the year 2017. Other growing segments will be financial services and retail services.Third, it may be time for Lansing to consider adopting right-to-work legislation, which would allow workers to take a job without being required to join a union. Controversial as this move would be, it must be conceded that right-to-work states are faring much better than states such as Michigan. According to the Wall Street Journal, the 22 right-to-work states saw a 20 percent jump in employment between 1995 and 2005, compared with 11 percent for states that require union membership. These states also posted a 37 percent gain in household income during that period, compared to 26 percent elsewhere.
Finally, Michigan needs to continue to improve its image among non-residents. The state has many attractive strengths and advantages. No other state has more waterfront property. There are attractive year-round recreation and casino resorts, well-known universities, engineering and other high-skilled talents, hard-working residents and a century of accumulated capital infrastructure and wealth. The workforce, once stereotyped as unskilled and inflexible, is becoming more educated. According to the U.S. Census Bureau, in 2000, 23 percent of Michigan residents held at least a bachelor’s degree, compared to the national average of 26 percent. In 2006, that percentage grew to 26.1 percent, closing in on the national average of 28 percent. Also, nearly 90 percent of Michigan adults have a high school diploma, topping the 2006 national average of 86 percent.
A more detailed Economic report for Spring 2007 can be found on the MCUL Web site.