U-M forecast: Detroit economy overcoming pandemic challenges while grappling with recession fears

Source: Michigan News

Detroit is expected to recover after facing greater economic challenges during the pandemic than Michigan or the U.S. overall—even as new recession threats loom, according to a University of Michigan study.

The Detroit Economic Outlook for 2021-27, released Thursday, notes that long-planned development projects and pent-up demand from the previous economic collapse should help the city better withstand the upcoming slowdown.

“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 U-M’s Research Seminar in Quantitative Economics and lead author of the forecast.

The city’s unemployment rate leapt from about 8% in February 2020 to nearly 40% a few months later in the full throes of the pandemic, compared with jobless peaks of 22.7% for the state and 14.7% for the nation. Detroit’s rate quickly fell to 17.2% by the end of 2020 and dropped to 10.6% by May. Despite that drop, researchers note the rate this past spring was 2.5 percentage points above its pre-pandemic level.

Job growth is predicted to increase from 3% in 2021 to 5.4% this year, then cool down to 2.7% in 2023. The researchers say the rate of growth should slow further to the end of the forecast period, as scheduled projects wrap up. Other speed bumps include the city’s economy dealing with 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. 

The economists break down Detroit’s employment picture into two categories: payroll employment at city establishments and employment among residents.

Payroll employment (jobs in the city) had recovered about two thirds of its initial pandemic losses through last September, the point at which data for that measure extended. 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 in the study.

The forecast calls for the city to add 11,300 payroll jobs this year and 6,100 in 2023, the year in which the city is expected to recover to its pre-pandemic level. 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.

High, 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 potential 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 count 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 the Detroit’s economy “has room to prosper.”

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