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What experts predict for Michigan's 2021 economic outlook

Michigan enters 2021 with COVID-19 vaccinations underway, its manufacturing sector recovering and higher-than-expected tax revenue projections. But experts warn of a two-track economic recovery ahead that threatens to leave the state's most vulnerable workers and sectors behind.

In the home of one of America's poorest major cities, the pandemic has starkly illuminated disparities across racial, economic and gender lines, disproportionately killing Black Americans, forcing droves of women out of the labor force, and resulting in higher job losses and greater financial hardship for lower-income people.

"People at the lower end of the income distribution have been very disproportionately harmed by the pandemic recession," said Gabriel Ehrlich, the University of Michigan’s Director of the Research Seminar in Quantitative Economics. "We've seen very disproportionate job losses, and we do expect the recovery to be slower in those industries (such as leisure and hospitality), too."

Meanwhile, the pandemic spoiled a streak of rising optimism among state business leaders, most of whom said they were negatively impacted by the coronavirus and whose assessment of Michigan's business climate plummeted in the last year. That's according to a survey released Tuesday by the Detroit Economic Club.

Michigan businesses' outlook for 2021 dropped "dramatically" to a score of 72 out of 100, according to the survey results. That's down from a score of 80 last year, when the economy began the year riding high amid historically low unemployment. Meanwhile, 67% of respondents said the pandemic had an "extremely negative" or "somewhat negative" impact on their business.

"The primary story of 2020 involved the impact of the pandemic," said David Baker, managing partner of Ann Arbor-based Baker Strategy Group, which co-wrote the survey. "Some organizations have done well during this economic disruption. For most, however, it has been difficult."

The results were unveiled during a virtual Economic Club event that featured Ehrlich and state Treasurer Rachael Eubanks as panelists. The survey, which ran from Nov. 10 to Dec. 18, garnered 1,435 responses from employers across 361 cities and 40 states and provinces. It asked respondents to evaluate statements on a 1-10 scale; their responses were translated into a 0-100 score that was used to compare Michigan to an aggregate.

The survey notes 4.6 million people are employed of the state's 4.9 million-member labor force, for an unemployment rate of 6.9% — an improvement from the onset of the pandemic when employment tanked. But the results reflect some of the pandemic's uneven effects. 

For example,16% of respondents said the pandemic actually had an "extremely positive" or "somewhat positive" impact. The outlook of those businesses, with a score of 87, was much brighter than others.

"What we've seen across the board is that some businesses have been hit very, very hard by the pandemic, and others have even seen their business improve," said Eubanks. "That certainly aligns with some of the data we see at the state level about some declines in consumer spending around service-based industries and shifting toward durable goods."

Meanwhile, Michigan respondents' view of the state as business-friendly dimmed in the last year, with the score dropping eight points to 61 even as the aggregate score rose to 66. Michigan also fell below the aggregate on a question about recommending Michigan as a place to do business.

Eubanks and Ehrlich speculated that opposition to public health orders that have temporarily shuttered various sectors may have driven the decline in sentiment, but argued that public health and the economy are not at odds with one another.

"Sometimes we end up framing this as a shorthand as it's public health versus the economy," said Ehrlich. "But a lot of the research that I see shows these two things go together. We cannot get back to a normal economy until the public health situation is under control."

Patrick Anderson, CEO of the East Lansing-based Anderson Economic Group consulting firm, put the responses in starker terms: “The most serious problem here is that respondents overwhelmingly indicated a big drop in the business friendliness and the business climate of Michigan. This is unambiguously a double thumbs down on the policies of the state of Michigan during the coronavirus, and it’s a serious warning to our state’s political leaders.”

Respondents' view of the state's "entrepreneurial culture" remained relatively strong, with a score of 70. A steady improvement in the assessment of the state's skilled, educated labor pool continued, outpacing the aggregate with a score of 60.

Hospitals, cultural/religious institutions and public safety in the state received high marks. But business leaders took a dimmer view of the state's education system, with Michigan underperforming in questions about K-12 schools in local communities and the state's education systems. 

Eubanks noted Gov. Gretchen Whitmer's goal of achieving a 60% postsecondary education attainment by 2030. 

"What's been very fascinating about this pandemic is this differentiation you see between those that do have a college degree or postsecondary credential, and those that don't," Eubanks said. "COVID has illustrated even more that, in addition to having skills and talents to make sure our economy continues to thrive, that it's a really important insulating factor for our public to be able to have jobs that are able to continue on under conditions that we've seen this past year."

Anderson expressed concern that the loss of in-person learning for many students will exacerbate existing educational gaps: “Michigan’s own employers have been saying for years that our K-12 system is underperforming. This is not only an economic failure; this is a human failure."

Ahead of a conference Friday when state officials will estimate consensus revenue projections, Eubanks emphasized the importance of federal aid in shoring up state coffers: "A critical piece to looking at 2021 is going to be that federal response, what we see out of the Biden administration and the new Congress. But overall, we've seen revenues continue to exceed expectations and going into Friday, that's the baseline that we're starting from." 

Following dire warnings of financial calamity last spring and summer, an economic forecast released last week by the Michigan Senate Fiscal Agency generally predicted higher than previously expected tax revenues for the state.

The agency projected that revenues will be $810 million higher in Fiscal Year 2020, which ended on Sept. 30, than forecast in August. Revenues for Fiscal Year 2021 will be $602 million higher. The revenue projections for Fiscal Year 2022, which will be the budget that lawmakers craft this year, dropped, but only by $30 million, according to the Senate Fiscal Agency.

Adding another dose of optimism to the state's economic outlook, experts say, is the more widespread vaccine distribution this year will bring. 

"The economy was fundamentally healthy in 2019," said Ehrlich. "As the public health situation improves, the fundamentals are still there, and I really think we’re going to have pretty solid growth coming out of this.”

Twitter: @JGrzelewski

Staff Writer Craig Mauger contributed.