• Nationally, economic growth has stabilized and a recession does not appear imminent. 
• After a rough 2019, Michigan faces a few unique challenges that implicate long term growth.
• Consequently, General Fund growth will be limited in the next few years.

Last week’s Consensus Revenue Estimating Conference – a biannual event to give lawmakers an informed judgment of the state’s financial picture as budgeting starts – had a much more optimistic tone than in 2019. 

Instead of a forecast of uncertainty and worries of a looming recession, economists felt generally comfortable about where the national economy is heading. While growth is expected to slow, experts project economic stability and that the United States will likely avoid a recession for the next year, at a minimum. But while growth nationally remained steady, Michigan faced some unique problems in 2019, leading to questions on whether the state economy, and therefore state tax revenue, could keep pace. 

A Stabilized Forecast

Last year saw a number of downside economic risks, including the trade dispute with China and negotiations with Mexico and Canada on a new trade agreement; tariffs and uncertainty over trading conditions gave some sectors the jitters. With the U.S. House passing an agreement with Canada and Mexico in late December, and the U.S. and China marking out a path to end the trade war, international trade looks more stable than it did a year ago. That, in combination with accommodating monetary policy, has lowered the downside risk in the economic forecast, leading experts at the conference to predict a longer period of growth. 

The state’s Consensus Economic Forecast predicted that U.S. Gross Domestic Product would increase each of the next three years, though by less than two percent each year. While this is lower than it has been in recent years, the effects of the Tax Cut and Jobs Act of 2017 have begun to fade, and stable growth for this long of a period is still a good sign. IHS Markit (one of the presenters) reduced their odds of slipping into a recession in the next few years from 35 percent to 25 percent, and the likelihood of the expansion ending this year is even lower.

Challenges for Michigan’s Economy 

While the United States economy as a whole grew by more than two percent in 2019, Michigan experienced some turbulence. A UAW strike and impacts from the trade dispute with China lowered state economic growth for the year to about 0.5 percent, according to the estimate provided by the Research Seminar in Quantitative Economics at the University of Michigan. 

While the state should rebound from these disruptions, Michigan faces other risks. Continued decline of auto sales, and a small loss of market share for the Detroit Three automakers, could have negative long-term effects. With the state’s heavy historical reliance on auto manufacturing jobs, declines in demand will hit Michigan harder than other states. 

Additionally, job growth in the state has slowed relative to the national average, in part due to the state’s aging workforce. Census Bureau data projects that retirees will outpace new workers in Michigan, representing a 3.5 percent reduction in the labor force by 2035; this is a significantly larger aging problem than the national as a whole. Without new workers to take the place of retirees, some employers may have difficulty finding replacements, which may suppress economic activity in Michigan over the long run. Despite these risk factors, economic growth in Michigan is projected to continue in the short term, though it will lag behind the national rate.

What it Means for the Budget

Given the information presented, state revenues are projected to continue to grow for the next few years. The General Fund is expected to decline slightly (by less than one percent, or about $100 million) in FY2020, but will grow by nearly $200 million in FY2021 and more than $300 million in FY2022. The School Aid Fund is projected to grow by an average of $360 million (2.6 percent) each of the next three years.

Notwithstanding new revenue, these projections continue to show a tight window for the General Fund. With General Fund revenue increasing by a net of $400 million over three fiscal years, discretionary revenue will not keep up with a projected 1.7 percent inflation rate. As a result, inflationary increases to discretionary programs may require cuts elsewhere. Compared to the May estimates, however, the state will have a little more flexibility than previously projected.

Certainly, there are some risks that could cause the state to not meet those projections, and the risk of a recession is still not gone. But compared to last year, the economic and revenue picture has improved.