“The Michigan Model”

THE U.S. AND MICHIGAN OUTLOOK FOR 2015-2017

PREPARED FOR PRESENTATION AT THE CONSENSUS REVENUE ESTIMATING CONFERENCE

LANSING, MICHIGAN MAY 15, 2015

BY

GEORGE A. FULTON DANIIL MANAENKOV

JOAN P. CRARY GABRIEL M. EHRLICH

George A. Fulton, Director

Saul H. Hymans, Director Emeritus

Research Seminar in Quantitative Economics University of Michigan Ann Arbor, Michigan

734-764-2567

rsqe.econ.lsa.umich.edu

RSQE: May 2015

Current State of the Economy

• 2015q1 GDP growth at a 0.2% annual rate

• Consumption added 1.3 percentage points

• Net exports subtracted 1.3 percentage points

• Oil and gas exploration investment knocked off 0.5

percentage points

• Some weather-related drag again

RSQE: May 2015

First quarters are “special”

During 2010-2014 expansion:

• Average growth in the first quarter

0.6 percent

• Average growth during the rest of the year:

2.9 percent

• Weakness concentrated in:– Net Exports

– Business Fixed Investment

– Government

1

RSQE: May 2015

What is “special” this time?• Severe winter weather

– Impact on private and government construction

– Maybe some deferred consumption

• West Coast ports slowdown

– Disrupted import/export movements between November

2014 – May 2015

– Recent large trade deficit widening may be overstated

• Next: some trade deficit widening reflects fundamentals

RSQE: May 2015

90

95

100

105

110

115

120

2008 2009 2010 2011 2012 2013 2014 2015

Trade-Weighted US Dollar Index: Broad

Index

2

RSQE: May 2015

45.0

47.5

50.0

52.5

55.0

57.5

60.0

ISM Manufacturing and Non-Manufacturing Indices

Index

ISM Non-Manufacturing Index

ISM Manufacturing Index

2010 2011 2012 2013 2014 2015

RSQE: May 2015

Current State of the Economy• Payroll job gains around 200,000/month in 2015

– Slower than in 2014, on par with 2013

• Unemployment rate keeps sliding, at 5.4% now

– Labor force participation rate stable, temporarily

• Conflicting data on consumers

– U. Michigan Consumer Sentiment very upbeat

– April vehicle sales up only 3% from 2014 (6% in 2015Q1)

– Retail sales very weak in recent months

3

RSQE: May 2015

Fiscal Policy:

• Muddling through in the near term

– Sequestration relief for fiscal 2016

• Less brinkmanship

– Congress just passed permanent “doc fix”

– “Cromnibus” passed quite early

• Medium-term path uncertain

• Assumption: the Supreme Court keeps ACA subsidies

RSQE: May 2015

Federal Budget, NIPA Basis(Billions of Dollars)

Forecast

FY ’13 FY ’14 FY ’15 FY ’16 FY ’17Current receipts 2993.9 3267.2 3427.9 3631.9 3860.9% change 13.7 9.1 4.9 5.9 6.3

Current expenditures 3769.0 3844.5 3947.8 4135.9 4345.7% change 0.5 2.0 2.7 4.8 5.1Consumption 972.2 962.9 963.2 985.8 1018.1% change -3.4 -1.0 0.0 2.4 3.3

Transfer payments 2313.5 2384.7 2524.9 2648.6 2776.0% change 2.0 3.1 5.9 4.9 4.8

Surplus (+) or deficit (-) -775.1 -577.3 -519.8 -504.0 -484.7Percent of GDP -4.7 -3.3 -2.9 -2.7 -2.5

4

RSQE: May 2015

Monetary Policy

• Labor market progress has slowed

• Inflation forecasts under long-run target

• First rate increase in December– Unemployment rate approaching 5%

• Slow rate increases in 2016– Inflation trends still weak

– Evidence for declining “natural” rate of unemployment

RSQE: May 2015

2.2

3.2

4.8

0.0

1.3

0.40.00.10.1

1.7

2.82.5 2.4

2.9

2.1

3.4

4.3 4.1 4.14.6

3.8

0

2

4

6

8

4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

Actual Forecast

Market Interest Rates

Percent

3-Month T-bill

10 Year T-Note

Conv. Mortgage

’12 2013 2014 2015 2016 2017

5

RSQE: May 2015

Oil Prices(West Texas Intermediate Crude)

94.497.5 97.2

58.5

48.6

70.573.1

62.5

88.2

74.5

40

50

60

70

80

90

100

110

4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

Actual Forecast

Dollars/Barrel

98.0

93.0

57.5

67.5

*Implicit deflator for petroleum & products

’12 2013 2014 2015 2016 2017

-1.7 -2.9 -15.2 -24.6 10.0 5.5

-6.3 10.5 -25.0 -14.5 12.8 5.7

4th Quarter to 4th Quarter % Change

WTI

Imports*

73.0

RSQE: May 2015

Growth Rate of Real GDP

2.73.3 3.1

2.7

0.2

2.2

5.04.6

-2.1

3.5

4.5

2.7

1.8

0.1

-3

-2

-1

0

1

2

3

4

5

6

4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

Actual ForecastPercent, AR

1.6 3.1 2.4 2.4 3.1 2.9

’12 2013 2014 2015 2016 2017

4th Quarter to 4th Quarter Growth Rate of Real GDP (%)

6

RSQE: May 2015

Nonfarm Payroll Employment Gainsand Unemployment Rate

219

256

207 204

229

1931735.4

7.8

5.14.7

5.6

7.0

4.4100

200

300

400

4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

4

5

6

7

8

9

10Actual ForecastPercentThousands of Jobs per Month

Unemployment RateAvg. Monthly Job Gains*

* 1/3 the change in quarterly value

2.2 2.5 2.9 2.8 2.5 2.3

’12 2013 2014 2015 2016 2017

4th Quarter to 4th Quarter Job Change (Millions)

RSQE: May 2015

2.01.9

1.71.71.8

0.1

1.6

2.02.2

1.5

0

1

2

3

2013 2014 2015 2016 2017

Core All Items

Percent

Consumer Price Inflation(CPI-U)

7

RSQE: May 2015

Housing Market

1.08

0.730.650.62

0.92

0.43

0.310.35 0.38 0.41

1.51

1.11

1.000.93

1.34

0.0

0.5

1.0

1.5

2.0

2013 2014 2015 2016 2017

Singles Multis Total

4.974.804.58

4.334.48

0

2

4

6

2013 2014 2015 2016 2017

A. Housing StartsUnits (Millions) Units (Millions)

B. Existing Home Sales*

*Single-family homes

RSQE: May 2015

7.87.77.6 7.7 7.5

9.69.49.38.7

7.9

17.417.1

15.516.4 16.8

0

4

8

12

16

20

2013 2014 2015 2016 2017

Autos Lt. Trucks Total

Units (Millions)

Light Vehicle Sales

8

RSQE: May 2015

Risks

• Monetary policy timing

• Fiscal policy

• Economic growth abroad

– Long-term interest rate volatility

• Geopolitics

– Oil prices

• Abnormal weather

9

10

THE MICHIGAN ECONOMIC OUTLOOK

FOR 2015–2017

MAY 15, 2015

Motor Vehicle Industry Revisited

RSQE: May 2015

11

0

5

10

15

20

RSQE: May 2015

17

'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16

'91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17

16

U.S. Light Vehicle Sales, 1990–2017Millionsof Units

0

2

4

6

8

10

12

14

16

18

2013 20152014 2016

Total

15.516.4 16.8

U.S. Light Vehicle SalesTotal vs. Detroit Three, 2013–17Millions

of Units

2017

Detroit Three

6.9 7.3 7.5 7.87.7

Annual % Detroit Threemarket share

44.4 44.544.9

44.7

44.3

RSQE: May 2015

17.1 17.4

12

Current State of Michigan’s Economy

RSQE: May 2015

4025.0

4045.0

4065.0

4085.0

4105.0

4125.0

4145.0

4165.0

4185.0

4205.0

4225.0

Post-benchmark Pre-benchmark

15.4

44.5

4140.2

4124.8

4207.4

4162.9

Michigan Payroll Employment2012q4–2014q4Thousands

RSQE: May 2015

4056.7

’12q4 ’13q1 ’13q2 ’13q3 ’13q4 ’14q1 ’14q2 ’14q3 ’14q4

13

Michigan Outlook

RSQE: May 2015

4 1 2 3 4

’12 2013 2014 2015 2017

Michigan Job GrowthAnnual Rate

(%)

2016

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

1.7 2.0 1.6

68.7 82.7 67.2

4th Quarter to 4th Quarter Growth Rate (%)

4th Quarter to 4th Quarter Change (Thousands)

2.0 1.3

82.5 55.8

1.3

54.6

Actual Forecast

3.1

RSQE: May 2015

0

1

2

3

4

2.6

0.8

3.6

1.41.1

1.71.2

14

Change in Jobs by Industry Sector(Thousands of jobs)

RSQE: May 2015

2012q4to

2013q4

2013q4to

2014q4

2014q4to

2015q4

2015q4to

2016q4

2016q4to

2017q4

Total jobs 83 67 83 55 56

Government –7 –2 –1 1 1

Manufacturing 21 18 15 4 3

Prof. & bus. svcs. 22 17 20 15 15

Construction 7 7 12 7 9

Trade, trans., util. 15 12 10 9 9

Michigan Jobs

First Quarter of 2000 to Fourth Quarter of 2017

3,800

3,900

4,000

4,100

4,200

4,300

4,400

4,500

4,600

4,700

4,800

Forecast

Thousands of jobs

Loss:’00q2–’09q3 = 858,400

Gain:’09q3–’17q4 = 568,900(66% of jobs lost)

’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17RSQE: May 2015

’17q4

’15q1

Trough ’09q3

Peak ’00q2

15

Alternative Measures of Labor Underutilization

Michigan, 2013 and 2014

U-3: Comparable to the official unemployment rate (8.5% in 2013, 7.1% in 2014)

U-4: Unemployed (U-3) + discouraged workers

U-5: U-4 + all other marginally attached workers

U-6: U-5 + employed part-time for economic reasons

U-3 U-4 U-5 U-60%

2%

4%

6%

8%

10%

12%

14%

16%

18%

8.67.2

8.67.6

9.210.1

15.313.9

RSQE: May 2015

2013 2014

Alternative Measures of Labor Underutilization

Michigan vs. United States, 2010–14

(Percentage)

U-3 U-4 U-5 U-6 U-3 U-4 U-5 U-6

Change

Michigan

2010 12.2 13.1 14.0 21.02011 –2.010.2 11.1 12.3 18.8 –2.0 –1.7 –2.22012 –1.19.1 9.8 11.0 16.6 –1.3 –1.3 –2.22013 –0.58.6 9.2 10.1 15.3 –0.6 –0.9 –1.3

2010–14 –5.0 –5.5 –5.4 –7.12014 –1.47.2 7.6 8.6 13.9 –1.6 –1.5 –1.4

2010 9.6 10.3 11.1 16.7

2010–14 –3.4 –3.7 –3.6 –4.7

United States

2011 8.9 9.5 10.4 15.9 –0.7 –0.8 –0.7 –0.82012 8.1 8.6 9.5 14.7 –0.8 –0.9 –0.9 –1.22013 7.4 7.9 8.8 13.8 –0.7 –0.7 –0.7 –0.92014 6.2 6.6 7.5 12.0 –1.2 –1.3 –1.3 –1.8

16

Michigan Unemployment Rate2013–17

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

8.5

7.1

5.65.1

4.7

2013 2014 2015 2016 2017

RSQE: May 2015

8.2 6.5 5.3 5.0 4.6

4th Quarter Unemployment Rate

Detroit CPI

2013 2014 2015 2016

Michigan Inflation and Income Growth

1.61.1

–0.9

2.1

2017

2.1

RSQE: May 2015

0%

1%

2%

3%

4%

5%

6%

–1%

–2%

Personal Income

1.4

4.0 4.2 4.5 4.7

0%

1%

2%

3%

4%

5%

6%

–1%

–2%

Real Disposable Income

–1.1

4.9

2.12.6

2.2

0%

1%

2%

3%

4%

5%

6%

–1%

–2%

17