Michigan Home Price Update

By Martin Lavelle

A recently released home price index(1 suggests that the trend of climbing Michigan home prices continues. According to the latest FHFA Home Price Index (HPI) release looking at updated home transactions through the third quarter of 2014, home prices continued to grow at a faster rate in Michigan than in the U.S. and Seventh District(2.

Chart 1: Year-over-year Percentage Change in FHFA All-Transaction HPI: Michigan, U.S., Seventh District(3, 2007-present
Michigan HPI - Chart 1 Source: Author’s calculations using data from Federal Housing Finance Agency (FHFA).

Chart 1 shows that Michigan home values are about 8% higher than last year. Home values also appear to have appreciated at a slightly faster rate in 2014 than last year. The same holds true in the U.S., with home values about 6% higher than last year. However, as was the case in Michigan, the national rate of home value appreciation appears to have slowed slightly between the second and third quarters of this year. In the Seventh District, home values are about 4% higher than last year and have continued to appreciate at a faster rate than last year.

As chart 1 shows, home values in the U.S., Seventh District, and Michigan have increased year-over-year since 2012. However, not all regions have attained pre-recession HPI levels. Based on the most recent HPI data, U.S. home values overall are 8.5% below their pre-recession HPI peak, while prices in the Seventh District are 7.0% below their pre-recession HPI peak. Michigan’s gap between current and pre-recession HPI levels is 15.2%(4. Chart 2 shows the larger gap Michigan faces relative to the U.S. and Seventh District. On the positive side, those who have purchased homes in Michigan following the financial crisis could stand to realize significant gains in home value if Michigan home prices ever return to their previous peak.

Chart 2: Annual FHFA All-Transaction HPI Index levels, 2003=100: Michigan, U.S., Seventh District(5 , 2003-present(6
Michigan HPI - Chart 2 Source: Author’s calculations using data from Federal Housing Finance Agency (FHFA).

—————————————————
1) The Federal Housing Finance Agency (FHFA) publishes an all-transaction House Price Index (HPI), based on transactions involving conforming, conventional mortgages purchased or securitized by Fannie Mae or Freddie Mac. The HPI is a weighted sales index that tracks average price changes on sales or refinancing of mortgages purchased or securitized by Fannie Mae or Freddie Mac since January 1975. The all-transaction HPI, published quarterly, includes prices from appraisal data obtained from Fannie Mae or Freddie Mac. It examines national, state, and metropolitan statistical area (MSA) data that is not seasonally adjusted.
2) The Seventh Federal Reserve District comprises all of Iowa and most of Illinois, Indiana, Michigan, and Wisconsin.
3) The Seventh District HPI was calculated by averaging each member state’s respective HPI.
4) Michigan’s all-transaction HPI peak came in the third quarter of 2005, while the U.S. and Midwest both hit their peak levels in the first quarter of 2007.
5) The Seventh District HPI was calculated by averaging the member states’ HPIs.
6) The annual averages were calculated by averaging the regions’ quarterly levels.

Michigan Economic Update – 2014:Q3

By Paul Traub

Michigan’s contribution to the economic wellbeing of the Seventh District increased in July to 0.11, its highest level since March 2013, according to the Federal Reserve Bank of Chicago’s Midwest Economic Index. However, positive contributions from services, manufacturing, and the consumer continue to be offset by slow growth in the construction sector. A reading above zero indicates that Michigan’s economy is expanding above its historical trend. The index is a weighted average of economic indicators from four broad sectors of the economy; manufacturing, construction and mining, services, and consumer spending.

Real per capita income in Michigan registered continued improvement in Q1:2014, up 1.4% on a year-over-year basis versus 1.6% for the nation as a whole. Since hitting its recessionary bottom in Q1:2010, Michigan’s real per capita income has increased by a total of 8.9% compared with 5.3% for the nation over the same period.

Other key indicators include:
• Michigan’s unemployment rate declined to 7.4% in August versus 6.1% for the nation.
• Michigan home prices increased 7.7% in Q2:2014 on a year-over-year basis and have finally surpassed their calendar year 2000 level.
• U.S. light vehicle sales recovered to their highest level since January 2006 on a seasonally adjusted annual rate basis.
• Michigan light vehicle production fell 3.5% August year-to-date compared with the same period last year, as Michigan’s share of total North American production dropped to 13.9% versus 15.2% in 2013.

For a more detailed look into the numbers behind Michigan’s economic performance, follow the link to Chicago Fed’s Michigan Economic Update – 2014 Q3.

What Do the Latest Labor and Migration Statistics Say about Michigan’s Economy and Its Prospects?

By Martin Lavelle

Employment levels in Michigan have recently shown signs of improvement. In fact, since the end of the Great Recession in mid-2009, Michigan’s household employment has increased 2.6%, matching the national gain. However, these recent improvements belie Michigan’s poor employment conditions stemming from a long period of subpar economic growth. Indeed, Michigan experienced a “one-state recession” for most, if not all, of the first decade of the twenty-first century.
Facing job eliminations and poor employment prospects, many Michiganders have become discouraged in their job searches, some abandoning them temporarily and others retiring early. Those who are no longer seeking employment are no longer counted as being in the labor force. The chart below illustrates those who remain in the Michigan labor force—which comprises those who are employed along with those who are unemployed but actively looking for work. Since 2001, Michigan’s work force has declined by 10%, while the U.S. work force has grown by almost 10%.

Chart 1: Labor Force: U.S. vs. Michigan, 1990—present
US & MI Labor ForceSource: Author’s calculations based on data from the U.S. Bureau of Labor Statistics.

Some part of this gap has come about as hundreds of thousands of Michiganders have left the state in search of better labor market conditions (or have decided to retire out of state). Moreover, since 2000, Michigan’s population decreased 0.7%. In stark contrast, according to the U.S. Census Bureau’s population estimates, the U.S. population grew 11.3%.

The U.S. Census Bureau’s American Community Survey (ACS) looks at annual migration flows. Table 1 shows both the top five states and the bottom five states by domestic net migration rates over the period 2001–10. One can see that Michigan had one of the highest domestic out-migration flows among the 50 states during that decade.
Table1
Source: Author’s calculations based on data from the U.S. Census Bureau, American Community Survey, from Haver Analytics.

Even with the ongoing rebound of the auto industry and other manufacturing subsectors, Michigan continues to experience a large out-migration rate; see Table 2, which features the top five states and the bottom six states by domestic net migration rates in 2011–12. Despite the increase in job openings in Michigan, many employers continue to experience difficulty in trying to persuade workers to accept positions there because of the state’s reputation for having a challenging labor market environment.
Table2
Source: Author’s calculations based on data from the U.S. Census Bureau, American Community Survey, from Haver Analytics.

Table 3 shows the top ten destinations for Michigan residents. As one would expect, Michiganders are moving to nearby states—such as Illinois, Indiana, and Ohio. Indiana and Ohio have recently passed legislation that could be described as being more business-friendly: Indiana became a right-to-work state (meaning that the state bars union contracts from requiring nonunion members to pay fees for representation), and Ohio lowered its business taxes. Illinois and Ohio are viewed as more attractive destinations for recent college graduates; large cities in both states have seen rising employment in occupations that typically require a college or post-college degree in part because they are viewed as attractive places for younger college graduates.
Table3
Source: Author’s calculations based on data from the U.S. Census Bureau, American Community Survey.

Another emerging pattern that one might anticipate over the next few years is the movement to warm-climate locations for retirement. Such locales include Sun Belt states, such as Florida and Georgia, and southwestern states, such as California and Arizona. The 2010 U.S. Census data indicate that Michigan has one of the older populations in the nation: Michiganders have a median age of 38.9, which is the 12th highest among all 50 states. Of Michigan’s total population, baby boomers (those aged 45–64) make up 27.9%—tied (with Wyoming) for ninth highest state share of this demographic. Over the next few years, one could expect more population movements out of Michigan to locations popular with retirees.

Table 4 shows some of the top destinations for Michigan residents based on the ACS five-year survey of domestic migration between 2005 and 2009.
Table4
Source: Author’s calculations based on data from the U.S. Census Bureau, American Community Survey.

Many of the counties listed above either border Michigan or contain large metropolitan areas—two types of endpoints that one might expect to see when analyzing population movements. The border counties mentioned include cities such as Toledo, South Bend, and Elkhart. The large metropolitan areas found in the counties referenced above include Houston, Fort Worth, Chicago, Indianapolis, Los Angeles, San Diego, Phoenix, Atlanta, Charlotte, Memphis, and Nashville. The only counties that don’t directly fall under either category are Hidalgo County, Texas (which borders Mexico) and the Florida counties. The Florida counties mentioned include areas surrounding the “I-4 Corridor,” which runs through Tampa, Orlando, and Daytona Beach. These counties are prominent locations for retirees and feature easy access to recreation.
Restoring population and work force growth in Michigan will be a challenge given the forces at work inside and outside of the state. A number of public and private programs have been created to attempt to address these forces and attract people back to Michigan. After taking office, Governor Rick Snyder created the Office of Urban and Metropolitan Initiatives, which aims to draw more young graduates, especially those who attended Michigan’s many colleges and universities, to Michigan’s cities. The Michigan Economic Development Corporation replaced the state’s tax credits to clean up and revitalize brownfields (abandoned or underused industrial and commercial facilities) with a community revitalization program that offers grants and loans for individual urban projects. Private investors, such as Dan Gilbert, have moved their offices into downtown areas to try and regenerate urban consumer and business activity. But with the lingering effects of Michigan’s lengthy recession still present in much of the state, Michigan could face a difficult time replenishing its population and work force lost over the past decade.

Footnotes:
1.The share of the working age population counted in the labor force—that is, both the employed and unemployed (who are actively seeking work)—is referred to as the labor force participation rate. For 2012, Michigan’s labor force participation rate averaged 59.8%—slightly below the nation’s rate of 63.7% that year.

2. Natural population growth has also slowed because of out-migration of women of child-bearing age and possibly because of declines in voluntary fertility.

Employment growth continues slowly

Each year at the end of January, the U.S. Bureau of Labor Statistics updates its monthly seasonal factors and revises its nonfarm payroll employment numbers. This year, the revised employment numbers indicate that job growth in the United States may have been stronger than previously estimated. Chart 1 below shows monthly nonfarm employment from January 2010 through December 2012 before and after the latest revisions.

Chart1

According to the latest revision, there were some 647,000 more nonfarm payroll jobs created since January 2010 than originally estimated, with more than half of them created during calendar year 2012.

While this is good news, the unemployment rate in the United States in January 2013 remained at 7.9 percent; and the fact remains that there are fewer people working today than at the start of the recession. In fact, since the start of the recession in December 2007, we have lost over 9.0 million jobs. Through January 2013, only 5.8 million new jobs have been created. This means that nonfarm payroll employment levels are still running 3.2 million behind where they were when the recession began. Chart 2 shows U.S. nonfarm payroll jobs gained and lost by sector since January 2008, when U.S. nonfarm payroll employment peaked.

Chart2

In the private sector, the industries that have been the slowest to recover include manufacturing, construction, trade and transportation, information technology, and financial activities. In total, these sectors are still down a total of 5.2 million employees. The public sector is still down by 512,000 employees, with local governments accounting for 89% of those job losses. It is no surprise that local governments have been the hardest hit, given the impact falling real estate price have had on revenue generation in many local communities and school districts throughout the country.

On the plus side, the biggest employment gains can be seen in the education and health services, leisure and hospitality, and mining and logging sectors. Health services alone has added 1.6 million jobs, accounting for half of all jobs created since the start of the 2008 recession. In fact, that sector has added jobs in every month since December 2007. This is a pretty remarkable feat, given the severity of the recession.

How has Michigan fared? Unlike the U.S., in Michigan nonfarm payroll employment actually peaked in April 2000 at 4,691,100 jobs. Michigan continued to lose jobs from then through the start of the 2008 recession. By January 2008, Michigan’s total nonfarm payroll employment had fallen by 450,000 jobs. After the 2008 recession started, Michigan lost an additional 413,300 jobs before bottoming out in July 2009 at 3,827,800 jobs. This is a total job decline from peak to trough of 863,300 jobs or 18.4% of all nonfarm payroll employment in the state.  In December 2012, Michigan’s nonfarm payroll employment was reported to be 3,973,300, which is an increase of 145,500 jobs since July 2009. However, from peak to trough, Michigan is still down 717,800 nonfarm payroll jobs.

Chart 3 shows Michigan’s nonfarm payroll jobs gained and lost by sector since the start of the 2008 recession. Since the recession began, Michigan is still down 267,800 payroll jobs.

Chart3

Even with the recent job gains in the auto industry, Michigan’s manufacturing employment is still down 76,900 jobs from the start of the recession. However like the nation as a whole, Michigan has seen fairly steady job growth in the education and health services sectors. The good news is that, relative to the nation’s, Michigan’s job recovery has been somewhat stronger, albeit from a much lower base. Charts 4 and 5 show the percentage change in nonfarm payroll employment for the United States and Michigan by major category and by sector from the start of the recovery through December 2012.

 Chart4&5

As these data indicate, Michigan has seen stronger total growth than the nation since the start of the recovery, with private sector job growth overshadowing losses in the public sector. The auto recovery also shows up better in these charts, as Michigan is shown posting an 18.8% increase in manufacturing jobs compared with only 2.5% for the nation. The question is whether this trend will continue. Chart 6 shows total U.S. manufacturing employment by month from January 1960 to January 2013.

Chart6

Here we see that, even taking into account the cyclicality of the 1960s and 1970s, manufacturing employment remained fairly stable through the end of the 20th century. However, since the beginning of the 21st century, manufacturing employment has fallen by about 5.3 million jobs. More recently there has been talk about a manufacturing resurgence in the United States. This discussion started following the Japanese earthquake and tsunami when supply chains for some industries experienced major disruptions to production throughout the world. The debate centered on the need to minimize risk, even if it meant higher prices for some commodities and component parts. More recently, new technologies for extracting natural gas and petroleum products from shale rock have led some to argue that the availability of low-cost energy could make the U.S. more competitive and lead to the return of some manufacturing jobs. This debate is ongoing.

On April 8–9, 2013, the Chicago Fed’s Detroit Branch will host an event to discuss the impact of enhanced domestic recovery of natural gas and other fuels on industries and regional economies. The conference will focus on the shifting markets, development opportunities, and economic outcomes resulting from increasing shale gas and oil extraction in the United States.

For further details on the conference, including a complete agenda and information on registration, location, and accommodation, please visits our conference webpage.  

http://chicagofed.org/webpages/events/2013/detroit_energy.cfm

 

 

 

 

 


[1] Michigan’s employment data will be revised on March 16. We do not expect significant changes, but I will provide a review of the revisions in a subsequent blog.

The U.S. and Canadian Economies Continue to Improve Slowly

In an earlier blog entitled “What is Canada’s Role in the U.S. and Michigan Economies?,” I talked about the link between the economies of the United States and Canada and what role Canada might play in Michigan’s economic recovery. These topics were discussed in more detail at the Canada–United States Business Association’s (CUSBA) Economic Outlook for 2013. I was fortunate enough to be asked to speak at this event, along with Martin Schwerdtfeger, senior economist for Toronto-Dominion Bank. Here are some of the main points that were presented during the discussion.

I opened the discussion with a brief summary of the U.S. economy. The most recent data through December suggest that growth in U.S. economic activity has paused in recent months, in large part because of weather-related disruptions and other transitory factors. Employment has continued to expand at a moderate pace, but the unemployment rate remains elevated. On a positive note, the recently revised employment numbers indicate that total nonfarm payroll employment had increased by as much as 647,000 more than originally thought. Based on advanced estimates from the Bureau of Economic Analysis comparing the fourth quarter of 2011 with the same period in 2012, we see that total GDP grew by 2.2 percent, personal consumption expenditures increased by 1.9 percent, and gross private domestic investment advanced by 9.6 percent. Headwinds to this growth were net exports of goods and services (–0.7 percent) and government consumption expenditures and gross investment (–1.7 percent).

I then went on to discuss the U.S. consumer. When talking about the consumer, it is important to distinguish between the consumer’s ability and willingness to consume. On the ability side, the consumer has seen some recent improvements in real disposable income and an improved debt position evidenced by lower debt service ratios, low inflation rates, and low interest rates. However, on the willingness side, the consumer remains skeptical because of slow job creation, which has led to stubbornly high unemployment rates; and although the consumer’s household net worth has improved, home prices remain well below their previous peak. In addition, slower global growth expectations, higher payroll taxes, and potential fiscal spending cuts continue to add to uncertainty. Combined, these factors have kept consumer attitudes, as indicated by the University of Michigan’s Consumer Sentiment Index, at near recessionary lows since 2008.

One positive for Michigan and the Midwest economy has been the consumer’s increasing propensity to purchase automobiles. Light vehicles sales in the U.S. increased to 14.4 million units in 2012, which was an increase of 4.0 million units from the industry trough reached in 2010. According to analysts’ forecasts, auto sales are expected to continue to increase in 2013, reaching 15.0 million units, due to pent-up demand, an aging vehicle fleet, and the consumer’s desire to take advantage of the better fuel economy featured in some of the newer products on the market.
Transitioning to a discussion on the Canadian economy, Schwerdtfeger pointed out that Canada’s economy has long been closely tied to the economic health of the United States. According to Schwerdtfeger, Canada’s economy had outperformed the economies of other developed countries since 2007, led by growing consumer spending and a vibrant housing market. However, the housing markets in Canada appear to have peaked, and consumers are becoming more cautious about adding to their debt. Schwerdtfeger went on to say that, over the next few years, growing exports to the U.S. will likely help to sustain at least modest economic growth for Canada. But once the final figures are in for 2012, Canada’s almost seven-year run of outperforming the United States will likely come to an end.

On the international front, Schwerdtfeger warned that concerns over the U.S. fiscal outlook and a continued drag from the European recession will most likely negatively impact Canada’s economic performance in 2013. Fiscal consolidation in the U.S. alone could shave as much as 0.7 percentage points off Canadian economic growth through declining exports and knock-on-effects to other areas of the Canadian economy. Beyond mid-year, Schwerdtfeger suggested that U.S. economic growth could improve enough, based on stronger real estate activity, to support a modest increase in Canadian exports. Still, an overvalued Canadian dollar, elevated household debt, and government restraint will likely keep Canada’s overall pace of economic expansion in check. Schwerdtfeger saideconomic growth for Canada in 2013 and 2014 is forecasted at 1.7 percent and 2.5 percent, respectively. Faced with this continued sub-par performance of the economy in the near term, the Bank of Canada will be in no rush to raise interest rates earlier than 2014, unless growth at the end of this year exceeds current expectations.

Please use the links provided here to view Martin Schwerdtfeger’s presentation and Paul Traub’s presentation file.

Michigan Economic Update

I would like to open with a short introduction of myself and the newly created Michigan Economy blog. My name is Paul Traub and I am a Business Economist for the Federal Reserve Bank of Chicago.

In this spot, I will offer some insights into the ongoing performance of Michigan’s economy as well as some analysis of important public policy issues, manufacturing, construction, services, employment and of course the auto industry. I must be honest that I have never won a notable award in economics and I’ve yet to appear on a late night talk show. But, I have lived in Michigan my whole life and worked in the Detroit area my entire working career. My hope is to be able to use my knowledge of Michigan and my working experience together with my understanding of economics to provide an analysis of Michigan’s economy that is rooted in an understanding that only a true Michigander could possess. I hope to engage the reader in a way that we all learn more about this great state and its many opportunities.

I would not venture to engage in this endeavor without the support of a great amount of talent to back me up. The Chicago Fed has a number of very talented economists and researchers that I can and will call on for help. Some of them – such as William Testa, Thomas Klier, David Oppendahl, William Strauss and Martin Lavelle all offer a volume of expertise that would be difficult to match anywhere in the country. And of course, I would be remiss not to mention Scott Brave whose work on the Midwest Economic Index will help to make much of the analysis I will be sharing possible.

In addition, I will be posting some results from many of our local conferences, presentation materials from some of my public appearances, an occasional cross posting of articles from the Chicago Fed’s Midwest Economy blog as well as links to other data resources. As a regular feature, I will offer a monthly summary of Michigan’s economy. It will contain information about different sectors of the economy as well as data on things like employment, income, housing and the consumer. So if you are from Michigan or just interested in the economy of the Midwest, I’m confident you will find something here that will help you to understand Michigan’s complicated economy just a little better.

A summary of Michigan’s Economy

Michigan’s economic growth improved slightly in November, according to the Federal Reserve Bank of Chicago’s MEI Index for Michigan. The index remained below zero, indicating that growth is still below Michigan’s long-term average, but it increased to -0.04 in November from –0.09 in October. Manufacturing’s contribution to the index turned positive again following two months of decline. The most favorable change was the positive contribution from the construction sector, marking the first positive contribution to the index from construction since September 2005.

Michigan’s per capita income rose by 0.6% in the third quarter of 2012 on a year-over-year basis, although this increase was slightly smaller than in the second quarter. Based on data through the third quarter of 2012, Michigan’s GSP is estimated to be growing at a 0.8% pace relative to 2011. Most of this growth is due to positive contributions from manufacturing. Such positive developments should stimulate Michigan’s economic growth through the end of the year.

Other key indicators include:

•     Michigan’s unemployment rate declined to 8.9% in November from 9.1% in October;
•     Michigan’s housing market is showing some minor improvement, which may be an indication that the housing sector is on the mend; and
•     U.S. light vehicle sales remained strong in December, helping to drive Michigan’s light vehicle production for 2012 to its highest level in in five years.

For a more detailed look into the numbers behind Michigan’s current economic performance, follow the link to the Chicago Fed’s Michigan MEI – 201301.

An Analysis of State and Local Government Spending

Written by Martin Lavelle 

Starting in February 2012, the Federal Reserve Bank of Chicago, Detroit Branch, in partnership with the Michigan Council on Economic Education (MCEE) began hosting a series of educational workshops entitled, “Night at the Fed.” The purpose of these workshops is to give economics, history, and social studies teachers, as well as other financial or economic educators, the opportunity to enhance their knowledge of economics and personal finance. In addition, primary and secondary public school teachers may earn continuing education credits by attending these workshops. These workshops are held on a quarterly basis during the school year and will continue in early 2013.

The most recent “Night at the Fed” took place on Thursday, November 15, 2012, and focused on the distinction between monetary and fiscal policy. David Zin, chief economist of the Michigan Senate Fiscal Agency, presented information on the limitations and powers of fiscal policy. Zin discussed not only federal fiscal policy, but also state and local fiscal policy, in great detail. State and local fiscal policy has been somewhat ignored, with greater attention being placed on the approaching “fiscal cliff” facing the federal government. However, whatever proposals result from the ongoing “fiscal cliff” negotiations, state and local budgets will most likely be affected.

The largest sources of revenue for the state of Michigan and its local governments, as seen in Chart 1 below, are non-tax sources, such as school fees, state-provided services, licenses, permits not related to transportation, and lottery transfers to the School Aid Fund. The next largest revenue sources are intergovernmental revenues, corporate taxes, and income taxes, which when put together with non-taxable sources, comprise over 88% of the state of Michigan’s revenue and 96% of its local governments’ revenue.

Chart 1: State Revenue Sources: All States, Michigan

At the state government level, the two major state general purpose and restricted revenue funds are the General Fund/General Purpose Fund (GF/GP) and the School Aid Fund (SAF). The GF/GP covers all state appropriation, expenditure, and receipt transactions, except those for which special constitutional or statutory requirements demand separate fund accounting, such as the SAF.[1]  Chart 2 shows 63% of the GF/GP’s revenue comes from income tax collections. GF/GP revenues fell by almost half during the 2000s, mostly a recessionary decade for Michigan. Since the end of the national recession in mid-2009, nominal GF/GP revenues have slightly rebounded, though at rates about equal to inflation.

Chart 2:  Michigan General Fund Revenue Sources

Chart 3:  Michigan School Aid Fund Revenue Sources

As seen in Chart 3, the largest input into the SAF is state sales tax revenue, which makes up almost 47% of SAF revenue. SAF nominal revenues have remained flat since the beginning of the most recent national recession in December 2007; SAF real revenues have fallen slightly during the same period. Overall revenues (GF/GP + SAF) are expected to increase at 2% to 4% annual rates over a three-year period that includes the most recent fiscal year. After a slight decrease in net revenues during the most recent fiscal year, 1% to 3% increases in net revenues are expected from fiscal year 2012 to 2014.

Despite some increase in net revenues since the end of the recession, tax breaks have grown even faster. This gap may widen further because of the state’s failure to replace lost revenues due to changes in the state business and personal property tax codes, respectively.

The gap between tax expenditures and revenues based on current state policies takes on greater importance when analyzing state spending trends. At the state level, spending is dominated by intergovernmental grants, Medicaid, and other social services, areas of intensifying cost pressures. Those categories, plus insurance trusts, which include unemployment compensation funds, workers’ compensation, and employee retirement systems, constitute the majority of state government spending. When examining where all gross Michigan tax revenues are spent, more than 75% are spent on social services and education as seen in Chart 4.

Chart 4:  Where State of Michigan Tax Dollars Are Spent

Looking at spending that the state can control, which comes from the GF/GP, health services and education make up almost half of all appropriations, but another 20% is spent on corrections. When considering current fiscal year projections, gross spending has been relatively flat since 2008, while GF/GP spending has increased 5%. Most of the spending increases are occurring in the budget areas of community health and corrections. In the past decade, spending on community health in Michigan, which includes Medicaid, has increased 53% as Medicaid caseloads have increased by almost 47%. Spending on corrections has increased 21% in the past decade, yet the prison population has decreased by almost 15%. In contrast, higher education spending has fallen 29% over the last decade, in spite of an increase in enrollment of 8%.

Total  $8,944,202,300

Since the end of the Great Recession, Michigan has instituted budgetary reforms that have eliminated structural budget deficits present during the mid- to late 2000s. Also contributing to the elimination of these structural budget deficits has been above-trend economic growth, led by a resurgent domestic auto industry. However, more pressure will likely be placed on state and local budgets due to some of near-term challenges. These challenges include the potential establishment of health insurance exchanges and expansion of Medicaid through the Affordable Care Act, increasing state and local public pension fund liabilities, the slow housing market recovery, the taxable value cap on property values, and potential congressional action to avert the “fiscal cliff.” These challenges can be alleviated to some degree if Michigan’s economy keeps growing at a faster rate than the nation’s and more Michigan residents  opt to stay in the state rather than moving elsewhere, thereby supporting the state’s tax base.


[1] Michigan Senate Fiscal Agency, http://www.senate.michigan.gov/sfa/StateBudget/Glossary.html

Ballard Discusses Michigan’s Economy

At the Detroit Association of Business Economists’ (DABE) November 1, 2012, meeting, Charles L. Ballard, professor of economics at Michigan State University, delivered a presentation entitled “Michigan’s Economy on the Eve of the Election.” In his opening remarks, Ballard pointed out how “fundamental structural changes in the U.S. economy have created big problems for the Michigan economy for a very long time – not just in the last decade.” The structural change he was referring to is the shift away from manufacturing as a dominant contributor to Michigan’s economy toward more technical and service-oriented industries. The following graph shows just how much manufacturing’s share of the economy has declined for the United States and Michigan since 1963.

In 1963, almost half of Michigan’s economy (measured as gross state product, or GSP) was in manufacturing, most of which was related to the automotive industry. By 2009, at the bottom of the recession, manufacturing’s percentage of Michigan’s GSP had fallen to 12.5%. During that same period, manufacturing’s share of U.S. gross domestic product (GDP) fell from 27.2% to 11.1%.
Looking deeper into the data, it can be seen that while total manufacturing was declining, motor vehicles and equipment remained a significant share of Michigan’s manufacturing structure. Even after suffering some significant declines in the late 1980s and early 1990s, the motor vehicles and equipment share of Michigan’s total manufacturing output reached a high of 50.9% in 2001 (see chart ). Every time it became apparent that Michigan’s economy was going through a significant structural change and something needed to be done to diversify its economy, the automotive industry would stage a cyclical comeback, which would act to mask Michigan’s over-dependence on a declining sector of the U.S. economy. To some extent, Michigan became a victim of its own early success with the auto industry.

Professor Ballard went on to point out that despite its struggles, Michigan remained a relatively affluent place to live. The following chart shows Michigan’s inflation adjusted per capita income, compared with that of the United States as a whole. What this seems to show is that through the early 2000s, Michigan’s per capita income tracked the nation’s very closely.

However, a closer look at the data tells a slightly different story. The following chart uses the same data to show Michigan’s per capita income as a percentage of the nation’s. Here we see that Michigan incomes started losing ground as far back as the early 1950s. However, the auto industry continued to be a very attractive industry to many workers. It was a well-established fact for anyone growing up in Michigan that they could make a good living working for one of the automotive manufacturers with not much more than a high school education. According to Bureau of Labor Statistics (BLS) data, just prior to the recession in 2009, the average hourly earnings for Michigan production workers in the motor vehicle parts manufacturing industry were $25.56, which is equivalent to an annual salary of $53,165. According to U.S. census data, in 2009 the average income for all persons regardless of level of education attainment was $42,469. But because of global competition and automation of some of the assembly jobs, many of the higher paying low-skilled automotive jobs began to disappear. This seemed to accelerate the decline in Michigan’s per capita income, compared with the rest of the nation. By 2011, Michigan’s per capita income was down to 87.3% of the national average.

Taking the broader perspective across all U.S. states, Ballard pointed out that there seems to be a strong positive relationship between income and educational attainment. The following scatter plot shows per capita income by state and the percentage of population with at least a bachelor’s degree.

The data in this chart show that higher levels of education seem to lead to higher expected incomes. So even though Michigan was once near the top compared with the rest of the nation in per capita income, by 2009 it had fallen to 31st in per capita income and 36th in educational attainment.
Ballard argued that given the current level of global competitiveness, education has become more important than ever for Michigan’s future. But this realization could not have come at a more difficult time for the state. In 2000, U.S. light vehicle sales peaked at 17.3 million units. By 2009, the effect of the recession reduced that number to just 10.4 million units, the worst light vehicle sales this country had seen since 1982. Because of its dependence on the auto industry, Michigan suffered a devastating impact from this decline. Many auto-related businesses were forced to make major cutbacks, forcing many workers to leave the state in search of employment. This led to drastic cuts in state spending, including spending on education. The chart below shows how inflation-adjusted spending per pupil in grades K through 12 has fallen in Michigan since its peak in 2001.

In addition to these cuts, since 2003 appropriations for state-funded colleges have been reduced by $637 million, not even accounting for inflation. In the 2012–13 fiscal year state budget, Michigan was forced to cut state appropriations to higher education by 15%. On a somewhat positive note, Ballard noted that, recently, auto sales appear to be on the rebound and Michigan’s economy is doing better. However, he warned that continued diversification of Michigan’s economy is imperative if the state is to avoid repeating some of its past mistakes. This will require more emphasis on education and a more diversified economy throughout the state.