Michigan economy keeps beating predictions, thanks largely to stimulus

LANSING — Federal stimulus spending has limited economic damage in Michigan, online sales have exploded during the COVID-19 pandemic, vaccines are going into arms, vehicle sales are rebounding and the state is climbing its way out of a “deep jobs hole.”

That’s the word from leading economists, who told lawmakers that tax collections are stronger than expected one month before Democratic Gov. Gretchen Whitmer unveils this year’s state budget proposal.

“The biggest reason for hope is that the vaccine rollout is now underway, and that is the very best way to return to a normal economy,” Michigan Treasurer Rachel Eubanks said following a bi-annual revenue conference that is designed to inform budget decisions. 

Related stories:

• Schools spared, pork added, Pure Michigan restored in $62.8B state budget
• Michigan’s $6.2B coronavirus budget gap ‘as bad or worse’ than Great Recession
• GOP leader: Up to 25 percent cuts to Michigan schools from coronavirus

While they’re still predicting a $500 million loss in state tax collections next year, Eubanks and other Michigan officials on Friday increased state tax revenue projections for 2021 by $1.2 billion and for 2022 by $874.8 million, respectively.

There are still worries: After earlier gains, new jobs postings are again declining, Michigan is outpacing the nation on small business closures and consumer spending may be wavering at both the state and national level.

Michigan lost about 840,000 out of 4.5 million jobs in the second quarter of 2020, when the virus first hit the state and prompted Whitmer to impose aggressive lockdown measures, including a temporary stay-at-home order. 

About 380,000 of those jobs were recovered during the third quarter, said Gabe Ehrlich, an economist at the University of Michigan. 

But he said “job growth has slowed down considerably” because of a spike in COVID-19 cases in late 2020 “and the imposition of restrictions on certain activities late this fall and winter,” including Whitmer’s continued closure of restaurant dining rooms.

“COVID-19 remains in the driver’s seat of the economic recovery,” Ehrlich said, noting U-M projects the state will still be down about 74,000 jobs by the end of 2023. 

Without another federal stimulus, experts predict the state is poised to lose about $533 million in general fund tax collections in 2021. That could force some reductions in government services, but far less than earlier projections. 

Michigan still down 435,000 jobs

Michigan is seeing a “two-track” recovery, economists said. While manufacturing jobs have rebounded quickly, other industries have been particularly slow to recover, including the hotels, tourism, government and personal services like hair salons, restaurants and bars. 

“Social distancing is just clobbering economic activity” in the service industry, said Joel Prakken, chief U.S. economist for IHS Markit, a U.S. and British information provider. 

It wasn’t just forced business closures that caused damage. The nonpartisan House Fiscal Agency said increased case rates have hurt spending even in sectors where “strict containment measures have not been imposed.”

Ehrlich concurred:  While Michigan small businesses closed at a faster rate than the country as a whole, “the research I’ve seen is that government restrictions are only part of the story,” he said. “Private precautions are also driving, in my opinion, the majority of the economic effects of COVID-19.”

As of November, Michigan was still down about 435,000 jobs from February, according to state analysts.   

Michigan’s 9.5 percent decline in payroll employment for 2020 was the sharpest since 1958. That’s when Michigan “bore the brunt” of a separate H2N2 flu pandemic, said David Zin, chief economist for the nonpartisan Senate Fiscal Agency.

The stimulus helped

Federal stimulus dollars likely prevented an even sharper economic collapse and major revenue losses for states like Michigan, experts said Friday. 

Total wages and salaries for Michigan workers fell by about 4.7 percent in 2020, according to preliminary data, but personal income still increased by 5.8 percent because of cash payments and expanded unemployment benefits.

Nationally, the U.S. economy has recovered about two-thirds of the ground it lost early in the pandemic, said Manaenkov, the U-M economist. “Obviously, without massive federal support, the situation would have been far more dire.”

First, there was the $3 trillion CARES Act in March 2020. And then in December, Congress approved another $900 billion relief package, which included $600 rebate checks, $300 a week in extra unemployment benefits and $284 billion for the paycheck protection program for small businesses.

Michigan is also poised to receive about $90 million for vaccine distribution, $500 million for contact tracing and other virus mitigation efforts and roughly $1.5 billion to help K-12 schools navigate the pandemic and resume in-person instruction, said Dave Massaron, the state’s new budget director. 

“We need to work as quickly as we can, and we will, with the Legislature to get that money out,” Massaron said. 

Online shopping explodes

Prior to the pandemic, the state was averaging about $17 million in monthly tax collections from online retailers. That average has jumped to about $65 million per month. For the 2020 fiscal year, taxes collected from online and mail-order businesses totaled $493 million, a $318 million increase over 2019. 

Overall, state sales tax collections increased by 2.6 percent to $8.3 billion in 2020, roughly keeping pace with inflation. 

“That’s pretty remarkable given the size of the unemployment and the shock to the economy, but a lot of that is representative of the shift to taxable goods that we saw in Michigan,” said Eric Bussis, chief economist for the Michigan Treasury. 

Online taxable spending for families of four in Michigan quadrupled to $440 a month from $110 , Bussis said. Tax revenues were buoyed because Michigan generally doesn’t tax services, and that’s the industry most “clobbered,”  Prakken said.

Economists say it’s too soon to know if shoppers will return to brick and mortar stores and recover jobs that were automated during the pandemic.

What it means for government 

Despite major job losses, baseline income tax collections increased in Michigan by 3.6 percent to $10.49 billion in 2020. And sales taxes, which help fund schools and local governments, climbed by 2.6 percent. 

Economists attributed the income tax gains to “unprecedented” tax withholdings on unemployment benefits, which were expanded during the pandemic to include $600 or $300 a week in extra payments. 

In addition to the federal stimulus and increased spending on taxable goods, housing markets have remained strong, which stabilized property tax revenues for local governments, said Prakken, the economist with IHS Markit. 

“The plight of state and local governments has turned out to be far less pernicious than was originally feared,” Prakken said. 

But without additional aid, there are still signs of trouble for the Michigan budget: Officials predict tax collections for Michigan’s $10.8 billion general fund will drop by more than $500 million in 2021. School Aid Fund revenue, which is more dependent on sales tax collections, is projected to relatively flat in 2021. 

Another stimulus?

Economic and revenue projections for Michigan are clouded by uncertainty over additional federal spending. 

Increasing the recent $600 stimulus payments to $2,000, as proposed by outgoing President Donald Trump and President-elect Joe Biden, would increase Michigan personal income by almost $14 billion and increase sales and use tax by $375 billion, according to state estimates.  

By picking up two Senate seats in Georgia, Democrats will control the White House and both chambers of congress for the first time since 2010. They’re expected to pursue additional stimulus and relief spending. 

Biden on Thursday unveiled a $1.9 billion rescue plan to speed vaccinations, distribute another round of $1,400 stimulus checks and $400 a week in extra unemployment benefits, up from $300, among other things. Biden’s plan also calls for $400 billion in aid for state and local governments, which Senate Republicans had declined to include in previous stimulus plans.