U of M Economists Predict Little Change In Michigan's Economy

Economists were all in a hair-on-fire tizzy earlier this year about tariffs, claiming they would create explosive inflation. This misapprehension was blown away seven days ago by a San Francisco Fed study: What Is a Tariff Shock? Insights from 150 years of Tariff Policy. Economists across the country are now in full CYA mode, revising all their previous, half assed forecasts.

Economists at the University of Michigan's College of Literature, Science, and the Arts now seem adrift in their predictions for the Michigan economy, but this is good. No economic drama is predicted in the immediate future. Your job is probably secure and you won't be eaten alive by inflation (except for health care prices).

These LSA economy predictions are extremely influential on Michigan's biannual Consensus Revenue Estimating Conferences.  The last was held on May 16, 2025 and the next will be held in January 2026.  The Consensus Revenue Estimating Conferences determine the State of Michigan's available revenues for the next fiscal year during the state government-wide budgeting process.

The calm economic forecast should allow the health care community to recalculate the inflation factors in their pricing decisions.  They probably won't, and the public demand for political action (subsidies and price controls) will grow much louder in the absence of general inflation:

https://www.freep.com/story/money/personal-finance/susan-tompor/2025/11/20/university-of-michigan-economists-2026-forecast/87353479007/

https://lsa.umich.edu/content/dam/econ-assets/Econdocs/RSQE%20PDFs/RSQE_MI_Forecast_Nov2025.pdf

https://lsa.umich.edu/content/dam/econ-assets/Econdocs/RSQE%20PDFs/RSQE_Michigan_Forecast_Feb25.pdf

U-M economists say Michigan's economy hit a 'growth pause' but some gains could be ahead
By Susan Tompor - November 20, 2025
Detroit Free Press

• Risks to Michigan’s economic outlook, according to University of Michigan economists, include the future direction of tariffs and the evolving regulatory environment for the auto industry.
• Michigan’s unemployment rate, according to the U-M forecast, is expected to rise from an estimated 5.3% in the fourth quarter of this year to 5.6% by the second quarter of 2026.

If you sense that things seem a little so-so with Michigan's economy, you might be onto something. Michigan's economy likely hit a "growth pause" this fall that could drag into 2026, according to a new forecast released by University of Michigan economists.

Looking for a little hope? Growth could pick up in Michigan in 2027.

Some good news: No recession is forecast so far for the United States in 2026 or 2027, according to the U-M economic outlook released Thursday, Nov. 20. But economists note that some federal government data is lacking, thanks to the 43-day federal government shutdown.

Blame some of the shifting shake-up in the Michigan's auto industry for some weakness ahead following a new agenda in Washington, DC.

"The auto industry has faced a rapidly evolving policy mix this year. We believe the shift in policy support away from electric vehicles will cost Michigan jobs in the short run," the economists wrote.

In the future, though, the economists expect that the effective elimination of Corporate Average Fuel Economy standards, known as CAFE, can be expected to "boost the Detroit Three’s share of the auto market over the longer term."

The University of Michigan economists who wrote the state forecast — Jacob T. Burton, Gabriel M. Ehrlich, Donald R. Grimes, and Michael R. McWilliams — noted in their report that in earlier projections, they maintained that the Trump administration’s tariff policy would end up reducing employment in Michigan’s auto sector.

Yet, their worst fears might not materialize.

Recent extensions of rebates on tariffs on auto parts used to assemble cars and trucks in the United States shifted the estimates given by the U-M economists from "small negative to a small positive" when judging the eventual impact of tariffs on domestic auto production.

Consumers, of course, will see higher vehicle prices for cars, thanks to the tariffs. And the eliminations of CAFE standards will lead to higher vehicle emissions, the report stated.

University of Michigan’s campus in Ann Arbor during dusk on Friday, Nov. 8, 2024.
"Nonetheless, we believe they will eventually provide net support for employment and economic activity in Michigan," the economists wrote.

It should come as no surprise that Michigan’s economy is "very sensitive to international trade policy due to the critical role of the local auto industry."

"We see three main risks to Michigan’s economic outlook over the next two years: the future direction of tariffs and international trade policy, the evolving regulatory environment for the auto industry, and the potential for a national recession," the economists stated.

They stated that a potential national recession remains a major downside risk to Michigan’s economic outlook, but added that a national recession is not in U-M's baseline forecast.

"Michigan’s economy is highly cyclical and tends to experience deeper contractions than the national average during downturns," the economists wrote.

Make no mistake, much of the outlook has been clouded by a lack of official government economic numbers.

"While recent national indicators point to moderate economic momentum, the risk of misjudging the underlying strength of the economy has grown amid the federal government shutdown, which has delayed the release of key economic data," the economists wrote.

"These gaps in information make it more difficult to assess turning points in activity, especially in areas such as consumer spending, business investment and labor market conditions."

The economists noted that specific challenges facing Michigan's economy stem from reduced immigration and its aging population.

The state's aging demographic, according to the U-M economists have long been expected to "eventually put a speed limit on job creation."

And they noted: "That long-term future has now arrived."

"Our outlook for Michigan’s economy may seem underwhelming, but these sorts of projections are likely to become the norm in the years to come unless there are fundamental changes to demographic trends," the economists stated in the report released Thursday, Nov. 20.

What's the U-M forecast for the Michigan economy?
The U-M projections include:

• Michigan’s unemployment rate is expected to edge up from an estimated 5.3% in the fourth quarter of this year to 5.6% by the second quarter of 2026. It's expected to trend back to 5.5% in 2027.
• Detroit CPI inflation is projected to slow to 2% this year, its slowest pace since 2020. But local inflation is expected to pick back up to the 2.9% to 3% range over the next two years, according to the forecast, as tariffs continue to work their way into consumer prices.
• Michigan’s payroll job count is projected to edge lower in 2026, with 2,000 job losses forecast. And growth of 11,300 jobs is expected to return in 2027.
• Michigan’s manufacturing sector is likely to shed about 3,000 jobs in 2026, according to the U-M forecast, before adding 4,500 in 2027 with a boost from a looser regulatory environment.

Every day, of course, people wonder whether the state's economy is doing better or worse. Heading into the next downturn? Or holding on?

The U-M economists noted that "gauging the health of Michigan’s economy was difficult even before the federal government shutdown interfered with key data releases."

"The two key measures of employment, from the payroll and household surveys, have generally trended in opposite directions this year," the economists stated. "Furthermore, preliminary data suggests a large downward revision is in store for Michigan’s payroll employment. The shutdown has not clarified matters."

What's the U-M forecast for the U.S. economy?

The University of Michigan also released its outlook for the U.S. economy on Thursday, Nov. 20.

The economists behind the national forecast stated that they had to turn to alternative sources of data since the historic federal government shutdown — which began Oct. 1 and ended Nov. 12 — due to the lack of official government statistics released during the shutdown.

The U-M economists who wrote the U.S forecast — Burton, Ehrlich, Grimes, Daniil Manaenkov, Niaoniao You and Yinuo Zhang — referred to a "controlled softening in the labor market."

"The WARN Act notices, which track the number of affected employees 60 days before layoffs, have retreated to a modest level in recent months after a spike in May–July," according to the executive summary for the U-M economic outlook for the country.

At the same time, they noted that progress with inflation appears to be stalling. Price hikes on goods reaccelerated, they said, and price increases for services continued to run hot.

"Without quality alternative data on real-time inflation, we will have to wait for official releases to assess whether inflation has peaked or continues to accelerate in the aftermath of the tariffs," the economists stated.

Some uncertainty associated with trade policy, they noted, has narrowed.

"Although we await the Supreme Court’s ruling on a subset of tariffs, the one-year truce with China brought back some predictability," the economists stated.

"Actual tariff costs borne by businesses appear to track below headline policy rates as firms rely on bonded warehouses and other tactics to minimize duties due," they said.

"We expect effective rates paid by firms to settle near 10%. Tariffs should keep modest, temporary pressure on core goods inflation," they wrote.

The economists expect the federal government shutdown to have a "meaningful drag" on economic growth in the fourth quarter, with a rebound early next year.

The economists are not forecasting a recession in the United States in 2026 or 2027.

Instead, they stated that they expect the annualized pace of real gross domestic product growth in the third quarter of 2025 to come in around 3.1%, thanks to robust consumption and business fixed investment.

The pace of growth in the United States roughly halves in the fourth quarter of 2025, according to the U-M forecast, as "a rising share of tariff costs accrues to consumers, the labor market softens further, and the federal government shutdown adds drag."

Yet early next year, the economy should benefit from "moderate tax cuts, less restrictive monetary policy, and the end of the shutdown," the economists wrote.

"The jagged pattern of quarterly growth rates results in calendar year 2026 growth, averaging 2.4%. In calendar 2027, growth settles down to 2%."