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Michigan's economy positioned to withstand a NAFTA withdrawal

ANN ARBOR—The Michigan economy, in its ninth year of growth, would likely absorb a negative shock related to a pull-out or weakening of the North American Free Trade Agreement fairly well, say University of Michigan economists.

As the fifth round of NAFTA talks gets under way in Mexico this week, U-M economic forecasters Gabriel Ehrlich, George Fulton, Donald Grimes, Daniil Manaenkov and Michael McWilliams release their annual analysis of the state's economy. The forecasters judge that NAFTA withdrawal remains unlikely, but they have simulated the the potential effects as part of this year's forecast.

The forecasters believe the effects would depend critically on whether Mexico and the United States placed additional tariffs on each other's exports after withdrawal. In the scenario with no additional tariffs—a "soft withdrawal"—the forecasters would expect only slight harm to the U.S. economy. In a scenario with retaliatory tariffs on both sides—a "hard withdrawal"—the forecasters would expect NAFTA withdrawal to reduce real GDP by 0.2 percent and slash 300,000 jobs by the year 2020.

"The imposition of a 25-percent tariff would spark a shift of nearly one million automobile assemblies away from Mexico primarily to China and elsewhere in Asia, but not to the U.S.," said Ehrlich, director of U-M's Research Seminar in Quantitative Economics. "On the other hand, many light truck assemblies probably would move to the United States."

The forecasters estimate that Michigan would gain 6,400 jobs by 2020 in a soft withdrawal because of additional light truck production. A hard withdrawal would trim 7,000 Michigan jobs by 2020, 3,900 of them in manufacturing.

The overall 2018-19 forecast for Michigan sees steady job growth, low unemployment, tame inflation and an economy that continues to diversify. Other findings include:

Jobs: The state will add 41,900 jobs during 2017, 40,900 in 2018 and 52,200 in 2019. That's slower growth than the 1.7 percent rate the state had from summer 2009 to summer 2017.

"Since last year, the Michigan economy has pumped its brakes, with job growth posting an annual rate of 0.9 percent in the first three quarters of 2017," Fulton said.

In all, Michigan will have gained 670,500 jobs during the economic recovery from summer 2009 through the end of 2019, recouping nearly eight out of 10 jobs lost since mid-2000.

Automotive sector: U.S. light vehicle sales have been running below their 2016 pace, and the Detroit Three's share of sales has also nudged down from a year ago. Based on the first three quarters of 2017, U-M economists forecast sales to decline from the record high of 17.5 million in 2016 to 17.1 million this year and in 2018, then dropping to 17 million in 2019.

The forecast includes a decline in manufacturing employment through 2019, with a loss of 9,000 jobs over the two-year period. Detroit Three market share remains relatively flat at just over 42 percent in 2018-19.

"Michigan's economy has diversified over the last 20 years, which should make it easier for the state to add jobs even without employment growth in the manufacturing sector," Grimes said.

Top growth sectors: Five major industry divisions account for nine out of every 10 job gains in the private, nonmanufacturing sector for 2018-19: construction; professional and business services; trade, transportation and utilities; private education and health services; and leisure and hospitality.

The construction industry will add 11,400 jobs over the next two years; professional and business services will add 37,300 jobs by 2019, amounting to two in five of the total jobs created in Michigan over the period.

Unemployment: Michigan's sustained recovery will help the state's unemployment rate creep down from an average 4.4 percent this year to 4.2 percent in 2018 and 4.1 percent in 2019.

"It bears noting that the state had over 300,000 more employed in 2000 than it does today," McWilliams said. "The labor participation rate has drifted down further since the end of last year, meaning that a substantial part of the drop in the state's unemployment rate came from Michiganders exiting the labor force rather than finding jobs."

 

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