Coronavirus

Michigan economy is stronger than expected amid pandemic. Thank the stimulus.

spending

Consumer spending in Michigan is now up over January levels and above the national average, driven largely by increases in online sales.

LANSING — Federal stimulus checks and expanded unemployment benefits have propped up the Michigan economy during the coronavirus pandemic, driving up spending and tax revenue and blunting the impact of an ongoing recession.

The message, delivered Monday by financial experts in Lansing, is good news for Democratic Gov. Gretchen Whitmer and leaders in the Republican-led Legislature. What had been projected as a $3 billion deficit for the fiscal year that begins in October is now likely less than $1 billion, according to Chris Kolb, Michigan’s budget director.

But experts warn it may take years for Michigan to replace the more than 1 million jobs lost at the height of the pandemic. And “the path of the virus remains uncertain,” noted David Zin, chief economist for the non-partisan Senate Fiscal Agency, who cautioned the pace of recovery will likely slow.

“We still need additional federal aid to help us manage through the devastating impact that COVID-19 has had on revenues, or else we will be facing tough decisions about what essential services and programs to cut,” Kolb told reporters following a virtual Consensus Revenue Estimating Conference in Lansing, where officials estimated future tax collections.

The $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act created a series of federal assistance programs for businesses, residents and laid off workers that added nearly $43.3 billion to the Michigan economy during the second quarter of 2020, according to fiscal experts.

That included nearly $16 billion in forgivable business loans through the Paycheck Protection Program, $8.4 billion in stimulus checks and $19 billion in extra unemployment benefits. All told, those payments equaled about 8.5 percent of the state’s annual personal income, or about $4,350 per person. Economists estimate residents spent up to 75 percent of that money, rather than saving it.

Consumer spending in Michigan is now up over January levels and above the national average, driven largely by increases in online sales. “Michiganders are spending more freely than elsewhere,” said Gabriel Ehrlich, a University of Michigan economist who forecasts the state and national economies. “We’ve seen a stronger recovery in consumer spending here than nationally.”

Michigan lost nearly 1 in 4 jobs this spring. The state had gained back 909,000 of those jobs by the end of July but was still down about 370,000 jobs compared to February, according to preliminary federal data.

In April, Michigan led the nation with a 24 percent unemployment rate as COVID-19 cases and deaths peaked and Whitmer shut down much of the economy. But the rate declined in June and July, falling below the national average to land at 8.7 percent — still more than double the 3.6 percent rate in February.

With some parts of the state economy still closed, Michiganders are spending less on things like movie tickets, airline flights and non-taxable services. But that’s left residents with more to spend on goods that are taxable, including automobiles, home improvement supplies, computers and other products often purchased online, officials said.

That’s part of the reason state sales tax collections have not declined as much as state economists predicted in May, when they lowered projections from $8.7 billion to $7.5 billion for the current fiscal year. On Monday, they bumped those projections back up to $8.2 billion — still a decrease, but a substantially smaller one than feared.

Among the winners and losers so far this year:

  • Restaurant tax collections are down 23 percent for 2020 as consumers avoid public spaces.
  • Building materials, gardening supplies and home improvement projects are going strong.
  • Total vehicle sales are down, but Michiganders who are buying autos are purchasing more expensive ones, said Jim Stansell, senior economist for the non-partisan House Fiscal Agency.
  • Michigan Lottery sales are up $160 million this year, as the state has had “some of the most spectacular months we’ve ever had from the lottery during the pandemic,” Zin said.
  • That unexpected lottery surge has helped buoy the state’s School Aid Fund, the primary source for K-12 classroom spending in Michigan schools.

Officials had predicted revenue flowing into that fund would drop by a combined $2.5 billion in 2020 and 2021 but on Monday estimated the size of that hole will likely end up closer to $1 billion. There may be several reasons consumer spending in Michigan is outpacing the country, Ehrlich said.

While Michigan’s unemployment insurance agency was slammed by initial claims, the state has done a “better job in getting benefits to people in a timely fashion” than some other states, he said. And Michigan has also been one of the biggest beneficiaries of the federal “work share” program, which allows employers to reduce hours but ensure full payments for workers.

It’s also possible Michigan residents could be spending more because they are “more optimistic about the future than other states,” said Gabriel Ehrlich, a University of Michigan economist. Despite the relatively good news, Michigan officials warned tough times may still lie ahead. Even with unemployment recovery, the state may still be down jobs by the end of 2022.

Economists now predict general fund revenue will drop by 7.4 percent to $9.5 billion in fiscal year 2021. School Aid Fund revenue, meanwhile, is expected to drop by about 1.5 percent to $13.5 billion, a $212 million reduction.

“While the revenue picture has improved, it’s important to remember this virus has been one step ahead of us at every turn, and revenues could easily swing the other way if another wave would hit this fall,” Kolb said. “Until COVID-19 is defeated, uncertainty is the word when it comes to revenues and their impact on our budget.”

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