RSQE: May 2016

The U.S. and Michigan Outlook for 2016-2018

Consensus Revenue Estimating ConferenceLansing, Michigan

May 17, 2016University of MichiganRSQE

RSQE: May 2016

The Current State of the Economy

RSQE: May 2016

Latest Data • 2016q1 real GDP growth at 0.5 percent, SAAR

– Third year in a row with a very slow first quarter

• Real GDP up 1.9 percent over 2015q1

• Key factors in 2016q1 slowdown:– Inventory correction

– Weak vehicle sales

– Another sharp drop in oil and gas exploration• Wiped nearly $100 billion off GDP since the end of 2014

RSQE: May 2016

0

20

40

60

80

100

120

2008 2009 2010 2011 2012 2013 2014 2015

Industrial Production: Drilling Oil and Gas Wells

Index = 100 in 2012

RSQE: May 2016

8

10

12

14

16

18

20

2008 2009 2010 2011 2012 2013 2014 2015

Light Vehicle Sales, Monthly

Units, SAAR (Millions)

RSQE: May 2016

Latest Data • Labor Market keeps improving

– Labor force participation rate up recently

– Wage growth finally picking up

• At a slower pace along some dimensions– Jan-Apr payroll job gains slowed to 192,000/month

– Unemployment rate ticked up to 5.0 percent

– Slower improvement on broader unemployment rate

– Decelerating decline in share of long-term unemployed

RSQE: May 2016

Unemployment and Participation Rates

Percent

Labor Force Participation Rate (Right Axis)Unemployment Rate (Left Axis)

Percent

RSQE: May 2016

4

6

8

10

12

14

16

18

20

10

15

20

25

30

35

40

45

50

2008 2009 2010 2011 2012 2013 2014 2015

Long-term Unemployed Share and U-6 Unemployment Rate

Percent

U-6 Unemployment Rate (Right Axis)Unemployed, 27 Weeks+, Share (Left Axis)

Percent

RSQE: May 2016

Key Inputs

RSQE: May 2016

Monetary Policy• Fed’s dual mandate update:

– Inflation stubbornly under 2 percent target– Labor markets improving, somewhat more slowly

• Next fed funds 25bps target range increase: – September, the last one for 2016

• Future tightening is data-dependent• Most consistent with our outlook:

– Two 25bps increases in target range in 2017– Four 25bps increases in target range in 2018

RSQE: May 2016

1.9

0.1 0.0 0.00.6

1.1

0.2

2.8

1.8

2.62.12.22.3

2.7

4.5

3.6

4.23.84.04.0

4.3

0

2

4

6

8

4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

Actual Forecast

Market Interest RatesPercent

3-Month T-bill

10 Year T-Note

Conv. Mortgage

’13 2014 2015 2016 2017 2018

RSQE: May 2016

Fiscal Policy• No major action until 2017

• Discretionary spending set to grow in 2016 – First time since 2011

• Retiring baby boomers drive transfer spending growth

• 2016 Elections – major risk

• Single-party control is unlikely

• Federal deficit projected to inch down

RSQE: May 2016

Federal Budget, NIPA Basis(Billions of Dollars)

ForecastFY ’15 FY ’16 FY ’17 FY ’18

Current receipts 3390.2 3521.4 3686.9 3900.0% change 4.2 3.9 4.7 5.8

Current expenditures 3988.2 4117.9 4278.9 4475.7% change 3.2 3.3 3.9 4.6Consumption 956.1 970.8 995.7 1027.6% change 0.1 1.5 2.6 3.2

Transfer payments 2537.0 2637.8 2748.4 2875.4% change 5.2 4.0 4.2 4.6

Surplus (+) or deficit (-) -598.0 -596.6 -592.0 -575.6Percent of GDP -3.4 -3.3 -3.1 -2.9

RSQE: May 2016

Oil Prices(West Texas Intermediate Crude)

47.0

97.598.7

73.1

46.442.2 41.0

43.033.5

51.0

2030405060708090

100110120

4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

Actual ForecastDollars/Barrel

93.0

48.839.9

45.5

*Implicit deflator for petroleum & products

’13 2014 2015 2016 2017 2018

-2.8 -14.5 -49.6 -1.6 11.6 8.410.5 -24.9 -42.3 1.9 9.3 8.5

4th Quarter to 4th Quarter % ChangeWTIImports*

49.5

RSQE: May 2016

RSQE Forecast

RSQE: May 2016

2.42.6

2.4 2.4

1.9

0.0

1.0

2.0

3.0

2014 2015 2016 2017 2018

Real GDP GrowthPercent

RSQE: May 2016

Growth Rate of Real GDP

2.32.6 2.52.72.5

0.5

1.42.0

3.9

0.6

2.1

4.3

-0.9

4.63.8

-2

-1

0

1

2

3

4

5

6

4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

Actual ForecastPercent, AR

2.5 2.5 2.0 2.1 2.5 2.4

’13 2014 2015 2016 2017 2018

4th Quarter to 4th Quarter Growth Rate of Real GDP (%)

RSQE: May 2016

Nonfarm Payroll Employment Gainsand Unemployment Rate

170.4

146.3166.4

190.4222.3

260.4

203.7

4.6

5.04.7

4.95.0

5.7

7.0

100

200

300

4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 44

5

6

7

8Actual ForecastPercentThousands of Jobs per Month

Unemployment RateAvg. Monthly Job Gains*

* 1/3 the change in quarterly value

2.4 2.8 2.8 2.3 2.0 1.9

’13 2014 2015 2016 2017 2018

4th Quarter to 4th Quarter Job Change (Millions)

RSQE: May 2016

2.11.9

2.1

1.81.7

1.1

0.1

2.02.2

1.6

0

1

2

3

2014 2015 2016 2017 2018

Core All ItemsPercent

Consumer Price Inflation(CPI-U)

RSQE: May 2016

Housing Market

1.03

0.820.71

0.65

0.94

0.420.35 0.39 0.37 0.41

1.45

1.191.11

1.00

1.35

0.0

0.5

1.0

1.5

2.0

2014 2015 2016 2017 2018

Singles Multis Total

5.054.944.794.634.34

0

2

4

6

2014 2015 2016 2017 2018

A. Housing StartsUnits (Millions) Units (Millions)

B. Existing Home Sales*

*Single-family homes

RSQE: May 2016

7.07.17.7 7.5 7.1

10.710.710.59.88.7

17.617.816.4

17.3 17.6

0

4

8

12

16

20

2014 2015 2016 2017 2018

Autos Lt. Trucks TotalUnits (Millions)

Light Vehicle Sales

RSQE: May 2016

Risks to the Outlook:

• World economic growth

• Financial turbulence

• 2016 elections

• Monetary policy

• Commodity prices

• Abnormal Weather

THE MICHIGAN ECONOMIC OUTLOOK

FOR 2016–2018

May 17, 2016

Motor Vehicle Industry Revisited

RSQE: May 2016

0

5

10

15

20

'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

With data

U.S. Light Vehicle Sales, 1990–2018Millions

17

18

'91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17

RSQE: May 2016

16.4 17.3 17.6 17.8 17.6

7.3 7.5 7.7 7.8 7.8

02468

101214161820

2014 2015 2016 2017 2018

U.S. Light Vehicle SalesTotal vs. Detroit Three, 2014–18

Total Detroit Three

RSQE: May 2016

Millionsof Units

Annual % Detroit Threemarket share

44.3

43.744.143.943.6

Current State of Michigan’s Economy

RSQE: May 2016

4136.6

4207.4

4276.8

4314.5

4140.2

4287.4

4,100

4,150

4,200

4,250

4,300

4,350

'13q4 '14q1 '14q2 '14q3 '14q4 '15q1 '15q2 '15q3 '15q4 '16q1

Post-benchmark HistoryPre-benchmark HistoryRSQE Forecast January '16

Thousands

Michigan Payroll Employment2013q4–2016q1

RSQE: May 2016

Michigan Outlook

RSQE: May 2016

1.2 1.3

0

1

2

3

4

2.0 1.7 1.7 1.8 1.2

82.1 70.4 69.8 76.9 53.0

4th Quarter to 4th Quarter Growth Rate (%)

4th Quarter to 4th Quarter Change (Thousands)1.2

53.8

4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 42014 2015 2016’13 2017 2018

Annual Rate(%)

Michigan Job Growth

Actual Forecast

RSQE: May 2016

2.1

1.0

3.6

1.4

1.1

Change in Jobs by Industry Sector(Thousands of jobs)

2013q4to

2014q4

2014q4to

2015q4

2015q4to

2016q4

2016q4to

2017q4

2017q4to

2018q4

Total jobs

Government

Manufacturing

Prof. & bus. svcs.

Construction

Trade, trans., util.

70

-2

24

12

8

16

70

2

14

14

5

7

77

3

2

19

14

13

54

1

-2

20

11

10

53

1

-1

19

8

11

RSQE: May 2016

3

4

5

6

7

8

9

10

11

12

3,500

4,000

4,500

5,000

'91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17

Michigan Total Jobs andDetroit Three Sales of Light Vehicles

1991 to 2018Total Jobs

(Thousands)

Salesin Millions

of Units

Forecast

Total jobs

Sales

RSQE: May 2016

3,8003,9004,0004,1004,2004,3004,4004,5004,6004,7004,800

With data

Michigan Wage and Salary EmploymentFirst Quarter of 2000 to Fourth Quarter of 2018

Thousands of jobs

ForecastPeak ’00q2

Loss: ’00q2–’9q3 = 858,100

Trough ’9q3

’18q4

’16q1

Gain:’9q3–’18q4 = 628,700

(73% of jobs lost)

RSQE: May 2016

’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18

7.2 7.68.6

13.9

5.4 5.96.8

11.4

02468

10121416

U-3 U-4 U-5 U-6

Alternative Measures of Labor UnderutilizationMichigan, 2014 and 2015

U-3: Comparable to the official unemployment rate (7.1% in 2014, 5.4% in 2015)U-4: Unemployed (U-3) + discouraged workersU-5: U-4 + all other marginally attached workersU-6: U-5 + employed part-time for economic reasons

RSQE: May 2016

2014 2015

Percent

Alternative Measures of Labor UnderutilizationMichigan vs. United States, 2011–15

(Percentage)

U-3 U-4 U-5 U-6 U-3 U-4 U-5 U-6

Change

Michigan

2011 10.2 11.1 12.3 18.82012 –1.19.1 9.8 11.0 16.6 –1.3 –1.3 –2.22013 –0.58.6 9.2 10.1 15.3 –0.6 –0.9 –1.32014 –1.47.2 7.6 8.6 13.9 –1.6 –1.5 –1.4

2011–15 –4.8 –5.2 –5.5 –7.42015 –1.85.4 5.9 6.8 11.4 –1.7 –1.8 –2.5

2011 8.9 9.5 10.4 15.9

2011–15 –3.6 –3.8 –4.0 –5.5

United States

2012 8.1 8.6 9.5 14.7 –0.8 –0.9 –0.9 –1.22013 7.4 7.9 8.8 13.8 –0.7 –0.7 –0.7 –0.92014 6.2 6.6 7.5 12.0 –1.2 –1.3 –1.3 –1.82015 5.3 5.7 6.4 10.4 –0.9 –0.9 –1.1 –1.6

7.1

5.44.8 4.7 4.5

0123456789

10

2014 2015 2016 2017 2018

Michigan Unemployment Rate2014–18

6.4 5.1 4.8 4.6 4.44th Quarter Unemployment Rate

RSQE: May 2016

Percent

Michigan Inflation and Income GrowthWith data

1.1

-1.4

0.8

2.0 2.2

-2-10123456

2014 2015 2016 2017 2018

Detroit CPI

4.1 4.33.8 3.7

4.4

-2-10123456

2.7

5.1

2.8

1.7 1.9

-2-10123456Percent Percent Percent

Personal Income Real Disposable Income

RSQE: May 2016

UNIVERSITY OF MICHIGAN

www.rsqe.econ.lsa.umich.edu