Threat of recession grows as coronavirus disrupts Michigan business
Detroit — Economists are warning of the growing threat of recession as the coronavirus pandemic radically disrupts daily life and business, and the economic relief measures being debated in Washington won't do much to turn it around, they say.
Confirmation this week that all three Detroit automakers are shutting down their plants for at least two weeks makes it even more likely that Michigan's economy — heavily dependent on manufacturing — will be hit harder than the nation as a whole, as it has in previous slowdowns.
How hard? Three million Michiganians will suffer "significant lost wages" due to layoffs, furloughs, sick leaves, self-isolation or quarantine orders, predicts East Lansing-based Anderson Economic Group, which provides economic analysis for private companies, nonprofits and governments.
The Ann Arbor-based Center for Automotive Research estimates that a one-week shutdown of the U.S. auto industry would lead to an "annual loss" of 94,400 jobs in the United States, cost $7.3 billion in overall earnings, and siphon $2 billion from government tax revenue. A six-week shutdown would "impact" 566,600 jobs, cost $43.7 billion in earnings and reduce government revenues by roughly $12 billion.
"This economic pain would hit the top automotive states — with almost a third of the impact concentrated in just four states: Indiana, Michigan, Ohio and Texas," according to a recent commentary by CAR CEO Carla Bailo and Kristin Dziczek, vice president of research. "The deep supply chains and relatively higher wages mean the employment multiplier impacts will be more significant as well."
And the $1 trillion economic relief package being touted in Washington by the Trump administration? It could help around the edges, said Robert Dye, senior vice president and chief economist for Comerica Bank, but will be insufficient to stem the tide of economic pain.
"I would not encourage people to think passage, no matter how big, is a Band-Aid that can fit over the wound from the coronavirus," Dye said. "It will help, but it will not address all the economy damage we're going to see over the next few months."
The downturn already is being felt in Michigan, long a bellwether in past recessions because its heavy manufacturing base tends to reflect both consumer sentiment and national economic trends. The state Unemployment Insurance Agency on Wednesday reported a 550% increase in claims compared to normal anticipated activity this time of year. That number was released the same day that the agency stopped in-person claims-filing and went to online filing only.
The state had been on shaky ground well before the pandemic came into play. Michigan State University’s Center for Economic Analysis noted in December that "on multiple occasions in this past year, it looked like a recession was just on the horizon. Parts of the economy are not doing so well. Manufacturing, in particular, had a rough year, leaving many to claim we are in the midst of a manufacturing recession."
Patrick Anderson, president of the Anderson Economic Group, said Wednesday's agreement by Detroit automakers to close plants — followed Thursday by many foreign-owned automakers operating in the United States — could make the impact dire for Michigan, the nation's No. 1 auto-producing state. General Motors Co., Ford Motor Co. and Fiat Chrysler Automobiles NV already have started shutting down factories. They are expected to remain closed through at least the end of the month.
"We estimated back in February that most of American production would not be shut down because of parts shortages from China," Anderson said. "That assessment proved to be correct. But once you have plant closures because of infected workers, this is going to cascade quickly. That would move Michigan into one of the most economically impacted states."
He expects "an unprecedented number" of people to lose income over the next 45 days: "The majority of those people will not be unemployed because their jobs haven't been eliminated, but they will be suffering from loss of income. Many of the disruptions will be because of government orders.
"I have no doubt that we are in a recession today. It may end up being called the panic of 2020. We don't have a name for it."
Sales of automobiles across the U.S. already are tumbling as a result of the pandemic. March sales could plunge as much as 41% compared to last year, nearly all of that attributable to the outbreak, according to a forecast released Wednesday by J.D. Power. Although sales had fallen little in Detroit through Sunday, the company reported declines of 18% in Seattle, 17% in San Francisco, 16% in Los Angeles and 15% in Chicago.
The Treasury Department wants to start issuing direct payments to Americans by early next month as the centerpiece of a $1 trillion plan to stabilize the economy and encourage spending. It proposed two $250 billion cash infusions to individuals: A first set of checks issued starting April 6, with a second wave in mid-May. The amounts would depend on income and family size.
Treasury Secretary Steve Mnuchin said Thursday the checks would be $1,000 per adult and $500 per child, so a family of four would get $3,000 in April if Congress approves the plan. Another round of checks in the same amount would go out again May if the coronavirus is still considered a national emergency.
The Treasury plan, which requires approval by Congress, also recommends $50 billion to stabilize the airlines, $150 billion to issue loan guarantees to other struggling sectors, and $300 billion for small businesses.
"This is another good step to try to soften the blow," Michigan State University economics professor Charles Ballard said, "but just too many people are out of a job right now for me to think that we won’t have a downturn.
"Traditionally, the whole idea of fiscal policy is to get people to spend more. I am not sure that’s going to be very effective. It will leave more money in their pockets, but will they spend it? It’s not that they don’t want to spend, it’s that they can’t spend it."
The outbreak has led Michigan and other state governments to temporarily order businesses to close, including restaurants, bars and movie theaters. Retailers large and small have voluntarily gone dark, and some, like Grand Rapids-based Meijer, have reduced hours to allow for cleaning and restocking. Two major Metro Detroit shopping malls, Somerset Collection and Great Lakes Crossing Outlets, are temporarily closing. Across the state, those who are able to work from home are doing so, venturing into public spaces only when necessary.
Many of those working in stores will not be paid. Layoffs there and in service industries like restaurants and bars could cause associated layoffs as those workers tighten their spending.
Much of the service industry is "typically fairly recession-resistant," said Comerica Bank's Dye. But because the government has moved to close much of the service industry, it's going to get hit first and hard.
"Part of the economy that involves people going to get things is grinding to a halt," Ballard said. "This is serious."
Plans on hold
Jessica Harpe, owner of Belle Santa Spa in St. Clair Shores, said her business is in limbo. She planned to move next month into a larger space a few doors down within the same commercial strip on Harper Avenue. She’s unsure of making such a move now.
“I don’t feel comfortable with that,” she said. A lot of her staff are independent contractors. "They’re not going to have any income at all."
Canine to Five, a doggy day care in Detroit’s Midtown and suburban Ferndale, is on an unpredictable path now that clients are canceling vacations and staying home from work with their pets.
“I was having the best year I’ve ever had,” owner Liz Blondy said. This was to be the week she was going to carve out time to interview job candidates and finally add much-needed staff.
Instead, the number of dogs she houses during a weekday went to just 120 on Monday from the usual 350 to 400. The number of canines she keeps overnight went to four from 30. So far, the grooming side of her business has stayed steady.
Mitigating the impact
Trade associations and union leaders representing various sectors have urged legislation to protect the tens of thousands of businesses and employees who now are vulnerable. Business groups hope they provide a tax holiday, or delay tax payments.
“Everyone has been focused on Wall Street. We better start paying attention to Main Street,” said Charles Owens, the Michigan director of the National Federation of Independent Business.
Earlier this week, Gov. Gretchen Whitmer agreed to expand eligibility for unemployment benefits to: workers who have an unanticipated family care responsibility; workers who are sick, quarantined or immuno-compromised and who do not have paid family and medical leave; and first-responders in the public health community who become ill or are quarantined.
Business advocates want the state to lessen a company's unemployment insurance payments if it has to lay off people. They are pressing for more legislative measures to deal with the income loss that businesses and their workers face.
“The impact will be significant across the board and hit all sectors,” Owens said. “There is an interconnection to many businesses. If there is less business, then that will mean the suppliers of those businesses will have less work and potentially fewer workers.”
Whitmer announced Thursday that the U.S. Small Business Administration has approved Michigan's request for an Economic Injury Disaster Loan Declaration. That makes low-interest disaster loans available to small businesses. Those with credit available elsewhere are not eligible.
The interest rate is 3.75% for small businesses and 2.75% for nonprofits for a maximum term of 30 years. Go to https://disasterloan.sba.gov/ela for applications. Grants and loans totaling more than $20 million are also available through the Michigan Small Business Relief Program.
Blondy, the owner of Canine to Five, was caught off guard by the sudden turn of fortune, as was nearly everyone.
“We survived the recession, so I thought, 'What could really throw me off now?' This week, I got that answer," she said. "A pandemic."
Staff Writers Candice Williams and Craig Mauger contributed.