THE ECONOMIC OUTLOOK FOR WASHTENAW COUNTY

Transcription

1 THE ECONOMIC OUTLOOK FOR WASHTENAW COUNTY IN Prepared by George A. Fulton Donald R. Grimes Institute for Research on Labor, Employment, and the Economy Prepared for March 2016 This report was prepared in connection with the March 22, 2016, Ann Arbor News edition featuring the outlook for the Washtenaw County economy. The full report is available on the Web (updated each year) at and also at

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3 Introduction The Economic Outlook for Washtenaw County in By GEORGE A. FULTON, research professor, and DONALD R. GRIMES, senior research area specialist, Institute for Research on Labor, Employment, and the Economy, University of Michigan As good as it s been for the economy in Washtenaw County, it continues to get better in the ongoing recovery from the Great Recession. Job gains have been robust, and the unemployment rate has fallen dramatically since the economy hit bottom in the summer of But that success has been accompanied by lingering trepidation among some of the county s residents, who remember only too well the difficult times that prevailed not long ago. The economy slowed considerably in 2014, raising fears that the weakness was foreshadowing an imminent downturn after five years of recovery. (A reminder is due here that there is no time limit on the duration of economic recoveries.) The slowdown turned out to be more of a hiccup; and as we had projected in last year s report, the economy bounced back strongly in Some muting of the enthusiasm over the mushrooming economy is warranted, however, particularly among those who are still not fully participating in the economic recovery. In addition, for those with jobs, wage growth has been largely anemic as employment expands. This certainly provides fuel for political candidates who play on this discontent by claiming the domestic economy is a mess. The Washtenaw County economy is hardly a mess. Washtenaw has gained over 21,000 jobs from calendar year 2009 to 2015, and the unemployment rate has fallen 5 percentage points, from 8.6 percent to 3.6 percent over the same time frame. Job growth in the county has been at its most rapid pace for any six-year period since the 1980s, and Washtenaw has outperformed both Michigan and the nation over that time. By early 2013, the county had recovered the

4 2 number of the jobs it lost in the previous downturn, but even so, the state is still well short of full recovery. What will it take for this very promising economy to become a truly great economy, and will we see that happen over our three-year forecast horizon? To qualify for the status of great, the county s job growth would have to be sustained, certainly, but that is not enough. We also need to see improvements in the areas of concern, those being underutilized labor and wage stagnation, all taking place in an environment of moderate inflation. Will the county get there, or will the recovery run its course by 2018? Our view of where the Washtenaw County economy is now and where it s headed over the next three years is, of course, the central focus of this report, which offers our view on the path of employment, unemployment, wages, and inflation through The local forecast is generated from a regional model constructed specifically for this study at the University of Michigan s Institute for Research on Labor, Employment, and the Economy. The regional model uses as inputs national economic indicators from the University s Research Seminar in Quantitative Economics in the Department of Economics. Before considering our perspective on how the Washtenaw County economy will evolve through 2018, we first take a look at 2015, to learn more about what kind of year it was and to gauge how well we anticipated developments as that year began. Review of the Forecast for 2015: A Report Card A year ago (March 19, 2015), we presented our thirtieth annual economic outlook for Washtenaw County (coterminous with the Ann Arbor metropolitan area). Last year s forecast of employment, unemployment, and inflation for 2015 can now be compared with estimates of the outcome for that year, to see how accurate our forecast was.

5 3 In our forecast last March, we considered the weak job growth in 2014 (the smallest annual increase in jobs during the current recovery) to be simply a pause in an otherwise continuing path of healthy job growth. By our current estimate, the outcome for 2015 supports that prognostication, as job growth accelerated from 0.7 percent in 2014 to 1.9 percent in Our forecast last year of job growth for 2015 was a tad high at 2.1 percent, but only by 0.2 percentage points, as recorded in table 1. Our average error over the past thirty years is 0.6 percent, or six workers per 1,000. In fact, the forecast errors for employment across all of the major industry divisions were modest, save for one category. The overshoot in job growth was concentrated in one sector, government, mostly in the state government component, which in Washtenaw is dominated by the University of Michigan and Eastern Michigan University. This too-optimistic forecast for the institutions of higher education deviates from a pattern established in recent years of our being too pessimistic about employment gains in this sector. The errors among the other major sectors were quite small and typically on the low side. The largest discrepancy in industry job performance between what we anticipated a year ago and what transpired for 2015 was a moderate underprediction of 265 jobs, occurring in the large trade, transportation, and utilities sector. The forecast record overall grades out as an A, especially in view of how difficult it is to forecast at this level of detail for a small, open economy such as Washtenaw. The observed and forecast numbers for the unemployment rate and the local consumer price inflation rate in 2015 are reported at the bottom of table 1. Last year we forecast a decline of a little less than one percentage point in the unemployment rate, from 4.8 percent in 2014 to 3.9 percent in We were not too far off, with the now posted unemployment rate falling a little more than one percentage point, to 3.6 percent, in 2015.

6 4 Table 1 Report Card: Track Record over the Years Percentage forecast error Year of forecast for total jobs n.a (estimate) (Positive numbers indicate that the forecast was too high; negative, too low.) Average absolute forecast error : 0.6% Forecast 2015 Actual 2015 Unemployment rate 3.9% 3.6% Consumer inflation rate -0.1% -1.4% Forecast date: March 2015

7 5 After hitting the bull s eye for two years in a row in forecasting local inflation, we made a fairly large miss for We did anticipate that local inflation would be very weak in 2015: we projected a decrease of 0.1 percent, due largely to declining energy prices. According to recently released government data, local prices did decline last year, but at a more substantial rate of 1.4 percent. The large decline in prices is quite pervasive, and quite puzzling. The U.S. CPI increased by 0.1 percent in 2015, and the decline of 0.1 percent we forecast for the local CPI is more in line with the typical relationship between the two measures. This review gives us a glimpse of an economy picking up the pace again last year after a slowdown in the prior year, with job growth in 2015 matching the average annual rate of 1.9 percent recorded over the current six-year recovery period. We need to take a more detailed look at the current state of the economy, however, before we anticipate developments beyond The Current State of Washtenaw County s Economy Employment Path of the Washtenaw County Economy What we have learned from the report card for 2015 is that the Washtenaw County economy continued to expand in 2015, returning to cruising altitude after a hiccup in As shown in figure 1, Washtenaw recorded its sixth calendar year of economic recovery in 2015, as measured by net annual job growth. The county suffered job losses at an accelerating pace from 2006 to 2009, bottoming out in 2009 with a loss then of 5,712 jobs. This low point was a culmination of the national Great Recession, bankruptcy proceedings for both General Motors and Chrysler, and the repercussions locally of Pfizer s departure. By 2010, Washtenaw turned the corner to return to positive growth, creating 17,490 jobs in the five years from 2010 to 2014, a vigorous pace of 1.9 percent per year. The gains in 2014 softened to 1,426 job additions with the retrenchment of certain industries, led by the auto industry. Last year we anticipated that this was simply a pause in the recent pace of job growth

8 6 due to special circumstances, and not a foreshadowing of a general slowdown in the economy into Our assessment of a year ago was validated by the data on 2015 released since then. By our estimate, job growth in 2015 has rebounded to grow at 1.9 percent, matching the average annual growth rate of the prior five years of the recovery. The gains over the six-year recovery period from 2009 to 2015, amounting to 3,537 jobs per year, exceed the average yearly additions of 2,720 jobs in the prior growth era from 1991 to The top job producers in 2015 among the major industry divisions were: professional and business services; trade, transportation, and utilities; state government (public higher education and the U-M Health System); and private education and health services. That certain major industry divisions have grown more rapidly than others this far into the recovery raises the

9 7 question of which underlying industries are leading the resurgence of Washtenaw s economy. Next, we ll probe a little more deeply into that angle of Washtenaw s economic development. Twenty Private-Sector Industries with the Greatest Job Gains in Washtenaw County, It is instructive to break out, at the most detailed industry level available, the top job producers in Washtenaw s recovery to date. The twenty industries with the largest employment gains in the county from calendar year 2010 to 2015 are shown in table 2, with the percentage job growth and the average annual wage in 2014 for each industry also included for reference. Table 2 Private-Sector Industries with the Greatest Job Gains in Washtenaw County Change % Change Average Annual Wage 2014 Private sector 11, $51,056 Computer systems design and related services 1, ,897 Nondepository credit intermediation and related activities 1, ,673 Full-service restaurants ,096 Offices of physicians ,972 Limited-service restaurants ,451 Nursing and residential care facilities ,676 Data processing, hosting, and related services ,576 Education except primary and secondary schools ,258 Caterers, mobile food services, and food service contractors ,954 Testing laboratories ,251 Facilities and other support services, travel and security services ,172 Warehouse clubs, supercenters, and other general merchandise stores except department stores ,399 Home health care services ,079 Marketing, veterinary, and other professional and technical services ,506 Wholesale trade, durable goods ,136 Physical, engineering, and biological research ,886 Computer and electronic product manufacturing ,097 Beverage, textile, apparel, wood, paper, petroleum, nonmetal products, primary metals, electrical equipment, and furniture manufacturing ,305 Fitness and recreational sports centers ,443 Plastics and rubber products manufacturing ,406

10 8 Among the twenty industries, ten of them have wage levels above the average for the county overall, most of them well above. In addition, three of the top five industries with the largest job gains over the period pay well above average wages. Half of the top twenty job providers are in three general areas of activity: (1) computerrelated and R&D; (2) health-care-related; and (3) restaurants and caterers. The first category is higher-wage; the second category is a mixture of compensation levels; and the third is lowerwage. That the job profile for Washtenaw is dominated by technology, health care, and hospitality is entirely consistent with its traditional strength and its image. One industry on the list that has been on the rise in recent years is testing laboratories, largely related to the whitecollar auto industry. Next up is a consideration of the unemployed in the current recovery. Unemployment Path of the Washtenaw County Economy The performance of Washtenaw s economy can also be evaluated with unemployment as the measure. The path of the county s yearly unemployment rate from 2010 to 2015 is shown in figure 2. (Note that the rate is for the county, and should not be confused with the rate for the city of Ann Arbor.) The rate for the United States is included for comparison. The unemployment rate for Washtenaw County has shrunk dramatically with the recovery in the local labor market, cut by more than half from a rate of 8.1 percent in 2010 to 3.6 percent in The decline in the rate observed in 2011 was due in part to discouraged workers leaving the labor force, which officially removes them from the count of the unemployed. By 2012, movements in the local labor force turned positive as a greater number of residents sought out expanding job opportunities. These county unemployment numbers can be put into context in two ways. First, if we compare the outcomes over time for the county, we find that the rate of 3.6 percent for 2015 has

11 9 returned to the annual reading last registered in 2002, and matches the rate of 3.6 percent averaged between 1990 and Second, if we compare rates geographically, we find that Washtenaw does compare favorably with the United States, as shown in figure 2. The gap between the two rates has ranged from 1.4 percentage points to 2.1 percentage points in Washtenaw s favor from 2010 to 2015, with Washtenaw s rate in 2015 of 3.6 percent falling 1.7 percentage points below the U.S. rate of 5.3 percent. Even though the county s unemployment rate is dropping, a number of Washtenaw s residents who want to work are still not working, or are working part-time and would prefer to

12 10 work full-time. Fortunately, there are progressively fewer of them as the county economy continues to improve. Washtenaw operates within a broader economic environment that has ramifications for our outlook for the county. As we extend our analysis into the future, we start with a summary of the national outlook. National Outlook: The future course of the Washtenaw County economy depends in part on the overall health of the national economy. Forecasts of economic indicators for the U.S. economy in are from a forecast prepared in March 2016 by Gabriel M. Ehrlich, Matthew G. Hall, Daniil Manaenkov, Ben S. Meiselman, and Aditi Thapar of the Research Seminar in Quantitative Economics (RSQE) at the University of Michigan; they also provided internally generated extensions of the forecast to The national outlook is summarized in figures 3, 4, and 5 by two economic indicators key to the Washtenaw economy. The best single measure of the U.S. economy is inflation-adjusted, or real, Gross Domestic Product (GDP): all of the goods, services, and structures produced in the economy. As shown in figure 3, real GDP growth averaged 2.4 percent in 2015, the same as in In 2015, final sales to domestic purchasers a broad measure of domestic final demand grew by 2.8 percent, the fastest pace during this recovery by far. Annual real GDP growth, however, was only the third-strongest since 2009, reflecting a drag from the rest of the world due to slowing global growth and a sharply higher value of the dollar. The drag from net exports continues into the earlier parts of 2016, holding down the annual growth rate to 2.3 percent. The headwinds from net exports are expected to moderate, although remaining sizable, during the rest of 2016 and Coupled with the projected growth of final domestic demand similar to 2015, this

13 11 pattern implies a slight acceleration in GDP over the rest of 2016 and Real GDP growth then tapers off a bit in 2018, to 2.5 percent. Underlying the projection for domestic final demand growth are solid consumption growth, steady support from residential construction investment, a quick turnaround in business fixed investment, and at last a positive contribution from the federal government sector. Another important input to the outlook for Washtenaw is the national vehicle sales forecast. From a longer-term perspective, sales of U.S. light vehicles cars, minivans, sport utility vehicles, crossovers, and pickup trucks were in the range of 16 to 17+ million units sold annually from 1999 to 2007, as shown in figure 4. Sales then retreated to 10.4 million units by 2009, and have increased every year since then. The industry crossed the 16-million-unit line in

14 , and then cleared the 17-million-unit line in 2015 at 17.3 million units, finishing approximately on par with the year 2000, until now the all-time best year for sales, and another period of cheap gas and rising truck popularity. In our forecast, we move upward from there. Pent-up demand continues to be a significant factor in the climb, as the average age of vehicles on the road today is still at record high levels, gasoline prices and interest rates remain low, and the labor market continues to improve. A shorter-term perspective on vehicle sales can be seen in figure 5, which also shows the prospects for the Detroit Three share of the light vehicle market. Total unit sales grow from 17.3 million units in 2015 to 17.8 million in Sales increase more slowly in 2017, to 18 million units, and hold at roughly that pace in The sales projection for 2017 would set a new alltime record for a calendar year.

15 13 The Detroit Three s share of the light vehicle market fell from 44.3 percent in 2014 to 43.6 percent in That decline was due to very rapid growth in non-detroit Three sales, rather than a decline in Detroit Three sales. We see the Detroit Three share drifting up from there to 44.2 percent in 2016 and 44.5 percent in 2017, where it holds for This pattern is consistent with our projection of a slight decline in the share of foreign-made vehicles, as a rising share of auto imports is offset by a declining light truck share. The projections for total sales and the Detroit Three s share of that market, taken together, yield our outlook for Detroit Three sales, which move up from 7.5 million units in 2015 to 8 million in 2017 and From 2016 to 2018, Detroit Three sales flatten out after growing consistently over the recovery period. We now turn to our view of the prospects for the county economy through 2018.

16 14 Washtenaw County Outlook: The economic outlook for Washtenaw County through 2018 is measured using information on employment, unemployment, inflation, and the real wage. First, we evaluate the county s prospects for job growth in total, putting that in context with recent job market developments. Employment The Washtenaw County economy is now well into its seventh year of recovery since the previous recession s low point in the summer of To date, the recovery has been brisk, adding 21,222 jobs from calendar year 2009 to 2015, a growth rate of 1.9 percent per year. Over that same period, the county s job growth outpaced both the nation s 1.3 percent per year and Michigan s 1.5 percent per year. The county economy added another 3,732 jobs in 2015, an increase of 1.9 percent that matched the pace of job growth over the current recovery period, returning job creation to its cruising altitude after a weak We see the local economic fundamentals in place, in combination with a continuing expansion of the U.S. economy, to support the extension of a solid recovery in the county through 2018, lengthening its span to nine years with job growth averaging a touch slower 1.7 percent per year over the next three years. As shown in figure 6, we are forecasting that the county will add a total of 10,594 jobs over the next three calendar years, picking up a little each year: 3,041 in 2016, 3,713 in 2017, and 3,840 in The job additions in each of the next three years will exceed the 2,720 jobs per year gained on average during the prior growth period between 1991 and Indeed, there is no nine-year period since 1990 that can rival the 31,816 jobs created from 2009 to 2018, if our forecast proves correct.

17 15 To put the current recovery, including the forecast period, in broader historical context, we now consider how much ground the Washtenaw economy is making up from 2009 through 2018 relative to what it lost in the preceding decline. Here we assess Washtenaw s progress measured from its previous economic peak in the summer of 2002 a more challenging benchmark. The quarterly path of total jobs from the start of 2000 to the end of 2018, adjusted for seasonal variations, is shown in figure 7, which summarizes in a single picture Washtenaw s recent economic history and our view of its near-term future. For comparison purposes, we include the same profile for Michigan, with both the county and state employment paths indexed to equal 100 in the second quarter of 2000, which represents Michigan s previous peak

18 16 employment level. Using index values permits us to compare on the same figure two regions with widely different employment scales. 1 From its peak employment quarter in the summer of 2002 (index value of 100.4) to its trough in the summer of 2009 (92.1), the county lost 16,122 jobs, 62 percent of them occurring in the two-year period spanning the summer quarters of 2007 to Then the recovery follows: from the low point in the third quarter of 2009 to the first quarter of 2013 (100.6), Washtenaw gained 16,555 jobs thus replenishing the number of jobs lost between the summers of 2002 and From then to the end of 2018 (109.3), we are forecasting that the county will 1 To clarify: an index value of 90 indicates that employment in a given period is 90 percent of its level in the base period (in this case, the second quarter of 2000), that is, it s 10 percent less than the base period value. An index value of 110 indicates a level of employment that is 10 percent higher than its level in the base period.

19 17 create an additional 17,041 jobs, thus cumulating to 33,596 job additions from the quarterly bottom of the downturn through the fourth quarter of 2018 (16, ,041). In contrast, the state as a whole is forecast to fall well short of the employment level enjoyed at its peak in the spring of 2000 (100) by the end of The employment decline in the state was much more precipitous from the spring of 2000 to the summer of 2009 (an index value of 81.7 compared with Washtenaw s 92.1). Washtenaw s recovery has also been more vigorous from the summer of 2009 to date, and the gap is expected to continue to widen over the forecast period through 2018 (109.3 for the county compared with 95.0 for the state in the fourth quarter of 2018). By the end of 2018, we are forecasting that the state will replenish 73 percent, or about three in four, of the number of jobs lost from the spring of 2000 to the summer of That would return the state to the job levels it posted at the beginning of 2003, leaving it with still more ground to be made up. Real Wage The average real wage (2014 dollars) in Washtenaw County between 1990 and 2018 is shown in figure 8. 2 The average is also shown for three industry group combinations: (1) bluecollar industries such as natural resources and mining, construction, manufacturing, and transportation; (2) service-providing industries that tend to employ workers with relatively high levels of education, including government, education and health services, professional services and corporate headquarters, wholesale trade, financial activities, and information services; and (3) service-providing industries that employ workers with less education such as retail trade, leisure and hospitality services, business support services such as temporary help services, and the miscellaneous other services category, which includes repair and personal services. 2 The wage series are averages per worker, and do not include variations in hours worked, a measure that is not available to us in the detail we would require. This is likely less of a consideration over the longer term.

20 18 The average real wage in the county for all workers has slowly risen over time from $46,462 (2014$) in 1990 to an estimated $53,206 in We estimate that the average wage in the county rose to $55,669 (2014$) in 2015 as a 1.4 percent decline in prices converted a 3.2 percent nominal wage gain into a rather impressive 4.6 percent increase in the real wage. We are forecasting that the average wage will continue to increase, at a more modest pace, to $59,131 in Note in figure 8, however, that the wage gains have not been evenly distributed either across time or by major industry group. In 1990, the blue-collar industries had the highest average real wage ($63,903), about one-third more than workers in the higher-educational-attainment service industries earned ($47,650), and more than double the average wage in the lower-educational-attainment service industries ($24,301). The average wage in the blue-collar industries continued to increase

21 19 through 2007, reaching a peak of $76,780 (in 2014$). The average blue-collar wage then fell sharply through 2013, reaching a low of $61,816, about 3 percent below 1990 levels. Since 2013, the average blue-collar wage has increased, and is forecast to exceed 1990 levels in A note of explanation might be helpful here. The average wage in any industry group reflects both the wages in a detailed industry and the share of the group accounted for by the detailed industry. Thus, a change in the mix of industries over time can by itself cause a change in the average wage, apart from any change in actual wage levels. 3 In contrast, the average wage in the higher-educational-attainment service-providing industries grew throughout the historical period. In fact, we estimate that in 2015, the average wage in those industries, for the first time, exceeded the average wage in the blue-collar industries. As shown in figure 8, the wage gap in favor of the higher-educational-attainment service industries compared with the blue-collar industries is expected to widen throughout the forecast period. The average wage in the lower-educational-attainment service industries grew steadily from 1992 through 2002, reaching a peak of $29,061 (in 2014$). Wages in these industries then declined through 2014, when the average wage was $25,422. We estimate that wages in this group of industries increased sharply in 2015 (4.2 percent), and we predict that inflation-adjusted wages will continue to increase over the next three years, albeit at a more modest pace. More detail on the time pattern of wage growth is shown in figure 9. The time periods shown in this figure ; ; ; and reflect the peak-to- 3 For example, say that an aggregate industry is composed of two detailed industries, A and B. In time period 1, industry A accounts for 60 percent of the aggregate category and pays an average wage of $70,000 a year. Industry B accounts for 40 percent of the aggregate and pays an average wage of $30,000 a year. This would mean that the aggregate industry category has an average wage of $54,000 (0.6 x $70, x $30,000). In the second time period, assume that wages in the individual industries remain the same, but that industry A loses jobs and industry B gains jobs, so that they both now account for 50 percent of the aggregate category. Even though wages in neither individual industry declined, the average wage in the aggregate category will fall to $50,000 (0.5 x $70, x $30,000). So, part of the reason for the big decline in the average wage in the blue-collar industries after 2007 was the disproportionate loss of jobs in relatively high-wage industries such as motor vehicle manufacturing. The other reason for the decline in blue-collar wages is that the wages of the auto industry itself actually did fall sharply.

22 20 peak time periods of the national business cycle, with the exception that the forecast period ( ) is shown separately. (We are not expecting the business cycle to peak in 2018; that is simply the end of our forecast period.) Real wages across all industries grew by 1.2 percent per year between 1990 and 2000, then slowed to 0.6 percent per year between 2000 and 2007, and then slowed further, to only 0.2 percent per year on average between 2007 and All of the growth in that period is in fact due to the jump in the real wage in 2015; the average real wage in 2014 was below the average real wage in We are forecasting that the average real wage in the county will grow by a healthy 2 percent per year for the next three years. The average wage in the blue-collar industries grew rapidly during the period, but then fell sharply after The primary reason for the big decline was the collapse in the

23 21 average wage in the motor vehicle manufacturing industry. In 2007, the average wage in that industry was $112,821, as most local auto workers enjoyed Detroit Three pay scales with lots of overtime and bonuses. The Great Recession caused the wages of the Detroit Three to drop as long-term employees saw their wage rates frozen and new workers were hired in at much lower wages, but even more important locally was the shift in the ownership of the local plants to lower-wage independent producers. By 2015, the average wage in the local motor vehicle manufacturing industry was down to $61,122 (in 2014$). Now, however, we are forecasting that wages in the blue-collar industries will begin growing again, with growth averaging 1.3 percent per year over the forecast period. Wages in the lower-educational-attainment service-providing industries fell over the entire period; even the big jump in the real wage in 2015 was insufficient to compensate for the decline in the earlier years. Consequently, the average wage in these relatively low-wage industries in 2015, adjusted for inflation, was 6 percent below 2000 levels. We predict that the average wage in these industries will grow by 1.7 percent per year in the forecast period, but this will still leave the average wage about 1 percent below 2000 levels. The big winner, in terms of wage growth, has been the higher-educational-attainment service-providing industries. These industries enjoyed real wage growth of almost 1 percent per year between 2000 and 2015, adjusted for inflation, while wages in the other industry categories were declining. These industries are also expected to see the most rapid wage growth over the next three years, averaging 2.1 percent per year. This is also the largest group of workers in Washtenaw, accounting for almost two-thirds of all employment in the county in Employment by Industry The projected job movements shown in total in figure 6 are distributed among twentythree major industry divisions in table 3, and into 174 finer divisions in the appendix. The detail

24 22 for the forecast presented in table 3 includes, for each industry, the level of employment in 2015 (including two quarters of preliminary data); the forecast change for 2016, 2017, and 2018; and the cumulative change over the three-year period The table also includes the average annual wage for each industry category in 2014, as does the appendix. 4 Total employment is forecast to grow by 3,041 jobs, or 1.5 percent, in Job gains are then forecast to pick up a bit to 3,713 (1.8 percent) in 2017, and 3,840 (also 1.8 percent) in The private goods-producing sector is forecast to add only 407 jobs over the next three years, as job losses in transportation equipment manufacturing ( 162) partially offset modest job gains in natural resources and mining (34), construction (234), and other manufacturing (301). The manufacturing industries that we anticipate will gain the most jobs over the next three years are computer and electronics products (108), chemicals (43), food (40), medical equipment and supplies (36), and other miscellaneous manufacturing (50). In addition to transportation equipment, manufacturing industries that we expect to lose jobs include book printing ( 62) and fabricated metal products ( 16). Job growth in the private service-providing sector in 2016 is forecast to slow to 1,782 (1.6 percent) compared with a gain of 2,897 (2.7 percent) in Job gains then increase to 2,337 in 2017 and 2,506 in The slowdown in job gains in 2016 is most pronounced in trade, transportation, and utilities. This sector added 684 jobs in 2015, but adds only a little more than half as many jobs (356) in Much of this slowdown reflects smaller job gains in wholesale trade and transportation services, which added jobs at an unsustainably rapid rate in Still, job gains 4 The historical employment data are from the Bureau of Labor Statistics Quarterly Census of Employment and Wages. The average annual wage includes both full- and part-time workers, weighted equally. Consequently, the average wages for industries that employ a disproportionately large number of part-time workers, such as retail trade and leisure and hospitality, are much lower than they would be if the wages were calculated only for full-time workers.

25 23 in wholesale trade (123 or 2.5 percent) and transportation and utility services (135 or 3.9 percent) are very strong in 2016 and subsequent years. Job growth in retail trade in 2016 and in later years is the weakest of any major industry outside of the manufacturing sector. Over the next three years, the retail sector gains only 374 jobs (2.3 percent). Within the retail sector, the greatest job gains are in clothing stores (81), grocery stores (73), pharmacies and drug stores (64), and automobile dealerships (44). Retail industries that lose jobs include general merchandise stores including department stores ( 59) and electronics and appliances ( 31). Job growth in the retail sector is limited by technological change, the Internet replacing brick-and-mortar stores, and rising labor costs driven by growing labor shortages and an increasing minimum wage. The information sector is projected to add 265 jobs over the next three years. While newspaper and book publishers continue to shed jobs over the period, these losses are more than offset by gains in software publishing (108 jobs or 7.1 percent) and other information services, including Internet publishing and web search portals (145 or 11.4 percent). The financial activities sector adds 309 jobs between 2015 and Most of the job gains are in finance and insurance (218), with a smaller gain in real estate and rental and leasing (91). These job gains do not include the anticipated improvement in the local residential real estate industry, because almost all real estate agents are self-employed and thus are not counted in the data on establishment employment shown here. The professional and technical services industry is forecast to add 470 jobs this year, with job gains inching up to 483 in 2017 and 488 in Over the three-year forecast period, professional services is forecast to add 1,441 jobs (9.4 percent). With this gain, professional services accounts for about one in every seven jobs created in the county, nearly double its share of the county s employment base in 2015).

26 Table 3 Forecast of Employment in Washtenaw County by Major Industry Division* Average Employment Change Annual Estimate Forecast Wage TOTAL JOBS (Number of persons) 202,393 3,041 3,713 3,840 10,594 $53,206 (Annual percentage change) (1.9) (1.5) (1.8) (1.8) TOTAL PRIVATE 127,355 1,892 2,504 2,636 7,032 51,056 GOODS-PRODUCING 18, ,086 Natural resources, mining, construction 3, ,709 Manufacturing 14, ,065 Motor vehicles 4, ,033 Other manufacturing 10, ,651 PRIVATE SERVICE-PROVIDING 109,247 1,782 2,337 2,506 6,625 49,211 Trade, transportation, and utilities 24, ,153 41,712 Wholesale trade 4, ,156 Retail trade 16, ,576 Transportation, warehousing, and utilities 3, ,454 Information 4, ,468 Financial activities 6, ,996 Professional and business services 26, ,171 69,181 Professional, scientific, and technical 15, ,441 87,187 Management of companies and enterprises 1, ,985 Administrative support and waste management 10, ,380 Private education and health services 25, ,874 50,668 Leisure and hospitality 16, ,971 Other services 4, ,761 Unallocated private services ,246 GOVERNMENT 75,039 1,148 1,209 1,204 3,561 56,788 State government 59, ,052 1,073 3,043 57, *Some subtotals do not add to totals due to rounding of annual average computations.

27 25 Within the professional and technical services industry category, the largest job gains over the next three years are in computer systems design (436), testing laboratories (321), and physical, engineering, and biological research (237). These are all very well-compensated industries, with an average salary in 2014 of over $85,000 a year. They also tend to employ lots of relatively well-educated workers, those with at least a bachelor s degree. The success of Washtenaw County in creating jobs in these industries has been a major contributing factor to the county s economic prosperity over the past several decades. Employment in the management and corporate headquarters industry added 236 jobs in Over the forecast period, this extremely well-compensated industry (average pay in 2014 of $191,985) adds a more modest 87 jobs. The administrative support and waste management industry adds 643 jobs over the next three years, most of them in 2017 and Within this industry category, almost two-thirds of the job growth is in employment services, which mostly consists of the temporary help services industry. This industry tends to grow very strongly in the first year of an economic recovery; for example, between 2009 and 2010 it added over 1,000 jobs in Washtenaw County. But as the economic recovery matures, more and more employers add permanent staff instead of hiring temporary workers. On the other hand, when the labor market gets tight, employers use the services of temporary help firms to fill their employment needs as they cannot find permanent hires among the relatively small pool of available workers. This explains the more robust employment growth expected in this industry in 2017 and The private education and health services sector lost jobs in both 2013 ( 141) and 2014 ( 118), after having added jobs every year since Employment in the private education services sub-industry grew in 2013, but then declined sharply in 2014; it rebounded in 2015 and is forecast to grow by 257 jobs over the next three years.

28 26 The much larger private health care and social services industry 88 percent of all jobs in the aggregate category lost jobs in 2013, but began growing again in Job growth accelerated in 2015 and continues to expand at an increasing pace over the forecast horizon, adding 1,617 jobs (7.1 percent). The greatest employment gains in private health care over the next three years are in nursing and other residential care facilities (606 or 13.3 percent); physicians offices (424 or 10.5 percent); and outpatient care centers, diagnostic laboratories, and ambulance services (246 or 17.0 percent). Employment in private hospitals, by contrast, barely increases over the next three years (44 or 0.7 percent). Employment in the leisure and hospitality sector grew rapidly between 2009 and 2014, averaging 3.7 percent per year, but then slipped to only 1.1 percent in 2015, and is expected to slow further in 2016, to 0.7 percent. Over the following two years, growth comes in at 1.3 percent per year. This sector includes arts and recreation, food services and drinking places, and hotels. The arts and recreation industry, which is projected to gain 160 jobs (7.3 percent) over the forecast horizon, includes businesses such as golf courses, fitness facilities, and the performing arts. (Much of the last category resides in the universities in Washtenaw County, and thus is not counted here.) Employment at local hotels and other lodging places continues to decline slowly. Fullservice restaurants add 278 jobs (4.6 percent), but limited-service restaurants, better known as fast-food restaurants, lose 12 jobs over the next three years. That decline may seem surprising, but it is worth noting that the number of jobs at fast-food restaurants also declined in the 1998 to 2000 period, when a very low unemployment rate made it virtually impossible for employers to find additional workers.

29 27 The miscellaneous other services sector includes a grab bag of individual industries such as repair services, including motor vehicle repair shops; personal services, such as hair salons and dry cleaners; membership organizations; and private household services. Collectively these industries add 305 jobs (an increase of 2 percent per year) over the forecast period. The largest job gains occur in private household services (92); religious, business, and grant-making organizations (80); and automotive repair and maintenance shops (54). The government sector grows by 3,561 jobs (1.6 percent per year) over the forecast horizon. Federal government employment increases slightly (139 jobs), as job additions at the Veterans Hospital in Ann Arbor more than offset job losses at the U.S. Postal Service and other federal government offices. Employment in local government, which includes public K-12 education and Washtenaw Community College, lost jobs every year between 2010 and 2015 even as the rest of the economy was adding jobs. We anticipate that this period of job loss will finally come to an end in 2016, with a modest gain of 379 jobs over the next three years. State government, which includes Eastern Michigan University, the University of Michigan, and the University of Michigan Health System, has gained jobs every year since 2000 (averaging 2.2 percent per year). Clearly, these institutions have been the foundation for the region s economic stability over the past decade. We expect that employment growth will continue over the next three years, albeit at a slightly slower pace, averaging 1.7 percent per year. The local economy has thrived over the past fifteen years, despite very large job declines in the motor vehicle manufacturing industry and the loss of two of our signature private-sector employers, Pfizer and Borders. In has thrived in spite of these losses because of the presence of the universities and the University of Michigan Health System, along with many other

30 28 knowledge-intensive firms in the private sector, especially in information technology. Our forecast indicates that this trend will continue over the next three years. Unemployment As shown in figure 10, the solid job growth we are projecting for Washtenaw County is accompanied by an unemployment rate that moves down from 3.6 percent in 2015 to 3.2 percent in 2016, and then declines systematically over the rest of the forecast period into rarified air, to 2.8 percent in 2017 and 2.5 percent in The drop of more than a percentage point over the three-year period brings the jobless rate into the neighborhood of where it was in 2000, a year that bordered the golden era of the second half of the 1990s. During that earlier stretch, the county unemployment rate hit its historical low of 1.6 percent in If our forecast of the unemployment rate proves correct, the county labor market could be approaching full employment over the next three years. We expect the county s labor force to grow smartly through 2018 as improving job opportunities encourage more people to reenter the labor force in the hope of finding

31 29 employment. If, instead, the labor force expands at a slower pace than we anticipate, then the unemployment rate would fall more rapidly with the employment gains we are projecting. The jobless rate for the county continues to be well below the U.S. rate over the forecast horizon, as shown in figure 10. The gap between the two rates widens slightly in the county s favor in the forecast period, from 1.5 percentage points in 2016 to 1.8 percentage points in Inflation Our forecast of local inflation, measured by the growth rate of the Detroit Consumer Price Index (CPI), is shown in figure 11. (Consumer price data are compiled at the regional level; they are not available for the county in isolation.) Local prices increased modestly by 1 percent for 2014, before plummeting by 1.4 percent in The recent decline in local prices is widespread across spending categories, not simply reflecting the sharp drop in energy prices, which we find a bit puzzling. We judge the broadly based drop to be temporary, however, and accordingly we expect inflation to rebound to a still-modest rate of 1.1 percent in The pickup in the inflation measure is due in part to our expectation that oil prices will stabilize and start creeping up during 2016, relieving some downward pressure on inflation. Local inflation then rises to 2.3 percent in 2017 and holds there, more or less, in 2018, with more robust wage growth and slowly rising oil prices putting some upward pressure on consumer prices.

32 30 Conclusion In 2014, Washtenaw County saw the smallest annual increase in jobs during the current recovery, 1,426 (0.7 percent). As we anticipated last year, the economy rebounded strongly in 2015, adding an estimated 3,732 jobs (1.9 percent). Our outlook for the county economy is upbeat over the next three years, supported by sustained expansion of the U.S. economy and by the county s strong economic fundamentals a highly educated populace combined with enterprises associated with the New Economy. Specifically, we see the county adding a total of 10,594 jobs over the next three calendar years: 3,041 in 2016, 3,713 in 2017, and 3,840 in That would extend the run of job growth to nine straight calendar years, besting the previous record of eight years between 1982 and

33 There is no nine-year period since 1990 that can rival the 31,816 jobs created on an annual basis from 2009 to 2018 if our forecast proves correct, although there was stronger growth during the 1980s. According to our forecast, by the end of 2018, the county economy would boast 18,124 more jobs than it achieved at its previous peak level of employment in the summer of The largest job gains over the forecast period are expected in higher education, health care services, information technology, and research and development. That the job profile for Washtenaw is dominated by these industries is entirely consistent with its performance over the recovery period to date and with its traditional strength and its image. Most of these industries pay well above average wages in the county. On the other hand, we anticipate relatively small job gains in manufacturing, retail trade, and restaurants, and a decline in jobs in motor vehicle manufacturing and fast-food restaurants. Movements in the average real wage in Washtenaw have been sluggish for some time, but began to pick up in 2014, increasing by 1.5 percent then. In 2015, a 1.4 percent decline in the local price level converted a nominal wage gain of 3.2 percent into a real wage gain of 4.6 percent. Real wages increase by an additional 2.6 percent in 2016 as price inflation turns weakly positive. Growth in real wages slips to 1.8 percent in both 2017 and 2018 as local price inflation moves above 2 percent. This would be the strongest period of wage growth in the county since the second half of the 1990s. We are forecasting that the unemployment rate will fall by 1.1 percentage points over the next three years, from 3.6 percent recorded for 2015 to 2.5 percent in 2018, the lowest rate in the county since And this occurs with a significantly expanding labor force. If our forecast of the unemployment rate proves correct, the county labor market could be approaching full employment over the next three years.

34 32 The primary risks to the forecast include: (1) the extent of the deceleration of GDP growth in China; (2) the path of the value of the dollar; (3) the effect of the 2016 national elections on government spending; (4) the possibility of a more aggressive timing of rate hikes by the Federal Reserve; (5) the uncertain path of oil prices; (6) natural causes, particularly abnormal weather; and (7) locally, growing shortages of labor with the tightening labor market. At the beginning of this report we posed the question of whether this promising county economy could become a truly great economy in the next few years. The criteria we established to achieve that status were sustained job growth over the forecast period, in fact approaching a full-employment economy with greatly reduced slack in the labor market, combined with growing real wages and moderate inflation. Our forecast suggests that all of that will come to pass over the next three years. It doesn t get any better than that.