Michigan’s Economic Forecast and Your Small Business

Join Michigan's State Treasurer Rachael Eubanks and her guest, Chief Economist and Director of Treasury’s Office of Revenue and Tax Analysis Eric Bussis, as they discuss all-new information that may provide small business owners with direction as they look ahead at Michigan’s economy. 

RESOURCES

• The Consensus Revenue Estimating Conference (CREC) economic forecast documents

Transcript

Michigan’s Economic Forecast and Your Small Business

Hosted by MI State Treasurer Rachael Eubanks, with guest Eric Bussis

Rachael
 Hello to our listeners! I'm Rachael Eubanks, and this is Treasury Talk. Our guest today is Eric Bussis, chief economist and director of Treasury's Office of Revenue and Tax Analysis. Eric is here to discuss all-new information from last week's Consensus Revenue Estimating Conference (CREC) that may provide small business owners with direction as they look ahead at Michigan's economy. So Eric, thanks for joining us today. I know that this is a really personal thing for you, trying to provide information to small businesses.

Why is that?

Eric 
Thanks, Treasurer. I grew up in a family that owned and operated a small business and it was a part of our livelihood. My parents ran a small community pharmacy. I've seen  firsthand what it's like to try to run a business and make things work with a huge shifting economy while trying to carve out a niche, making sure that you're able to meet your consumers demands, making payroll and trying to keep everything together throughout that small business lifestyle!

 Rachael 
So this is real for you. In thinking about being an economist and what we all talked about last week at the revenue conference, you're trying to predict the future that nobody knows. What kind of outcomes did you find from CREC? You know everyone wants to know what the future will bring and how their small business will be affected. What can you share with us?

 Eric 
I think the economic outlook right now is somewhat uncertain. We've just lived through this pandemic. So I know a lot of our small businesses were doing their best to hold on through that, and now we've come into a period of high inflation, labor shortages and a really tight economy. 

The good news here is the Michigan economy has continued to grow. We've seen a pretty robust recovery. But as we look to 2023, we do see some signs of a slowdown. 

 There are some risks on the horizon really centered around inflation and interest rates. These are presenting some serious risks to the economic outlook in 2023, but the good news coming out of CREC is all the economists we talked to and heard from at that conference suggested that the Michigan economy is in a much better place going into this recession than we have been over the last couple recessions that the state has had to weather.

 Rachael 
Is there anything that's small businesses can do to help plan for this recession?

 Eric
 In the next year, we're really expecting interest rates to drive a lot of this recession. We've seen really strong inflation and the Federal Reserve is increasing interest rates and that will likely continue into 2023, so as small businesses are planning for their cost of capital, you know whether you have a revolving loan that's tied to prime or you have some other business financing that's tied to adjustable interest rates, that's something you're going have to pay attention to carefully in managing your small business. 

 Small business owners have certainly been doing that over the last year as interest rates have increased dramatically, but that's still something in 2023 that they'll have to pay particular attention to.

 Rachael
I think you say the word ‘recession’ in Michigan and everyone has this memory of the difficulty in 2008 and how severe that was. Are we foreseeing a recession of a similar magnitude coming or not?

Eric
That’s a great question. We're really expecting a modest recession and it feels like in Michigan, we haven't had a modest recession in a long time. We've had huge recessions around 2008 and the COVID pandemic. Prior to that, looking at the ‘90s and the early 2000s, there was this period of time where people would joke the national economy would catch a cold and Michigan would catch pneumonia because of our dependence on manufacturing. Our economy has become more diverse. 

 We've moved away from such a heavy reliance on these auto manufacturing jobs. It's still a very key part of our economy, but we're not nearly as dependent as we have been in the past on the that sector and on those jobs, so we do think we're in a much better place.

 Also nationally we're not expecting a recession like we've had the last two recessions. The last two recessions by historical standards have been very dramatic and that's something that we don't expect to repeat this time around.

 Rachael
 You know, one of the things that we've been talking about quite a bit is this consumer demand that continues on through the recession and how that may have varied between goods and services. What do you see in terms of consumer behavior in the upcoming year? Are we going see a dramatic pull back or are there areas where we think there’s still going to be strong demand?

Eric
Yes, that's one sector of the economy that's really going to be key as we look forward to 2023. Consumers over the pandemic had a lot of extra cash. They were able to save on some things that they didn't have to buy during the pandemic. 

 They had excess savings and excess disposable income, and as we move into 2023 with interest rates rising, that's going to put a strain on consumers’ budgets. 

 Additionally, inflation is accelerating at levels that we haven't seen in 30 or 40 years and that's something that's continuing to constrain consumers. At this point, consumers are saying that they're pretty pessimistic. However, what they're spending has been surprisingly strong. In 2023, we're looking to kind of fall back in line with how consumers are feeling. We expect that in 2023 disposable income will fall and consumers will probably pull back a bit.

 Rachael
 It's also supported by low unemployment through a recession, right? I mean, we still see this incredibly strong demand for labor.

 Eric
Yes, that's been a surprise throughout this economic recovery and the COVID recession. Labor demand has been really high and people have been leaving the labor force. So it's been hard for small businesses to get employment, but that's been good for consumers. We expect that to change a bit.

 Over the next year, we do expect labor to fall back a bit because of the recession. We might see a few more layoffs depending on what industry you're in and how you supply the labor for your small business. But from a consumer standpoint, it may mean less consumer spending and people who are a little more hesitant to make that purchase or make that investment.

 Rachael
As we bring today's podcast to a close, do you have any words of advice for small business owners? I know we've had some recent business tax changes in Michigan.

Eric
Yes. So in the last year, the legislature and governor have enacted the flow through entity tax. This is a tax that helps small businesses and flow through entities manage their federal tax burden. It's a very complicated tax, but it's certainly something that small businesses should talk to their accountants about and really work on tax planning with their CPAs to make sure that they understand how this new optional tax might help lower their federal tax burden. 

 Rachael
 Great advice. Well, we have one last question about a forecast for 2023: Will the Tigers have a winning record this year?

Eric
I think it's a little short this year. I'm not sure they're going to see a winning record this year. I'm hopeful. I've already got some tickets purchased for spring training and regular season, so I'm hoping that they're able to pull out a winning season. Hope springs eternal when it comes to baseball.

 Rachael 
That's right. We have to have never-ending optimism as Tigers fans. Well, thank you so much, Eric, for taking the time to help Michigan small businesses interpret the economic forecast as it relates to the financial health of their own companies. I appreciate having your expertise on Treasury Talk.

RESOURCES

·         The Consensus Revenue Estimating Conference (CREC) economic forecast documents