The U.S. economy is expected to modestly grow over the next several quarters despite concerns about significant data release delays, the effects of tariffs, rising unemployment and the sustainability of the current fiscal path of the country.
However, Michigan's economy has hit a growth pause that isn't expected to resume until 2027.
Overall, a mix of confidence, caution and some ambiguity highlight the latest state and national economic outlooks, released Thursday by University of Michigan economists.
Additional uncertainty creeps into the forecasts, as the just-ended government shutdown all but stopped the flow of government data the economists rely on for their assessments. Researchers say in their report "an already complicated economy feels more like reading tea leaves this time," as they relied more heavily on alternative data sources and analyses.
Here are some highlights from the forecasts:
- The annualized pace of real gross domestic product growth, projected to come in around 3.1% in the third quarter of this year, drops by half in the fourth quarter as a rising share of tariff costs accrues to consumers, the labor market softens further, and the aftereffects of the federal government shutdown add drag. Growth in 2026 is expected to average 2.4% and settle to 2% in 2027.
- The U.S. unemployment rate is forecast to edge upward from 4.3% in the third quarter of this year to 4.5% in the final quarter, then flatline through the end of 2027. Michigan's jobless rate similarly increases from 5.3% in the fourth quarter of this year to 5.6% during the second quarter of next year before ticking down to 5.5% in 2027.
- The annualized pace of light-vehicle sales is expected to drop from 16.3 million units through September of this year to 15.6 million in the fourth quarter-as consumers lose the electric vehicle credit and the tariff front-running eases. Higher prices and lower incentives are likely to keep the average sales pace below 16 million in 2026-27.
- The annualized quarterly pace of core consumer price index inflation peaks during the final quarter of this year and the first quarter of next year at 3.4% as tariffs filter through the economy. Core CPI inflation remains above 3% through 2026, then further drops to 2.8% by the end of 2027.
- The six-month average pace of national monthly job gains declined from 179,000 in April to 64,000 in August. Gains are expected to slip further in the second half of this year as deferred federal layoffs materialize, but slowly improve through 2027 back over 100,000 per month. Michigan's payroll job growth is projected to stall next year, with 2,000 losses, before growth of 11,300 jobs returns in 2027. The state's manufacturing sector sheds about 3,000 jobs next year before adding 4,500 in 2027.
Forecasting always comes with risks, and the economists believe the positive and negative variables appear to be balanced. Still, limited data due to the government shutdown-the largest current risk to their outlook-means it's difficult to assess certain areas, such as labor market and inflation trends.
Michigan's economy, they note, is particularly sensitive to tariffs and international trade policy because of the critical role the auto industry plays in the state. That makes it especially vulnerable to changes in tariffs.
The researchers say extensions of rebates on auto parts tariffs for U.S.-assembled vehicles have shifted their estimate of the tariffs' eventual impact on domestic auto production from a "small negative" to a "small positive." But these policy changes come at a cost: Tariffs will raise vehicle prices for consumers and the elimination of Corporate Average Fuel Economy standards will lead to higher vehicle emissions.
Specific challenges facing Michigan's economy stem from reduced immigration and its aging population. The researchers say they have long warned the state's aging demographic "would eventually put a speed limit on job creation," and "that long-term future has now arrived."
The forecasts' authors, all from U-M's Research Seminar in Quantitative Economics, are Jacob Burton, Gabriel Ehrlich, Daniil Manaenkov, Donald Grimes, Michael McWilliams, Niaoniao You and Yinuo Zhang.
