The performance of Michigan’s economy, and in turn, Flint’s economy, remains largely tied to the performance of the national economy. Despite the decline of manufacturing employment that has occurred over the past 40 years, durable goods manufacturing (defined as the production of long-lasting goods such as appliances, automobiles and furniture) is disproportionately important to Michigan’s economy.
According to the U.S. Bureau of Economic Analysis, durable goods manufacturing is six percent of the national economy, but 12 percent of Michigan’s economy. Automotive manufacturing is less than one percent of the national economy, but is six percent of Michigan’s economy. This means that durable goods manufacturing is twice as large a component of Michigan’s economy, compared to the national economy. Automotive manufacturing is six times as large a component of Michigan’s economy, compared to national economy.
Purchases of durable goods experience a lot of volatility across the business cycle; when there is an economic downturn, it is easy for people to delay purchases of a car, furniture, or a new appliance. This is why Michigan (and Flint’s) economies are disproportionately affected by recessions. When the financial crisis hit in 2009, the U.S. unemployment rate peaked at ten percent while Michigan’s unemployment rate peaked at 14.9 percent. When the economy rebounds, people then acquire the durable goods that they delayed purchasing. This is one reason why Michigan’s unemployment rate has fallen faster than the national average, as it currently stands at 4.8 percent, compared to five percent nationally.
Unfortunately, the increase in economic activity has been less than forecasters predicted. In 2016, auto sales will be closer to 18 million units, rather than 20 million units. Given the importance of auto manufacturing to the state’s economy, lower than projected auto sales is causing the state to miss its tax revenue targets. Tax revenues for the 2016-17 fiscal year are coming in approximately $400 million lower than projected. This is due to lower than projected sales and corporate income tax revenues.
This is problematic for Flint for a couple of reasons. First, lower state revenues means less funds available for remedying the water crisis. Approximately 75 percent of the state’s budget is devoted to Health and Human services (e.g. Medicaid spending), and education. Only a small fraction of the budget is available for other expenditures.
Second, state revenue sharing is projected to make up approximately 9.5 percent of the City of Flint’s budget. The state of Michigan has, in the past, addressed revenue shortfalls by decreasing the amount of revenue shared by the state to local governments. Over the longer term, bailing out the Detroit Public Schools will cost the state approximately $700 million total. Medicaid expenditures will almost certainly continue to rise, given the expansion of Medicaid that occurred due to the Affordable Care Act. These will put additional pressure on the state budget.
Both Michigan’s and Flint’s economies remained tied to the national economy through its impact on durable goods manufacturing and in particular, the auto industry. Strong performance of this industry is vital for both the state and local governments to meet their current and future budgetary obligations.