VIPs
- Michigan is top-ranked in U.S. for falling initial jobless claims vs. 51% of states posting increased claims thus far in August, the worst showing of the current cycle; Michigan’s economy is insulated via its position as the top trading state with Canada
- Michigan’s intense exposure to the auto sector does render its economy vulnerable; University of Michigan data show auto buying conditions fell to a six-year low in August contrasting with Canadian small manufacturer optimism and auto rail traffic hitting a ten-month high
- Many believe consumption will continue to drive the U.S. economy and by extension Michigan’s strength; the top-third of the income earners buy more than 60% of new vehicles in America suggesting Michigan’s fate relies more on the stock market than other variables
Before being dubbed the Motor City, stoves put Detroit, Michigan on the map. In fact, nineteenth century Detroit was known as the “Stove Capital of the World.” The hot success can be drawn back to one Jeremiah Dwyer, who as a child walked by the Barclay Iron Works foundry. Stopped in his tracks, he was mystified by the red, glowing rivulets of molten iron required to produce steam ships, locomotives and farm equipment. Three apprenticeships later, Jeremiah was in the business of manufacturing stoves. By the 1870s, with the help of his brother James, he’d transformed Detroit into the go-to spot for stoves with the bustling city’s four large manufacturers accounting for more than a tenth of the stoves sold worldwide.
Today, the Wolverine State is cooking on a different burner. Our weekly jobless claims tracker places Michigan as the top performer on the list of the 50 states plus Washington, D.C. The -17% year-over-year decline through the first four weeks of August for those filing unemployment insurance beat every other state in the union. Only three others – Rhode Island (-15%), Georgia (-12%) and Alaska (-10%) – shared the same double-digit-decline zip code with Michigan.
The outperformance is even more notable when Michigan is juxtaposed against the move to DEFCON2 for our coast-to-coast state breadth jobless claims indicator. Thus far in August, 51% of states have posted year-over-year increases in jobless claims, above July’s 47% DEFCON3 reading.This pushes QI’s labor cycle mile marker to the highest print in three years. As a rule, we designate readings above 50% as DEFCON2, below 50% DEFCON3, and (red alert!) above 75% DEFCON1.
How is Michigan running ahead of the pack with trade war concerns aiming straight for the U.S. industrial heartland? That would be the state of Michigan’s highest trade intensity with Canada. In 2016, Michigan was the U.S.’s number one exporting state to Canada and the top importing state from Canada. Moreover, Canada has the highest trade intensity with the U.S. Recall, if you will, from the April 10 Feather, “If Michigan was a country, it would be Canada’s second-largest trading partner ahead of China.” In the current environment, the circular links through cross-border trade create a relationship that insulates Michigan from the global trade headwinds gusting across Europe and Asia.
It’s no secret that Michigan is geared toward autos and by extension dependent on the health of American households. But there’s nothing to worry about when it comes to the U.S. consumer, right? Second-quarter 2019 U.S. real consumer spending just posted the second strongest sequential performance, up a revised 4.7% annualized quarter-over-quarter, in the current (and longest) economic expansion.
How then, to square the circle of household auto buying conditions from the University of Michigan falling to a six-year low in August? They’ve taken out the prior low hit exactly one year ago. An update to this forward gauge is due out today. But the downshift already reported in this excellent guide for U.S. auto sales ramps up the vulnerability quotient for a downside surprise in auto demand. That can’t be helped given higher prices, deteriorating affordability and a weakening economic backdrop are conspiring against households.
So what’s to become of Michigan? Let’s ask Canada as U.S. households are likely tapped out though we’d ask that you think small, as in small businesses. The Canadian Federation of Independent Business (CFIB) is sister organization to the U.S.’s voice of small business, the National Federation of Independent Business.
Yesterday’s CFIB Business Barometer revealed relatively more small business optimism, but more importantly a ten-month high in the manufacturing sector whose key export is autos. Canadian rail traffic in the vehicle sector also remains squarely in positive territory, NOT coincidentally expanding at the highest rate in ten months. These indicators from “Canadia” are not flashing red, suggesting that Michigan’s auto sector and labor market are not facing imminent adjustments.
One widely shared view across the Street is that U.S. consumer strength should diminish fears that the trade war will lead to recession. Those with this bullish view should readily use Michigan as proxy to back up their case with one caveat: Six other top ten auto producing states – Indiana, Texas, Ohio, Tennessee, Kentucky and California – are flashing red on the jobless claims count. They don’t share Michigan’s Canadian trade cushion.
If there is a tiebreaker that decides Michigan’s fate in the current cycle, it’s U.S. upper-income households. The top-third of U.S. income distribution buys more than 60% of Americans’ new vehicles, underpinning U.S. auto demand and profitability, Canada’s auto manufacturing, and ultimately, Michigan’s jobless claims. Should the “Powell Put” fall further out of the money, the risk of shocking this cohort rises and fast, putting Michigan’s on the back burner.