News

Higher tariffs and their impact on trade remain the "wildest of wild cards" when it comes to economic forecasts, according to the latest outlook released May 16 by University of Michigan economists.

The U.S. economy remains "mostly healthy," U-M economists said, despite the news the U.S. economy shrank in the first three months. The nation's gross domestic product — which measures the value of all goods and services produced in the United States — fell at a 0.3% annual rate in the first quarter, the first such slide since 2022.

The outlook calls for slower growth this year, but it does not forecast a recession in 2025.

Even so, threats relating to President Donald Trump's sweeping tariff policy remain when it comes to jobs, car sales and more.

U-M economic forecaster Daniil Manaenkov said in a statement that the economists "expect the tariffs to start to drag on consumption and investment this summer after the rush to beat tariffs over the past several months."

The authors of the forecast, who are part of U-M's Research Seminar in Quantitative Economics, are Manaenkov, Jacob Burton, Gabriel Ehrlich, Kyle Henson, Michael McWilliams, Niaoniao You and Yinuo Zhang.

Tariffs expected to take a toll

Both consumer prices — and the jobless rate — are expected to go up in the near term.

The U-M forecast indicated that higher tariffs can be expected to exert an upward pressure of about 3% on goods prices in the next two years, as the higher costs trickle down to stores and filter through the economy.

And forecasters warned that Michigan faces a tougher time, too, with concerns that the state's jobless rate could climb to 6% by the first half of next year. The state's jobless rate was 5.5% in April.

More: How shoppers might want to calculate the cost of higher tariffs

More: Michigan's jobless rate remains unchanged in April but signs point to future increases

Sharp decline in car and truck sales ahead

When it comes to Michigan's auto industry, we're looking at a slowdown ahead.

The expectation is that U.S. car and light truck sales will fall behind last year's red-hot run when it comes to sales in 2025, 2026 and 2027.

Right now, U-M economists expect U.S. passenger vehicle sales to drop sharply later this year, from an annual pace of 16.4 million in the first quarter of 2025 to 14.8 million in the third quarter once the tariffs on vehicle imports drive up prices for new cars and trucks.

The strong momentum in early 2025, though, means that new car and light truck sales still could hit a projected 15.6 million, according to the U-M forecast.

In 2024, the forecast noted, automakers sold about 15.8 million cars and light trucks in the U.S., the highest level since 2019.

This year, the sales pace for cars and trucks surged in March and April past 17 million units, U-M forecasters noted, likely fueled by consumers rushing to buy ahead of the anticipated auto tariffs.

Forecasters expect a "sharp sales decline in the coming months as tariffs take effect and the surge in tariff front-running subsides."

The pace of light vehicle sales is expected to decline to 15.2 million in 2026.

But as automakers adapt to the tariffs and adjust supply chains, the U-M economists predict that vehicle sales should partly recover to 15.3 million units by 2027.

"The current auto tariffs are set to reshape the industry in several complex ways," the U-M forecast indicated.

Many countries and sectors are likely to receive exemptions from the tariffs or negotiate reduced rates for key industries, similar to the agreement the U.K. reached for auto imports, the U-M economists said.

U-M economists project that higher tariffs on imported vehicles ultimately will drive consumers to buy a different car or truck than they might have bought otherwise due to price.

The U-M estimate indicated that, if the total size of the market did not change, consumers would buy 1.9 million more domestically produced cars and trucks.

But that large gain is likely be offset by overall sales declines. U-M economists warn that the industry will still see a combined decline in total U.S. light vehicle sales and U.S. exports, in light of the higher tariffs.

The U-M forecast includes concerns that total light vehicle sales will decline by more than 1.6 million units. As a result, forecasters say that the net increase in domestic sales that U-M is projecting roughly 250,000 units.

U.S. light vehicle exports to other countries are likely to decline by more than 400,000 cars and trucks per year, according to the forecast.

U-M economists stress that "substantial uncertainty" surrounds that estimate, given the long list of unknowns that remain relating to tariffs.

The Detroit Three’s market share of U.S. light vehicle sales declined from 36.1% in 2023 to 34.2% in 2024. The U-M forecast anticipates further declines with share declining to 32.6% by 2027.

Economic outlook for jobs, tariffs

The U-M forecast indicated:

When it comes to tariffs: "The China tariff roller coaster" is likely to come to a rest at an effective rate of about 60%. "We anticipate the 10% broad-based tariff on other countries will stay throughout our forecast horizon, but reciprocal tariffs will not be imposed persistently."

The forecasters anticipated that the auto tariffs are likely to be sustained, with the U.S. content exemption applying to United States-Mexico-Canada Agreement (USMCA)-eligible vehicles and parts.

When it comes to jobs: April's U.S. unemployment rate held at 4.2%, which was flat with July 2024. Yet, the report noted that labor trends indicate that "even modest adverse changes in the pace of hiring or layoffs could quickly tip the labor market over."

The U-M forecast indicated that the U.S. unemployment rate can be expected to rise from 4.2% in April to 4.4% by the third quarter this year. The expectation is that the U.S. jobless rate will reach 4.9% in mid-2026. It then edges down to 4.7%, according to the forecast, by the end of 2027, as the population and labor force growth slow.

Michigan's job picture is bleaker, as the state's jobless rate was 5.5% in April.

The U-M forecasters noted that Michigan's unemployment rate rose by 1.3 percentage points in a year from March 2024 to March 2025. Michigan's jobless rate saw the largest increase of any state during that period and the second-highest unemployment rate in the nation, trailing only Nevada.

Michigan’s unemployment rate remains below its average from 2000–24 of 6.8%.

"We expect Michigan’s cyclical labor market to continue feeling the cumulative strain of elevated interest rates and the impact of the tariffs, with the state’s unemployment rate projected to peak at 6% next year," according to the U-M forecast.

Michigan's unemployment rate is expected to decline modestly after that, reaching 5.8% by the end of 2027, economists said, "as federal tax cuts and lower interest rates help offset the effects of the tariffs."

The U-M economists said tariffs on the auto industry, along with steel and aluminum, can be expected to reduce employment by roughly 13,000 jobs over the next several years."We emphasize that this estimate is very uncertain, both because we believe that the ultimate path of tariffs remains fluid and because of the inherent complexity involved in assessing the effects of such a large change in policy."

Contact personal finance columnist Susan Tompor: stompor@freepress.com . Follow he r on X @tompor.

This article originally appeared on Detroit Free Press: U-M economists predict rising jobless rate, auto sales dip in Michigan