Excluding food and energy, inflation is expected to average 2.2 percent over the next two years. In 2002, employment growth is forecast to accelerate to 1.0 percent with Michigan employment rising by 45,000. Michigan wage and salary income growth is expected to slow from 5.8 percent in 2000 to 3.1 percent in 2001, and then rebound to 5.6 percent in 2002. Inflation remains moderate at 2.8 percent in 2001 and 2.9 percent in 2002. Real, adjusted for inflation, personal income is forecast to grow 0.6 percent in 2001 before accelerating to 2.3 percent growth in 2002.
Several issues pose downside risks to the baseline forecast.
Higher energy prices or lower productivity growth could spur higher inflation. The higher inflation could spur the Federal Reserve to increase interest rates, which would slow economic growth, particularly in interest rate sensitive areas, such as housing and consumer durables. Higher energy prices would also increase production costs, which could curtail production and lower profits. Higher energy prices would also reduce consumers' discretionary income and thus slow consumption growth. Several factors, including higher energy prices, declining or more volatile stock market values and higher unemployment could erode consumer confidence.