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How would a national recession affect Detroit?

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High construction costs and a relatively soft market might insulate Detroit from the worst effects

A high view of a rectangular construction site where a foundation is being built below ground. In the foreground is a triangular-shaped building with a copper roof. The background is filled with tall buildings.
Construction at the Hudson’s site downtown.
AP

Many economists believe a national economic recession is on the horizon. A number of indicators, like the inversion of the yield curve and shaky stock market, point to a downturn of some sort in the near future. Not to mention that economic health is cyclical and the United States is undergoing the longest period of growth in the country’s history.

Given the likelihood, it’s worth asking how a recession would affect the local economy. Are Detroit’s fundamentals different enough from other cities that it would be hit harder by one or able to weather it better?

A recession’s severity and timing are impossible to predict with much accuracy—few people foresaw the devastating effects of the subprime mortgage crisis that caused the 2008 recession. The same goes with predicting how Detroit could stand up to one.

But looking at the current state of Detroit’s economy could give some clues about the future.

Housing demand

Despite steady growth, Detroit’s fundamentals are still well below the state and national average in almost every category. True, the unemployment rate in the city has dropped from 28 to 8.8 percent since 2009, but Michigan’s rate is 4.2 percent and the country’s is 3.5 percent. Detroit’s median income has risen over the same time, but only to $31,283. Meanwhile, Michigan’s is $56,697 and nationwide it’s $59,039.

Detroit’s poverty rate still hovers around 35 percent and the population has plateaued—a modest improvement after decades of loss.

These numbers concern Mark Skidmore, a professor in the Department of Economics at Michigan State University.

Detroit’s housing prices may have stabilized after bottoming out during the mortgage and tax foreclosure crises. But because population isn’t increasing alongside housing prices, Skidmore says, “There shouldn’t be much more demand for housing. That’s as a whole; there might be pockets where demand is pretty high. But there are huge areas where it’s not.”

Those factors might make Detroit’s housing market less stable than the rest of the country.

On the other hand, banks have been relatively tight despite the steady increase in home mortgages. That might not be great for homeownership now, but means there’s little chance of another subprime mortgage crisis.

“The credit available for housing in Detroit has continued to be a challenge and that’s been an impediment to the current recovery,” Sandy Baruah, president and CEO of the Detroit Regaional Chamber, says. “People being underwater on mortgages is highly unlikely because lending standards have increased so much and credit has been so careful, particularly in Detroit.

“When comes to housing,” he adds. “We don’t anticipate seeing anything like the Great Recession.”

Will development slow?
In the foreground is a courtyard with trees and a large pedestrian space. There are people in the courtyard. Surrounding the courtyard are various city buildings.
Rendering of the Monroe Blocks, where construction has stalled.
Schmidt Hammer Lassen Architects

In development terms, Detroit is still a “weak market” unable to finance large projects without significant subsidies from the public sector.

“If we go into a recession, one of two things could happen,” Skidmore says. “Credit could dry up because no one wants to take a chance. Or policymakers could put their foot on the gas and push liquidity out through even more subsidies.”

The federal government, however, might be reluctant to intervene given congressional gridlock and its own budgetary challenges. “We’re running $1.2 trillion annual debt increases in a period of modest economic growth. What happens if we have a recession? That number grows to $2 trillion—that’s crazy.”

Detroit developers like Clifford Brown, principal at Woodborn Partners, are less concerned. Brown says that development is already being suppressed by the high costs of construction, which have stalled projects like the Monroe Blocks and Cass & York.

“There’s so much demand versus supply in the marketplace,” Brown says. “We’re already crippled because of construction costs. It’s hurting more than a recession would.”

He also doesn’t expect a big change in access to capital. The government is unlikely to pump the brakes on incentives during a recession, and many financiers of Detroit projects tend to be community development financial institutions like Capital Impact Partners and local banks.

“Access to capital has already been tricky because people who are not regional or local banks don’t truly understand Detroit,” Brown says. “While there might be some pullback, the people investing in Detroit know Detroit, and have a sense of confidence in the city.”

Population and jobs

Brown admits that he’s “a little worried” about demand for rental space dropping. Whether or not Detroit can maintain its population during a recession is one of the biggest questions facing the city.

Jobs will probably be the most significant factor keeping people in the city. Some of the biggest job creators are still and will be the auto companies. Fiat Chrysler is building a new plant on the east side, Waymo is retrofitting the former American Axle & Manufacturing facility, and Ford is redeveloping Michigan Central Station. All these projects are set to bring thousands of new jobs to the city, many of which will likely go to Detroiters.

Skidmore says that the auto industry tends to be more susceptible to recessions as families look to defer on big ticket spending items like cars.

But Baruah says that across the board, companies are much better prepared for an economic downturn than in 2008. “The Great Recession is still not far from people’s minds,” he says. “Everyone’s been very cautious in terms of capital expenditures, hiring, and expansion plans. Banks’ credit standards and reserve standards are much greater and more stringent.”

With those reserve funds, Baruah expects far fewer layoffs than the last recession.

Because of the number of factors involved, predictions don’t mean a lot in economics. Ultimately, only time will tell how Detroit withstands a recession.