Michigan’s economy is slowing and an uncertain economic future has returned as President-elect Donald Trump’s administration prepares for its second term in Washington, DC

But economists at the University of Michigan predict this the state economyalthough adversely affected by planned tariffs and restrictions on immigration under the next administration, will see job and income gains from tax cuts.

How rosy the next two years are economically depends on which of Trump’s planned policies are actually implemented and how U.S. trading partners react to those policies, according to the university’s forecast released Thursday at the 72nd annual Economic Outlook Conference.

Despite the predicted challenges, experts believe Michigan’s economy, while shrinking over the next two years, will hold up under increased pressure.

“While we recognize the very real risks of economic disruption ahead, we believe the most likely outcome is a state economy that is resilient to these challenges over the next two years, with moderate employment growth accompanied by relatively low unemployment, acceptable inflation and rising real incomes, “, the economists said in the report. “The US economy has gone through times of great uncertainty before and emerged intact. We predict that both Michigan and the nation will follow that path over the next two years.”

Stay up to date with all things West Michigan business. Sign up for our free newsletter today.

Inflation, a key issue in the last election, in the state is expected to slow to 2.2% in 2025, down from 3.3% this year, before new tariffs on Chinese imports under Trump push it up to 2.7% in 2026.

And the unemployment rate in Michigan is expected to remain flat, declining to 4.6% at the end of the year to 4.3% by the end of 2026 as labor force growth slows due to planned changes in immigration policyincluding further limiting work visas and deportation efforts.

Job growth is expected to continue to slow as it has since the end of 2021. The state has actually lost roughly 13,400 jobs since the state employment peak in May.

Economists attribute the state job slowdown to high interest rates, because the state’s workforce is more sensitive to interest rates than other states.

“In many ways, the national labor market rebalancing is exactly what the Fed hoped to create with its policy actions,” the report said. “Unfortunately for Michigan, our relatively interest-sensitive industry mix means that higher interest rates have taken a greater financial toll than nationally.”

But like The Federal Reserve continues to cut interest ratesemployment growth is expected to reverse slightly over the next two years, with the state adding an estimated 19,000 jobs in 2025 and 26,700 in 2026.

“Michigan has really had a soft patch in terms of job losses going back to May. We expect that soft launch to the end of the year. We expect job growth to resume in 2025 and into 2026, and that will be in a more moderate pace than we’ve seen coming out of the pandemic,” said Gabe Erlich, director of the UM Research Seminar for Quantitative Economics. “Part of the reason growth is slowing is that we are at an economically neutral point. We don’t have that recovery base from reopening the economy that supported growth.”

Despite the slower job growth, Michigan still has a healthy labor market, Erlich said.

Federal policies that could halt that growth, however, lie in new tariffs and the elimination of tax credits for electric vehicles, which Trump has promised to cut. Although Trump has said he intends to implement new universal tariffs, the economist only included new tariffs against China in his forecast.

Economists expect the state’s manufacturing sector to continue its hemorrhaging, losing another 1,900 jobs next year after losing 9,300 this year.

But expected tax cuts should offset the economic damage from those plans, the economists said.

This results in improved per capita income across the state, which has increased since the pandemic.

Economists forecast Michigan’s per capita income to reach $64,000 in 2024 and rise to $68,500 in 2026.

Economists also took a rosy view of the next administration’s deportation plan, which Trump has said will be the most aggressive in U.S. history, because they believe such efforts will fail.

“We are projecting a stricter immigration policy in order to produce substantially slower population growth both nationally and in Michigan,” reads the forecast. “While we expect efforts to deport undocumented immigrants, we are skeptical that such efforts will result in widespread removals. We do, however, expect the flow of new international immigrants into the country to slow significantly.”

While the UM economists maintain their bullish outlook on the economy going forward, they put caveats on the forecasts for the uncertainty looming over the looming change in presidential administrations.

“While the risks to our forecast appear relatively balanced at this stage, the final details of new policies over the course of President-elect Trump’s second term will determine how much Michigan’s outlook shakes one way or the other,” the forecast reads. “Although Michigan’s economy has navigated choppy waters recently, our baseline forecast predicts moderate employment growth over the next two years, accompanied by relatively low unemployment and rising real incomes.”

Crain’s Grand Rapids Business reporter Mark Sanchez contributed to this story.

More from Crain’s Grand Rapids Business:

Developers unveil 2 new options for long-delayed mixed-use project in Walker

Kalamazoo industrial engine repair expands to West Virginia with latest acquisition

Cornerstone Alliance hires Muskegon economic developer as new CEO