Michigan economists warn tariffs could shave production, cost jobs in state auto sector

University of Michigan economists and a Federal Reserve Bank of Chicago Detroit-branch policy adviser said at the May 2025 Consensus Revenue Estimating Conference that new tariffs and retaliatory measures are likely to slow U.S. growth and will impose a tangible cost on Michigan's auto-dependent economy.

The warning came as Yinyu Zhang, a U.S. forecasting specialist at the University of Michigan Research Seminar in Quantitative Economics (RSQE), summarized the national outlook: “It contracted by 0.3% in the first quarter,” she said of U.S. real gross domestic product, adding that the pullback was driven by a surge in imports that subtracted 4.8 percentage points from growth.

Those national data, Zhang said, combine with RSQE policy assumptions that include substantial, sustained tariff rates and a fiscal package that raises tariff revenues. The RSQE joint outlook projects tariffs will raise consumer prices and restrain consumption and investment late in 2025, with core inflation expected to poke up in mid-2025 before later easing.

Why it matters: Michigan's economy remains closely tied to light-vehicle production and parts supply chains. RSQE director Gabe Ehrlich and his colleagues modeled tariff impacts on the auto sector and concluded that higher effective tariffs and retaliatory duties would raise vehicle prices and reduce production and exports, with measurable employment effects in Michigan.

Ehrlich presented RSQE's estimate that an average effective tariff on imported vehicles in the scenario they modeled would raise light-vehicle prices about 13.2% (roughly $6,200 at 2024 prices, if margins do not change). He said the combined effects of higher domestic production costs, reduced consumer purchasing power and retaliatory tariffs would reduce U.S. light-vehicle production by nearly 200,000 units per year in their baseline.

On Michigan specifically, Ehrlich reported an estimated 1.8% decline in domestic auto production in the scenario, which he translated to roughly 3,300 direct auto-sector job losses in Michigan. Using RSQE's statewide multiplier (approximately 4), that would imply about 13,000 total job losses statewide tied to the model's assumed tariff environment.

Federal Reserve Detroit-branch automotive policy adviser Kristen Gijek, who followed the RSQE presentation, emphasized the same uncertainty and supply-chain risks in conversations with manufacturers and suppliers. Gijek said the industry is operating with underutilized capacity in places and that many firms remain vulnerable to part shortages, licensing changes for critical inputs, and rapidly shifting policy that could alter incentives for both domestic production and investment.

What was discussed - National economics: Zhang and colleagues flagged a Q1 real GDP contraction of 0.3% and noted that much of that weakness came from an unusual spike in imports. They also cited declining inflation measures (CPI year-over-year around 2.3% in April; core PCE near 2.6% in March) alongside rising measures of policy-related uncertainty. - Tariff assumptions and channels: RSQE described tariff scenarios that include high statutory tariffs on certain vehicle imports, a higher effective tariff rate when exemptions and retaliations are accounted for, increased costs for domestic production (RSQE estimated a 5.7% rise in domestic production costs in their scenario), and retaliatory tariffs that would hit U.S. auto exports. - Michigan impacts: Ehrlich described a scenario in which light-vehicle production declines nationally and Michigan-specific production and employment fall, including the 3,300 direct-job/13,000 total-job estimate described above. He cautioned that the estimates are uncertain and depend on the final scope of trade and tariff policy and on how supply chains adjust over time. - Industry perspective: Gijek said she is hearing specific short-term part shortage threats and stressed that China controls a large share of processing for some critical minerals (rare earths), creating a potential pinch point; she compared the risk to the earlier chip shortage in magnitude and breadth.

Limits and uncertainty - RSQE and the Federal Reserve presenters repeatedly characterized their estimates as contingent on policy and implementation details and stressed the high level of uncertainty. Ehrlich said medium-run adjustments would likely take three to five years if supply chains and capacity shift, and he noted that short-run disruptions could be worse if suppliers fail before adjustments occur. Gijek highlighted industry reports of near-term part shortages that could cause temporary plant shutdowns.

Ending note: RSQE and Federal Reserve presenters urged close monitoring of trade and tariff developments and the high-frequency supply-chain signals that could quickly change the economic outlook for Michigan's manufacturing workforce and local communities.