@OR1 and @andy49898546 : Your high school’s profile will have information that will help the AOs compare your student to his high school.
Each high school is different, so the extent to which the profile information will enable the comparison will vary.
High schools typically provide a subset of the following information: average GPAs, class rank, grade distributions, average standardized test scores, the number of students taking advanced placement courses, and the overall academic rigor of the school curriculum. If the school profile has any demographic information or if Michigan utilizes any 3rd party demographic information like from the College Board, the admissions officer can also use that as context.
In the case of an unknown school, essays/anctivities/honors and especially the teacher recommendation would likely take on even more importance. Does the student have any activities or honors that could indicate they are 1/1 at the high school (an engineering applicant who is recognized as “best math student” each year, for instance)?
If the teacher recommendation is simply generally positive, it would not be making a strong case for a student from a school that is not well known to Michigan AOs. But if the language is specific and compelling, with phrases like “stands out among peers” or “strongest in recent years”, then that will carry far more weight than one where a teacher says a kid works hard, expresses curiosity about the subject, participates in class, and is involved in school outside the classroom.
My OOS student applied several cycles ago, when EA was released in December and Michigan still did monthly waves of acceptance afterward. When my child was deferred in EA, the high school principal wrote to the AO to say that the student had made a once-in-a-generation impact at that high school and that Michigan couldn’t continue to call themselves “Leaders and Best” if they didn’t accept her. 
I don’t say this to brag, but to indicate the kind of recommendation that helped my student get into Michigan in January, when the first wave of deferrals were accepted that year. My kids attended a small, rural high school that hadn’t sent a student to Michigan in about 30 years and sends about one student every other year to a top 20 or top 30 college.
My student’s SAT scores were a couple of hundred points above the school’s averages, but not impressive enough by Michigan standards to get accepted EA. My guess would be that it was the activities list, which was strong overall but also included something that had been evaluated by and received recognition from about 5+ national groups (so the principal’s endorsement was correlated) and the fact that the principal made the effort to reach out with such a specific and enthusiastic recommendation.
So, even with a school with which the AOs don’t have much — or any — history, factors in the school report, the applicant’s essays/activities, and the strength and specificity of the teacher recommendation would all give insight into how an applicant compares to his peers.