Area Economy

West Michigan economy surges upward across the board

March 15, 2013
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Nicely up. That’s the latest word on the West Michigan economy, according to the data collected in the last two weeks of February. Both December and January were flat, but as we rolled into February, things started to pick up. Our closely watched index of business improvement, which we call New Orders, came in at +16, up considerably from the +4 we reported in December and the dead flat 0 in last month’s report. Following the same trend, the Production index shot up to +21 from January’s bearish -6. Activity in the purchasing offices also turned back to positive at +12, up from -1. The Employment index, already positive at +10, rose nicely to +22. Just like last month, several large employers are very optimistic about 2013.

Looking at industrial groups, auto parts suppliers remain positive, and some are busier due to production schedules being revised upward. Similar to last month, the capital equipment firms are widely mixed, but some are reporting business is picking up considerably. For industrial distributors, this month’s bias was to the up side, with no firms reporting downticks. Finally, the office furniture firms still are holding their own, but the market shows signs of topping out or stabilizing at the current level.

Turning to national statistics, the March 1 report from our parent organization, the Institute for Supply Management, continued to pick up steam. ISM’s index of New Orders bounced to +21, up from +7 last month and up considerably from -7 in the December report. The Production index also shot up to +21 from +6 in January and -4 in December. The Employment index is always a laggard, but it was still good to see a modest advance to +7 from +5. ISM’s overall index rose to 54.2, up from 53.1. The report further notes at least some of the gain can be attributed to new export orders. In contrast, the British economic firm Market.com posted a U.S. industrial survey index of 54.3, down from last month’s lofty 55.8. Statistically, both reports are very close to each other.

The March 1 JP Morgan international manufacturing report is not quite as optimistic, partially because of continued economic problems in several key European countries. JPM’s Global Manufacturing PMI edged lower to 50.8 from January’s 51.4. New Orders eased to 51.5 from 51.8. In addition to the United States, improved business conditions were noted in Mexico, Ireland, Russia, the Netherlands and Brazil. Output fell modestly in the U.K., but France, Italy and Greece continue to drag the averages lower. The index for the 17-country Eurozone came in at 47.9, unchanged from last month. China, the third best customer for the U.S., remained positive, but the PMI dropped to 50.4 from 52.3. The survey author continues to believe the strong countries will continue to more than offset the weak countries for most of 2013, assuming current efforts to refinance the European sovereign debt remain on track.

As we have noted for many months, rising auto sales continue to boost the Michigan economy, and West Michigan is in a particularly good position to take advantage of the improved production schedules being posted for April, May and June. However, we expected auto sales to top out, and it appears they are now stabilizing at a SAAR rate of about 15 million vehicles per year. The industry analysts forecast a sales growth of about 3 percent for the year, so February’s industry gain of 4 percent is right on track. For the Detroit Three, Ford and GM led the way with 9 percent gains, followed by Chrysler at 4 percent. Among the foreign nameplates, Toyota gained 4 percent and revitalized Volkswagen ramped up 10 percent. Most of the others lost a little ground, with Honda down 2 percent, Hyundai 3 percent and Nissan 7 percent.

In the U.S., the economy was supposed to be ravaged by the “sequester” of $40 billion, resulting in airports closing, firefighters not responding, teachers being laid off, and as one politician pontificated, the loss of 170 million jobs. Never mind that the total labor force is only about 155 million. We are now looking at the sequester as another round of so-called “political theater.” Another $40 billion sequester will kick in later this year, but even the total of $80 billion is only about 3 percent of the federal budget. In short, except where it can be deliberately politicized, the cuts appear as vapor. Granted, states that have a big military presence may see more sequester consequences, but for West Michigan, it will probably be unnoticed.

When assessing the world economy, as the late Gilda Radner used to say: “It’s always something.” One of this month’s more viral spats was over a potential currency war among the “reserve” currency nations. In general, about 95 percent of the currency reserves for the entire world are amassed in only four currencies: the U.S. dollar, the euro, the yen and the pound sterling. They often compete to see which can be regarded as best, or as some put it, which can be the worst. At a meeting of the G20 about two weeks ago, ire was being aimed at Japan, because the yen had been rising in value faster than the other three reserve currencies. Japan agreed to “quit trying to manipulate its currency,” and the yen has subsequently stabilized in the world markets. The bottom line is that this seemingly small tiff clearly demonstrates how just one more rivalry can upset the world financial order.

Otherwise, the currency situation in Europe continues to show more signs of stabilization. Interest rates have generally fallen significantly in recent months in all the troubled countries, especially Ireland. Even interest rates on the 10-year bond in Greece have come down to 8 percent, falling from a high of 50 percent a few months ago when it looked like a total default was imminent. All of this apparent good fortune is the result of the austerity measures implemented by these countries, even though they have been vastly unpopular with some of the workers and continue to generate strikes and protests. Needless to say, the indecisive Italian elections of a few days ago and the recent militant protests in Portugal still stand as reminders that the crisis is not over yet.

The bad news for the United States is, of course, that the next two stumbling blocks on the calendar are more substantial than the sequester. On March 27, the “continuing resolution,” which has kept the government going since the last real budget was passed in 2009, comes due. Just like it did in late 1995, failure to act could shut down non-essential functions of the federal government. The odds are still about 70 percent that this will happen, but how long the shutdown will last is difficult to guess. Even if we get past this crisis, the next fight will be the May 18 deadline over the debt ceiling.

Yes, Gilda Radner, “It’s always something.”

Brian Long, Ph.D., is director of supply chain management research at Seidman College of Business, Grand Valley State University.

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