Housing and automotive markets lead economic rebound
Still gaining strength. That’s the latest word on the West Michigan economy, according to data collected in the last two weeks of June. As reported last month, March, April and May posted considerable economic improvement in West Michigan. The results for June are also strong, although a few indexes came in slightly lower than expected.
New Orders, our index of business improvement, fell insignificantly to +34 from +35. The Production index eased to +31 from +35. The Employment index backtracked to +25 from +28. Activity in the purchasing offices remained unchanged at +30. In general, the mood of the survey participants remains optimistic.
Looking at industrial groups, auto parts suppliers continue to cruise through the traditionally slow summer season with almost no down time. Exceptions come from GM suppliers feeling the effects of shutting down a few lines for a couple of weeks to help trim dealer inventories. Because of strong automotive sales, production schedules continue to be revised upward. Office furniture firms are seeing stronger sales. The local capital equipment firms continue to show modest improvement, and the majority of our industrial distributors had a good June.
At the national level, the industrial economy is still far less robust. The July 1 report from the Institute for Supply Management, our parent organization, noted that ISM’s index of New Orders edged up to +9 from +6, and the Production index rose to +11 from +9. The Employment index eased to +3 from an already anemic +4. These numbers are modestly positive, and ISM’s “seasonally adjusted” overall index bounced back to 50.9, up from 49.0, with 50 the breakeven point for an up versus down industrial economy. By contrast, Markit.com, the British economic firm, posted a U.S. industrial survey index of 51.9, down modestly from 52.3. The survey author concluded that U.S. manufacturing “clearly down-shifted a gear between the first and second quarters, and is at risk of losing further momentum as we head into the second half of the year.”
At the international level, the July 1 JP Morgan International Manufacturing Report remained flat. JPM’s Global Manufacturing PMI remained unchanged at 50.6. New Orders rose to 51.5 from 51.4. Japan, Russia, the U.S. and U.K. reported modestly improved conditions. In the 17-nation Eurozone, Ireland and Germany posted a modestly positive report; all of the other countries continue to post negative statistics.
Last month, we raised concern about the true economic health of China. Questions arise when the Chinese government provides numbers that depict nothing more than a slowdown, yet the HSBC survey of purchasing managers came in at 48.2, down from 49.2 in May. New export orders fell to the lowest level since March 2009. Inventories are rising, which bodes poorly for future expansion. Because of shadow banking loans similar to the subprime loans issued by U.S. banks six years ago, Gordon Chang, the author of "The Coming Collapse of China," told CNBC a few days ago that the credit crunch could lead to a “catastrophic failure” in the banking system in the next six months. Needless to say, with China’s status as the second-largest economy in the world and the third-largest customer for the U.S., this needs to be monitored closely.
Although our local index of Employment backtracked to +25 from +28, it is obvious many area firms are still adding staff. Because the local data from Michigan Department of Labor are not seasonally adjusted, June normally results in unemployment rates edging up because of the new wave of workers from colleges, high schools and trade schools entering the work force. The most recent state unemployment rate remained unchanged at 8.4 percent, but Kent County grew to 6.4 percent from 5.6 percent, Kalamazoo County rose to 7.1 percent from 6.2 percent, and Barry County edged up to 5.6 percent from 5.4 percent. Even the Holland-Zeeland “High Productivity Corridor” rose modestly to 2.8 percent from 2.6 percent. In a similar move, the unadjusted national unemployment rate rose to 7.3 percent from 7.1 percent. Overall, West Michigan continues to report better unemployment rates than the state or nation.
Local automotive parts suppliers continue to be optimists, largely because of booming auto sales. Sales for June posted a 9 percent gain over a year earlier, and an 8 percent increase for the first half of the year. Ford, GM and Chrysler posted gains of 13 percent, 7 percent and 8 percent, respectively. Stronger performances came from Toyota and Honda, both up 10 percent, Nissan up 13 percent, Subaru up 42 percent and BMW up 26 percent.
Although the current automotive SAAR sales rate is not sustainable in the domestic market, the current level of production is sustainable if the excess number of cars produced can be exported. For the Detroit 3, the quality levels have improved significantly, elevating the image of American-made cars in the world marketplace. Because of the perceived better reliability, innovative design and improved currency exchange rates, export of American-made cars is booming. In 2012, more than 1 million units produced in the U.S. were sold offshore. It is too early to tell how far this trend will go because the world economy is not overly strong.
Part of the recent economic growth can be attributed to the recovery of the housing market. A few of the manufacturing firms and distributors who respond to our survey are directly or indirectly tied in to the recovery of the residential and commercial construction business. Having weathered the worst housing recession since the Great Depression, these firms are now booming. In certain areas of Kalamazoo and Grand Rapids, housing values have risen by a whopping 12 to 13 percent in the past calendar year. This in turn fuels a recovery in consumer confidence. Higher consumer confidence results in more consumer spending. Because of the record low number of houses being listed and higher consumer confidence, residential construction is rising sharply.
Industrial inflation still appears to be subdued, with the possible exception of steel. As noted by previous reports, one problem associated with the Fed’s policy of low interest rates is it encourages speculation on all of the commodity markets. The policy of low inventories can create buying panic when supplies are threatened. This tendency can be seen in steel prices for hot rolled steel shooting up about 10 percent because of blast furnace outages in Ohio and Brazil and a work lockout in Ontario. Among other “big ticket” commodities like tin, copper, aluminum and PVC resin, prices are retreating because of the lackluster world demand.
The outlook for West Michigan remains positive, even though the national economy may be slowing. So far, the national slowdown has not resulted in a slowdown in auto sales, and the auto production boom continues to keep our local economic numbers very positive. The sales picture for other key industries such as office furniture is improving, as are the markets for our local firms associated with aerospace. When all of these industries are doing well, so are the industrial distributors that support them. Although regionally we still have a few pockets of weakness in the form of individual firms, the West Michigan economy is currently on a positive track.
Brian G. Long, Ph.D., is director of supply chain management research at Seidman College of Business, Grand Valley State University.