Area Economy

West Michigan’s economy shows a little summer hesitation

September 20, 2013
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Very slightly negative. That’s the latest word on the West Michigan economy, according to the data collected during the last two weeks of August. Just like July, business activity slowed in August.

New Orders, our index of business improvement, turned modestly negative at -4, down from last month’s +7, but much slower than June’s +34. The Production index eased to -6 from +17. It was disappointing to see the Employment index fall to 0 from +21, our lowest reading since January 2010. Following the same pattern, the pace in the purchasing offices, our index of Purchases, came in at -2, down from +7.

Once again, if not for the season and good statistics from other state and national reports, we could raise doubts about the future. However, our number will probably flip back to positive in a month or two.

As we look at local industrial groups, the “plateauing” we saw last month continues. Despite industry predictions to the contrary, 2013 is not turning out to be a boom year for the office furniture business. Most firms are not up, not down, but stable. By this time of year, automotive parts producers are near peak production for the new model year. They are also stable, and recent strong auto sales reports bode well for the future. However, new business will probably not come to the auto parts industry until October or November when the major firms begin assessing the acceptance of 2014 models. The capital equipment firms turned in widely mixed performances, and firms with improved performance were offset by those that have gotten tied up in the summer slump. Probably because of the summer vacation season, many industrial distributors came in lower than expected.

Turning to the national economy, the Sept. 3 report from the Institute for Supply Management, our parent organization, reported that New Orders rose significantly to +18, up from +7. The Production index posted a more modest increase to +20, up from +15. However, the Employment index, which hasn’t performed well in recent months, backtracked to +7 from +9. All of these numbers resulted in ISM’s overall manufacturing index edging up to 55.7 from 55.4. Since the break-even point is 50.0, we can say that the national economy is still modestly positive.

A slightly different view comes from Markit.com, the British economic forecasting firm, which compiles surveys for many industrial countries. The manufacturing Purchasing Managers’ Index edged slightly lower to 53.1 from 53.7, which “signals a slower, but moderate, rate of manufacturing expansion.” Markit’s index of New Orders rose to 55.7 from 55.5.

At the international level, the Sept. 3 report from many purchasing managers around the world came in modestly positive. Markit.com’s “Eurozone Manufacturing PMI” rose to another two-year high of 51.5, up from last month’s 50.5. The index of New Orders hit a 27-month high. Of the larger European economies, Ireland, Germany, Spain, the Netherlands and Italy posted positive manufacturing PMIs. Even the PMI for Greece, which has been negative for more than four years, has come back to 48.7. Observers have said that is evidence of capital starting to flow back into Greece because of the “fire sale” prices for what is left of its industrial capacity.

Many of the BRICS countries have not done as well in recent months. Indeed, part of the BRICS success was the result of a weak dollar and low interest rates among all of the reserve currencies. The inkling by the Federal Reserve that interest rates may soon start to edge up has had an especially negative impact on the Brazilian and Indian currencies, resulting in demands that the Federal Reserve keep the interest rates low. Softer demand for some commodities has restricted both the Russian and Australian economies. However, the August PMI for China, which had been falling for several months, came back to 50.1.

Chinese raw material prices increased for the first time in six months. Since China is now the world’s major consumer of lead, tin, nickel, steel, copper, coal and practically every other major industrial commodity, this could soon mean higher commodity prices around the world.

For Michigan, the strong auto sales report for August was the most important news. The U.S. sales rate came in 17 percent higher and now stands at 10 percent for the year to date. For some firms, it was their best month in more than five years.

Of the major brands, Honda led the way with a 27 percent increase, followed closely by Toyota gaining 23 percent and Nissan 22 percent. Smaller foreign nameplates like Subaru posted a whopping gain of 45 percent. Domestically, GM gained 15 percent, while Ford and Chrysler posted 12 percent gains.

A note of caution about automobile sales is worth repeating. Economists are always searching for an “equilibrium,” a magical point where supply and demand meet at a sustainable level. Several articles have been published about the plateauing of the number of miles motorists are driving. The beginning of the Great Recession marks the first time since the 1940s that number has not risen. Even in Michigan, driving is down 7 percent since 2005. The warning is this: Part of the high auto sales in recent months has been the unleashing of pent-up demand for replacing aging vehicles, lower interest rates and looser credit standards. So unless we start driving more or the cars start wearing out sooner, the current sales rate is higher than “equilibrium.” In more contemporary terms, this level of sales constitutes a slight bubble. If we run into another hitch in the economy, auto sales will fall until we again come back into balance.

A segment of the local press has recently raised the issue, “Is the recession over?” There is not an easy answer. Given the standard definition, the Great Recession was declared “over” in about June 2009 when GDP turned back to positive. In actuality, this bottoming out is just the point when we start to climb out of the hole, and real “recovery” does not occur until the GDP number returns to the pre-recession level. In this same context, some will argue the recession is not over until the unemployment rate returns to prerecession levels. Many years ago, 3 percent was considered to be full employment. In more recent years, 4 percent has become a more acceptable number.

Anecdotally, certain segments of the employment picture have clearly turned the corner, such as manufacturing and new home construction. With Kent County unemployment now at 7.2 percent, the unemployment numbers are four percentage points better than 2009 but far above the 2.1 percent reading of 10 years ago. Also, we will soon hear more about a little noticed statistic the Bureau of Labor Statistics collects called U-6, which adds to the number of people looking for work things like (1) people working but underemployed for their skill set, (2) part-time workers looking for long-term employment, and (3) people discouraged and no longer actively looking for work but that would take work if it was offered. Nationally, this number in July came out to about 14 percent, which is down only about 3 percent since the pit of the Great Recession.

As we move into early fall, the world geopolitical situation continues to be a major concern. Some kind of war action in Syria seems certain. In Washington, there is still a looming battle brewing over the debt ceiling and a potential government shutdown. Most everyone agrees inattention to our domestic debt situation will destroy the American dream, but agreeing on a solution seems increasingly unattainable.

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

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