Area Economy

Long-term economic outlook better for West Michigan

October 11, 2013
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Growing very slowly, but growing. That’s the latest word on the West Michigan economy, according to the data collected during the last two weeks of September.

New Orders, our closely watched index of business improvement, flipped back to positive at +6, up from August’s -4. The Production index also turned positive at +2, up from -6. It was gratifying to see the Employment index jump to +10. Industrial inflation, reported as our index of Prices, retreated to +8 from +12. With both of our Inventory indexes nearly flat at +4 and +3, respectively, it appears our local firms are doing a credible job of managing inventories. Barring economic disruptions at the national or international level, the current trend of slow growth should continue.

As we look at local industrial groups, some auto parts firms say new business may not come until October or November when the major firms begin assessing acceptance of 2014 models and fine tune their forecasts for the winter and spring selling seasons. Others are at full capacity and see no change in the immediate future. The office furniture business remains stable and profitable, although reports were mixed. Business conditions for industrial distributors also were mixed, but the bias was to the positive side. Because of the end of the vacation season, the business reports from capital equipment firms were generally positive. Many would-be buyers hold off major decisions until summer is over.

At the national level, the report from the Institute for Supply Management, our parent organization, reported that New Orders for ISM’s manufacturing index remained relatively high at +17, down from last month’s +18, but up from July’s +7. The Production index eased slightly to +15, down from +20. ISM’s Employment index eased to +6 from +7. Adding these numbers together, ISM’s overall manufacturing index edging up to 56.2 from 55.7, while the overall non-manufacturing index edged up to 58.6 from 56.0. 

A contrasting view of the U.S. economy comes from Markit.com, the British economic forecasting firm. For September, Markit’s manufacturing Purchasing Managers Index, edged slightly lower to 52.8 from 53.1. Although still positive, Markit’s index of New Orders eased to 53.2 from 55.7. The index of New Export Orders flipped negative to 49.0 from 52.0. Overall, the Markit report concludes the U.S. economy is still modestly positive but less robust than three months ago.

Turning to the international level, the October reports from some purchasing organizations continued to show modest improvement. Keeping in mind that an index of 50.0 is the up/down dividing line, JP Morgan’s “32 nation” Global Manufacturing PMI edged up to 51.8 from 51.6. HSBC’s China Manufacturing PMI rose to 50.2 from 50.1. For Brazil, HSBC’s Manufacturing PMI rose to 49.9 from 49.4. One of the strongest reports came from Canada, where the Royal Bank of Canada’s PMI bounced to 54.2 from 52.1 driven by sharply rising exports. However, the Markit Eurozone PMI eased to 51.1 from 51.4. Greece, which came close to break-even last month at 48.7, dipped to 47.5. Russia, which had been modestly positive for the past two years, now seems stuck at the August and September index of 49.4. Recalling that the Markit.com September U.S. index rests at 52.8, we are left with the conclusion that the world economy is edging in a positive direction, but the improvement rate is still very slow.

In this month’s survey we added two new questions relating to future business outlook. The first asked survey participants about their view of business conditions for the next three to six months. For September, we recoded the index of Short Term Outlook to be a rather modest +12. The second new question asked about business conditions for the next three to five years. It was gratifying to report our first Long Term Outlook index to be a whopping +64. For the future of the West Michigan industrial economy, the perception looks very promising.

In Michigan, it is typical for the employment picture to improve slightly in August, and this year was no exception. The August unemployment report released by the Michigan Department of Technology, Management & Budget Sept. 26 noted the state seasonally unadjusted unemployment rate fell to 8.7 from 9.7. Similar results were reported at the local level, as noted by Kent County’s unemployment rate falling to 6.4 percent from 7.2 percent. The rate in Kalamazoo County fell to 7.2 percent from 8.3 percent. The second lowest county rate in the state was reported for Barry County, which fell to 5.8 percent from 6.5 percent. Ottawa County came in at 6.6 percent. With so many of our unemployment numbers consistently landing well below state and national rates, it is easy to claim the West Michigan economy is doing better than most.

For the first time since May 2011, the monthly report for automotive sales was not positive. Although a shift in the accounting period that gerrymandered a couple sales days to the previous month can account for some of the difference, the U.S. sales rate fell a little more than expected from +17 percent to -4 percent. 

Bucking the trend, Ford led the way with a 6 percent increase, followed by Chrysler up a scant 1 percent. But the other big players were all down. General Motors fell 11 percent, Honda slipped 10 percent, Nissan eased 6 percent and Toyota tapered by 4 percent. The standardized rate of sales, the SAAR rate, came in at 15.3 million units, the weakest showing since April’s 15.2 million rate. However, as we have reported in previous months, a SAAR rate of about 15 million units is about what the current market can absorb without creating an industry bubble. Having sales rates in the 16 or 17 SAAR may sound appealing, but such a rate is not sustainable. Hence, this month’s automotive sales rate can be regarded as positive for the long term, even if it is a little lower. Excess auto sales could set us up for an unwelcome boom-bust cycle. Furthermore, at the present sales level, most of our local auto parts firms are still very profitable and still hiring. The Detroit Three auto firms are also profitable and expanding for the first time in many years. Since a record of more than 1 million cars produced in the U.S. were sold overseas in 2012, there is still room for expansion. Last but not least, many of our West Michigan auto parts suppliers now are “world competitive” in terms of price, quality and service.

With all of the issues, egos, scenarios, risks, hopes and opinions, the outcome of the shutdown in Washington is almost impossible to predict. Obamacare began Oct. 1, and we are beginning to get reports of the good, the bad and the ugly. Proponents claim the computer glitches and numerous burdensome taxes are the price we have to pay for the new insurance program. Opponents claim the cost alone to the federal government could bankrupt the country and run our unemployment rate up to about 27 percent like Greece. The budget fight will probably not even be resolved before the second fight over the debt ceiling begins. Approximately 1 million “non-essential” federal workers are now on furlough. Budget hawks say if they are truly non-essential, they should be permanently furloughed. The reports on consumer confidence have turned very negative. For Michigan, we will probably see little economic impact unless the shutdown lasts more than a month.

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

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