Area Economy

Weather woes put parts of economy on thin ice

March 14, 2014
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Still slow, but improving. That’s the latest word on the West Michigan economy, according to data collected during the last two weeks of February.

New Orders, our index of business improvement, advanced to +19 from +14. The Production index posted a bigger gain, rising to +18 from +7. The Employment index remained in double digits at +10, although lower than last month’s +12.

Activity in the purchasing offices picked up considerably; the index of Purchases advanced to +16 from +6. The wave of annual price increases continued into February, so our index of Prices came in at +18, virtually unchanged from last month’s +19. It was a little surprising to see the index of Finished Goods Inventory rise to +9 from 0, so we will be hopeful that the spring thaw will result in more sales to clear these inventories.

Looking at local industrial groups, the “integrated” office furniture companies are still in a winter slump, probably because of orders placed in November and December to use up funds before the end of the year. However, several of our specialty office and steel furniture fabricators had a much better month.

In a repeat of last month, auto parts firms turned in a mixed performance, but the bias was still to the up side. The capital equipment firms are still positive but frustrated by the slow pace of decision making. Any of the industrial distributors that support heavy equipment had a busy February helping to repair snow removal vehicles. Other distributors remained steady. Overall, most firms in our survey were slightly busier in February than January.

For the national economy, the March 3 report from the Institute for Supply Management, our parent organization, reported that New Orders for ISM’s manufacturing index bounced to +19 from +8. The Production index came in unchanged from January’s +8. Nationally, job growth in the industrial sector is better but still disappointing. ISM’s Employment index remained in single digits, but rose to +7 from +2.

ISM’s overall manufacturing index registered a significant uptick to 53.2 from 51.3. However, the nonmanufacturing index dropped 2.4 points to 51.6. Bad weather was the presumed cause.

Economic forecasting firm Markit posted a much stronger report for the United States. Markit’s Purchasing Managers Index jumped to 57.1, up from February’s 53.7. The New Orders index bounced to 59.6 from 53.9, one of the best gains in three years. Markit’s index of New Export Orders flipped back to positive at 51.6, up from 48.4. Order Backlogs also jumped to 57.9 from 49.2. 

At the international level, the March 3 report from JP Morgan’s “32-nation” Global Manufacturing PMI came in slightly stronger at 53.3, up from 53.0. The indexes from Russia, China and South Korea retreated slightly but were offset by strong performances in Japan, Canada, the United States and the U.K.

Again, China is the country to watch. In recent years, China has become the largest importer of oil and iron ore. Some of its taconite iron pellets actually come from northern Michigan. China is also the world’s largest user of steel, copper, zinc, lead, tin and many other big-ticket commodities. An economic downturn would impact the entire world market for commodities. Hence, the fall in HSBC’s PMI to 48.5 from 49.5 is not good news. Furthermore, the latest numbers for February show an 18 percent drop in exports. The rising value of the yuan makes exports less attractive to foreign customers, especially in Southeast Asia. Most importantly, new orders from the United States and Europe are down considerably, partially because of much higher labor costs.

With the ongoing problem of a shaky shadow banking system, the next few months will be critical. A total economic collapse in China, the world’s second largest economy, would draw the rest of the world back into a recession. This is not too likely to happen, but if it does …

In our survey’s two categories relating to the business outlook, the Short Term Outlook index retreated slightly to +28 from +32, which is still much better than the +12 we reported in November. However, the Long Term Outlook index dropped to +43 from +60 for no apparent reason, although some analysts would blame any drop on the bad winter weather.

For Michigan, the flat auto sales report for February drew some attention. Part of the drop can certainly be attributed to weather, although some analysts have noted higher interest rates had an impact, as well. For all of February, industry sales were a mere 0.03 percent lower than in February 2013, resulting in a year-to-date total down about 1 percent. Fueled by a 47 percent increase in Jeep sales, Chrysler posted a solid gain of 11 percent. Because of several new models, Nissan gained 16 percent. All other major brands were lower. GM lost 1 percent and Ford dropped by 6 percent. For foreign nameplates, Honda fell 7 percent, while Hyundai-Kia and Toyota each edged 4 percent lower. One of the bigger disappointments is Volkswagen, where sales fell 9 percent. The company has been plagued with problems in the dealer network.

The current international geopolitical attention has shifted to Ukraine. To the United States, the current economic impact of the trouble in Ukraine is more psychological than economic. No one wants or expects to see a return to the Cold War, but the threat is destabilizing the world economy. If conditions worsen, the supply of petroleum, both oil and natural gas, to Europe could be restricted or stopped. If so, the European economy would tank almost immediately. The impact on the U.S. would be to halt our current slow growth and possibly turn the economy slightly negative.

So far, the Ukrainian impact has been limited to rising commodity prices. Since Ukraine is the bread basket of Eastern Europe, any disruptions in the spring planting cycle will drive corn, barley and soybean prices higher around the world.

This past month’s economic news noted a revision in the fourth quarter GDP from 3.2 percent growth down to 2.4 percent. As a result, many economists are starting to be less optimistic about a booming second half of 2014. Indeed, the current numbers we are collecting in West Michigan depict a third and fourth quarter of continued slow growth, much resembling the pattern we have seen since April 2009.

It is worth repeating that we are hoping for a moderation of auto sales at or near the present levels, forestalling any kind of price wars between the manufacturers, or even worse, a boom-bust cycle resulting from overproduction.

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

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