Index for long-term outlook is reason for optimism
Growth accelerates. That’s the latest word on the West Michigan economy, according to data collected during the last two weeks of March.
Our closely watched index of business improvement, which we call New Orders, advanced to +27, up from +19. The Production index rose to +20 from +18, and the Employment index, which is a reflection of local industrial growth, jumped to +19 from +10.
The index of Purchases advanced to +19 from +16. Industrial inflation shows signs of moderating after a plethora of small increases in January and February, resulting in the index of Prices easing to +15 from +18. The index of Finished Goods Inventory remained almost unchanged at +8, but the Raw Materials Inventory index rose to +13 from +8.
Looking at local industrial groups, the “integrated” office furniture companies turned in a mixed performance. Some firms that posted modest incentives in late 2013 felt that orders placed back in November and December resulted in slower sales for early 2014. Other firms, including some specialty manufacturers, are seeing sales rebound.
In a repeat of the past several months, auto parts firms turned in a mixed performance, but the bias was still to the up side. The capital equipment firms are starting to see the annual spring rebound in sales, although some firms will probably have to wait a month or two to realize any strong improvement. Industrial distributors generally remained steady.
At the national level, the April 1 report from the Institute for Supply Management, our parent organization, indicated New Orders for ISM’s manufacturing index edged up to +22 from +19. However, the Production index bounced to +22 from +8. Job growth in the industrial sector is still stuck in single digits, and ISM’s Employment index eased to +6 from +7. ISM’s overall manufacturing index rose modestly to 53.7 from 53.2. The ISM non-manufacturing index fared a little better and rose to 53.1 from 51.6. Any reading above 50.0 is considered positive growth for a diffusion index.
The U.S. report from international economic forecasting firm Markit retreated a little after last month’s surprising jump. Markit’s Purchasing Managers Index came in a 55.5, down from 57.1 but still stronger than the aforementioned index from ISM. The New Orders index eased to 58.1 from 59.6. Markit’s index of New Export Orders eased to 51.1 from 51.6. Order Backlogs eased to 54.5 from 57.9. Overall, Markit’s view of the U.S. is: “The March data indicate that the U.S. manufacturing sector remains on a solid growth footing.”
Taking a world view, the April 1 report from JP Morgan’s “32 nation” Global Manufacturing PMI came in slightly lower than last month at 52.4, down from 53.3. Average input costs, primarily labor and raw materials, slowed to a nine-month low in March, while manufacturers’ selling prices fell for the first time since last July. The Eurozone Manufacturing PMI eased to 53.0 from 53.2, with Greece sliding back below the breakeven point to 49.7. To no surprise, the Russian PMI fell to 48.3. However, the recovery in Ireland brought the PMI up to 55.5. Ireland has been using its low corporate tax rate to scour Europe for firms interested in moving and has had considerable success.
Last month, we noted that China is the country to watch. For March, growth in the Chinese industrial sector remained slightly negative. The HSBC PMI index eased to 48.0, down from 48.5 in February and 49.5 in January. Last month, an 18 percent drop in exports scared everyone. Fortunately, the March report came back stronger, although the year-over-year increase of 8.9 percent only makes up for part of the difference. The value of the Yuan continued to rise in early March, making Chinese exports less attractive to foreign customers. With manufacturing activity moderating, and in some cases falling, the Chinese government has decided to offset the difference by exporting larger quantities of tin. Higher labor costs and a higher Yuan exchange rate mean higher prices, and new orders for manufactured goods from the U.S. and Europe are still down considerably.
Chinese government sources have privately admitted they do not expect business that has been “re-shored” to the United States to come back. The uncertainties of China’s “shadow banking” system are an ongoing concern, given that a large number of defaults would drag the whole economy down.
In our survey’s two categories relating to the short- and long-term business outlook, both indexes picked up. Short Term Outlook index rose to +34 from +28, but the Long Term Outlook index regained most of what it lost last month, rising to +58 from +43. Some analysts are still blaming the bad winter weather for the weak results in February. However, the tensions in Washington and Eastern Europe also may have been a factor. Either way, business confidence appears to be improving.
The Employment index for this month’s survey provides another source of optimism. For March, our index rose to +19, the highest since last summer. Part of the increase can be attributed to the recent increases in New Orders, especially for those firms that are running enterprise software. Another factor relates to the new investments several of our local firms have made. However, smaller firms are still not participating in the expansion, resulting in local unemployment numbers still being higher than satisfactory. West Michigan is still faring much better than the rest of the state. Among the unemployment rates in the 83 Michigan counties, Kent County is second best, followed by Ottawa at No. 3 and Kalamazoo at No. 4.
Auto sales continue to be the driving force behind the Michigan recovery, and the March report from Autonews is positive in several ways. First, sales were up 6 percent, although car sales were only 1 percent and light trucks made up 11 percent of the total. For the major firms, Chrysler led the way with a 13 percent increase, followed by Nissan at 8 percent. Toyota chalked up a 5 percent gain, GM added 4 percent and Ford advanced by a modest 3 percent. American Honda posted a modest loss of 2 percent. If this trend continues over the next several months, many of these statistics indicate the industry is stabilizing at or near the present level. With the auto firms still profitable and most of the auto parts suppliers remaining profitable, we can say the impact of auto sales on the Michigan economy is very positive. However, overproduction would create another bubble.
In summary, despite many problems in Michigan, the U.S., the Ukraine and all over the world, business managers seem to be moving ahead at a cautious pace. As long as governments continue to work through their financial problems and stick to their plans, the world economy should continue to show modest improvement for 2014. In Michigan, we expect auto sales to stabilize at or near the current level. The west side of the state has numerous economic expansion projects in the works, although it may take several years before the firms set up shop and contribute to job growth and expansion of the tax base. Of course, international events could destabilize the current growth pattern. For instance, if Putin decides to invade southern Ukraine, all bets are off.
Brian Long, Ph.D., is director of supply chain management research for Seidman College of Business, Grand Valley State University.