Mixed economic signals still mean one thing: slow growth
Back to slow growth. That’s the latest word on the West Michigan economy, according to the data collected during the last two weeks of May.
Our index of business improvement, which we call New Orders, retreated to a slower growth pace of +20 in May, down from +40 in April. In a similar move, the Production index eased to +16 from +28. The Employment index fared a little better and rose to +14 from +13.
Activity in the purchasing offices, our index of Purchases, eased to +9 from +13. The index of Finished Goods Inventory returned to growth at +1, up from -7. The Raw Materials inventory index tapered to 0 from +8, reflecting stability of inventory policy. Business optimism remained about the same, although our Short Term Outlook index eased to +32 from +35, but the Long Term Outlook index rose to +49 from +44.
Looking at individual industry groups, the local industrial distributors reported a strong month, although there were exceptions. The same held true for the automotive parts suppliers. Many are at full capacity and gaining strength, but a couple of automotive parts firms are not currently sharing in the success. The “integrated” office furniture companies turned in mixed performance for the month. The capital equipment firms are well into the “decision” season, and most are reporting good business conditions.
The national economy remains in a slow growth mode. The June 2 report from the Institute for Supply Management, our parent organization, indicates that ISM’s index of New Orders eased to +21 from +25. The Production index edged lower to +26 from +27. ISM’s Employment index remained in double digits, but retreated from +18 to +12. When all factors are combined, ISM’s overall manufacturing index rose to 55.4 from 54.9.
Adjusted for seasonal influences, the U.S. manufacturing PMI from Markit.com, the British economics firm, posted an uptick to 56.4 from 55.4. In the service sector, the ISM non-manufacturing index rose to 56.3 from 55.2. In confirmation, Markit’s non-manufacturing index came in substantially higher at 58.1, up sharply from 55.0. The chief economist for Markit further notes, “…this is not simply a weather-related rebound. Companies are reporting that their customers are feeling more confident, restocking, expanding and investing.”
The results for the world economy are still much more marginal. According to JP Morgan’s June 3 report, world manufacturing activity rose modestly to 52.4, up from last month’s six-month low of 51.9. The report cited the U.S., the U.K., and the Czech Republic as bright spots, but noted that Japan, China, South Korea, Indonesia, Brazil and Russia continue drag the worldwide statistics lower. The Eurozone registered a modest slowdown in May, resulting in the overall PMI easing to 52.2 from 53.4.
Analysts in Europe note that Americans seem to have been quicker to forget the new Russian threat to the Ukraine, probably because we are “across the pond.” The Europeans are not so fortunate.
Although still modest by historical standards, industrial inflation pressures picked up in May. Our local index of Prices edged up to +16 from +7, reflecting an uptick in demand for many key commodities around the world. ISM’s index of Prices shot up to +20 from +13. JPM’s world index of Prices jumped to 53.0 from 51.2. Given the increased (and some say unfair) level of foreign competition, steel will probably taper lower in price over the next few months.
Reviewing the employment numbers, there is more good news for West Michigan. Among the unemployment rates in the 83 Michigan counties, Kent County tied for first place as the county with the lowest unemployment in the state at 4.8 percent. Ottawa County again came in at No. 3. Kalamazoo County eased to sixth place, but at 5.6 percent, is still far better off than the rest of the state and nation. For Michigan, the unadjusted rate fell to 7.3 percent from 8 percent. The seasonally adjusted rate is now 7.4 percent, which is still the lowest Michigan’s unemployment has been since early in 2008.
This month’s big economic news comes from Lansing in the passage of a new minimum wage law. Historically, the minimum wage reached its peak in 1968 at $1.60 per hour. That’s $10.61 in today’s dollars. With the new legislation, the rate will rise from the current $7.40 per hour to $8.15 on Sept. 1, and ratchet to $8.50 in 2016, $8.90 in 2017 and $9.25 in 2018. Critics properly note that the increase will result in fewer people being hired and some workers in marginal industries simply being let go. The laws of economics cannot be defied. Any increase in wages or salaries results in some increase in unemployment. However, it is nearly impossible to calculate the actual amount of jobs lost. For fast food workers in large chains, the impact will be negligible, because the added wage cost can be added to the Big Mac with few customers even noticing the difference.
It is the small, independent firms that operate on slim margins that will feel the biggest pinch. In a better economy even these firms can absorb and/or pass along the increase. Hence, with near record low unemployment rates in 2007 when minimum wage increases passed they had very little impact on unemployment. Today, our unemployment is already high by historical standards, and the unemployment rate among the 18-25 age group is especially high. This is the group that will feel the biggest impact, both good and bad. The new wage rate will benefit some workers at the expense of others.
One more rub for the minimum wage worker will come at tax time. The amount of the “earned income credit” will be reduced, and the tax refunds will be correspondingly smaller.
Another news item that received little attention comes from the recent elections in India. By 2028, India will be the largest country in the world by population, and as a result of the current political shift, may also become the country with the second or third largest economy. For the first time since 1948, a new political party has come to power that promises to change the way the country does business at all levels.
If the potential reforms are successful, this could be the point at which India pivots toward a better business environment resulting in industrial expansion and more foreign investment. This could be as big as the 1984 revisions that unleashed the Chinese industrial capacity on the world markets. We’ll see over the next few months and years where these revisions take the Indian economy.
Auto sales for May continue to be the driving force behind the Michigan recovery. According to the May report from Autonews, car and light truck sales were up 11 percent for the month, partially because of pent-up demand due to the harsh winter, but primarily because of some strong incentive programs during the Memorial Day time period to clear excess inventories.
Year to date, the industry sales are now up 5 percent, which is in line with expectations. For the Detroit Three, Chrysler gained 1 percent, GM rose 13 percent and Ford edged up by 3 percent. For the other major firms, Toyota gained 17 percent, Nissan rose 19 percent and Honda edged up 9 percent.
GDP and the way it is calculated gives us a broad average of the health of the economy. Like any average number, it can easily be overly generalized. For instance, if there were such a thing as a weather index, it would take the form of averaging the current temperature, current precipitation, current wind speed, current UV coming from the sun, and perhaps the current humidity in order to make a single numerical statement about the current quality of the weather. It would make little sense.
In this context, there has been a little stir in the economics community over this past month about the downward revision of the 2014 first quarter GDP. The reading of -1 percent is the lowest since a similar dip in the first quarter of 2011. Almost everyone agrees that the first quarter was heavily influenced by unusually bad weather for most of the nation, but not everyone agrees by how much.
In our local survey of business conditions, given our positive numbers, we found the impact of the harsh winter to be fairly minimal for most firms. With the winter now past, the next three quarters of 2014 will be positive, but not at the annualized rate of 3.5 percent that some are forecasting. As our current data indicate, we are still in a pattern of slow growth.
Brian Long, Ph.D., is director of supply chain management research at Seidman College of Business, Grand Valley State University.