Optimism fades as slow economic growth continues
Slow growth continues. That’s the latest word on the West Michigan economy, according to the data collected during the last two weeks of June.
New Orders, our index of business improvement, edged up to +23 from +20; it’s still down from April’s +40, but respectable. The Production index jumped back to +30 from +16, which corresponds with the June uptick recorded in previous years. The Employment index remained in double digits at +15, up from +14. Purchasing office activity, our index of Purchases, rose to +19 from +9. The Raw Materials Inventory index jumped to +14 from 0, but the index of Finished Goods Inventory flattened to 0.
Automotive components manufacturers remain strong, although a couple firms seem to have been disappointed with business that didn’t materialize. The office furniture business remains stable but flat, and contrary to some forecasts, is not vastly exceeding last year’s performance. Smaller office furniture firms are doing better than their larger counterparts. Industrial distributors came in with a mixed performance. Capital equipment firms are stable, but some are doing very well.
At the national level, the July 1 report from the Institute for Supply Management, our parent organization, indicated the U.S. economy remains stuck in a pattern of slow growth. ISM’s index of New Orders backtracked slightly to +15 from +21. Production eased to +19 from +26. At +9, it is disappointing to see ISM’s Employment index slide back to single digits. ISM’s overall Index of Manufacturing retreated modestly to 55.3 from 55.4.
Reflecting the same pattern, ISM’s Nonmanufacturing index eased to 56.0 from 56.3. The U.S. statistics from Markit.com, the British international economics consulting firm, are more optimistic. Markit’s index of New Orders rose to 61.2 from 58.8. The production index, which they report as Output, rose to a four-year high of 61.0.
At the international level, JP Morgan’s Global Manufacturing PMI rose to a four-month high of 52.7, although the survey author notes this level is still not spectacular. The Chinese PMI, which had raised caution for world economic stability, rebounded to 50.7 from 49.4, a 13-month high. At 51.5, Japan also flipped back to positive, up from 49.9. For diffusion indexes such as these, 50.0 is the breakeven point.
Conversely, the Eurozone PMI eased to 52.8 from 53.5. Of the countries having difficulties, Ireland, Spain and Italy all turned in strong performances. Germany appears to be stabilizing at a PMI rate of 54.0, but France continues to sink under pressure from both the government and the unions. The situations in the Ukraine and in Iraq are still dampening enthusiasm.
Our statistics for business optimism took an unexpected drop. The Short Term Business Outlook index fell to +21, down from+32 in May. An equal drop was noted in the Long Term Business Outlook index, which eased to +36 from +49. Perhaps because of the geo-political situation in the world and the pessimistic news from Washington, the long-term index is now well below the +64 less than a year ago. This month’s big stir came from the revision of the first quarter GDP rate down to -2.9 percent, the biggest drop since the fading days of the Great Recession. As a result, the IMF has now downgraded the 2014 estimate of growth down to 2.0 percent for the year, and the Federal Reserve has lowered its estimate to 2.25 percent.
Regrettably, both estimates are still probably high. To average 2.25 percent for the year, the remaining three quarters would have to average almost 4 percent. There is little doubt the second quarter will look much better than the first, but 4 percent growth for the next three quarters seems doubtful.
Needless to say, the markets have generally ignored the ominous GPD drop, and generally for good reason. Glancing at our statistics, we see no evidence of a significant decline in the first quarter. Some firms said deliveries were delayed a few days by bad weather, and others noted some local spot shortages in steel because of ice on Lake Michigan. Nothing we have seen justifies a 2.9 percent GDP drop. Second, the system for computing GDP was changed last year, and the resulting revision was supposed to yield a higher GDP for the past six years. By moving the goal posts, it is possible the new system got tangled up in itself and generated a number that exaggerated the drop. Even with the revision, the current method of computing GDP does not adequately account for the activity in the industrial market.
What this really suggests is that GDP is not an especially good measure of economic health or measure of economic activity. It may have been fine in the ’60s or ’70s, but the world has changed. Many economists are starting to notice the impact of firms moving headquarters to foreign countries to reduce corporate taxes. Locally, we saw Perrigo make the move a few months ago, and we watched Pfizer threaten to make a similar move. Pfizer openly admitted the move to buy AstraZeneca was primarily for tax purposes. The insiders at these corporations have become very frustrated with failed attempts to enact corporate tax reform. At 35 percent, our corporate tax rate is the second highest in the world, although the average effective rate is actually close to 20 percent because of an unending series of tax loopholes targeted at some industries in political favor. Significant movement on tax reform in an election year is nearly impossible, but it will need to be addressed in the next Congress.
It is a safe bet that less than 1 percent of the Michigan population knows Kent County has the lowest unemployment rate (5.2 percent) among all 83 Michigan counties. Locally, second place is claimed jointly by Barry and Ottawa counties at 5.3 percent. Kalamazoo County eased to 11thplace, posting a 6.1 percent unemployment rate for May.
Auto sales for May were up only 1 percent for the industry as a whole, but part of the tepid performance is blamed on the 24 vs. 26 sales days compared to 2013. The Standardized Adjusted Annual Rate rose to 17 million cars. Unfortunately, this is a seasonal adjustment, and is based on business paradigms of the past. Otherwise, sales show signs of stabilizing at the current level, which is a sustainable and profitable rate for both the manufacturers and automotive suppliers. For car sales in May, Chrysler led the way with a 9 percent increase, followed by Nissan at 5 percent, Toyota at 3 percent and GM at 1 percent. Losers included Ford and Honda, both down 6 percent. Volkswagen, which continues to have dealership issues, lost 8 percent.
As we enter summer 2014, will the slow growth continue? In all probability, yes. There is no reason to believe the current pattern will change for the next six months or so.
Brian G. Long, Ph.D., is director of supply chain management research at Seidman College of Business, Grand Valley State University.