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Economy keeps trending in a positive direction

September 12, 2014
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The August rate of economic growth remained positive but came in a little slower.

According to the data collected during the last two weeks of August, New Orders, our index of business improvement, eased to +9 from +18. Summer vacations mean some purchase decisions tend to be put off until September or October. The Production index remained strong at +22, although slightly off from +25 in July. Activity in the purchasing office, our index of Purchases, eased to +5 from +19. This month’s pleasant surprise is the Employment index, which rose to a 16-month high of +26, up from +15. The index of Lead Times remains high at +29, but slightly improved from last month’s +32.

For individual industry groups, the automotive parts producers are in full swing for the 2015 model year, although a couple are expressing reservations about production schedules for early 2015. The office furniture business remains positive, but like last month, the smaller firms are outpacing the larger “integrated” firms. August is usually an off month for industrial distributors, so it was good to see most firms reported business to be fairly steady. The capital equipment industry is marking time until fall “decision season” kicks in.

Our statistics for business optimism continue to show stabilization, although August resulted in a little shifting around. The Short Term Business Outlook index eased to +20, down from +27. However, the index for the Long Term Business outlook posted a modest increase to +42, up from +34. Unfortunately, the level of optimism for this index has retreated considerably in recent months, given the +64 we reported less than a year ago.

At the national level, the Sept. 1 report from the Institute for Supply Management, our parent organization, reported a considerable improvement. ISM’s index of New Orders jumped to +24, up from last month’s +15. The Employment index eased slightly to +13 from +14. ISM’s seasonally adjusted Manufacturing Index registered 59.0, an increase of 1.9 percentage points from July's 57.1, indicating continued expansion. This month's index reflects the highest reading since March 2011. The ISM Nonmanufacturing Index also benefitted from statistical seasonal adjustments, and rose to 58.7 from 56.0, the highest since January 2008. For the “unadjusted” numbers, the Business Activity, New Orders and Employment indexes were all slightly lower.

The U.S. statistics from Markit.com, the British international economics consulting firm, also reported a strong performance for August. Markit’s overall index jumped to a four-year high of 57.9, up from 55.8 in July and slightly ahead of the 57.3 in June. Despite trouble in Europe, Markit’s index of New Export Orders came in at a three-year high.

At the international level, a mixed picture is evolving. JP Morgan’s Global Manufacturing PMI edged up to 52.6 from 52.4. However, the Eurozone manufacturing sector lost further growth momentum in August. Markit’s Eurozone PMI hit a 13-month low of 50.7. Ireland, Spain and Germany remain positive, but other major economies such as France and Italy are pulling the averages toward the breakeven point. Growth in countries outside of Europe such as Taiwan, Canada and the United States is helping to keep the world economy modestly positive. China continues to try to resolve a myriad of economic problems, but at a PMI of 50.2, business conditions are still slightly positive. However, the geopolitical uncertainty over the supply of natural gas from Russia will keep a damper on European growth until the political situation can be resolved.

Some economic news has raised concerns. Since our last report, considerable attention has been given to the second quarter GDP drop in Europe. With considerable evidence that the financial crisis of a couple years ago is abating, questions have been raised that the recovery has stalled. Germany’s economy, Europe’s largest growth engine, shrank for the first time in over a year. Growth for the other major players such as Italy and France continues to be flat with no significant sign of impending improvement. Some analysts have tried to attribute the economic softness to the weather, but most say the biggest worries continue to relate to the ongoing Russian/Ukrainian conflict and the potential consequences of additional escalation. Russian gas accounts for 37 percent of the usage in Germany and 16 percent in France. None of the European countries have any significant natural gas storage, meaning Russia could create economic Armageddon by simply turning off the export valve.

Much as we expected, auto sales for August have continued to plateau. Among the major brands, Chrysler rose 20 percent, but Ford flattened to even and GM was down 1 percent. Toyota sales rose 6 percent, Nissan 12 percent and Hyundai 6 percent. Honda remained flat, but Volkswagen declined 2 percent. For the first eight months of this year, overall auto sales for the industry are up 5 percent. It is worth repeating that auto sales at the current level should be regarded as a positive trend. In a recent article in “Automotive News,” the executive vice president of Honda blasted the current industry practices of excessive cash incentives, lowering lending standards and selling more cars to rental companies just to boost current sales. To quote John Mendel, “You are not only pulling sales forward, you’re probably pulling people out of used cars into a new car they can’t afford.”

At the current level of sales, the major auto firms are all profitable, as are the major automotive suppliers. For West Michigan, a major portion of economic recovery has been based on the revival of the auto industry. The obvious caution is that we cannot expect too much more dynamic growth from this segment of the economy and need to focus attention on other industries for future growth.

Although there is no end in sight for continued positive growth in West Michigan, it is worth repeating what we have said for the past 10 years: Should a significant terrorist attack occur on American soil, the confidence of our country would be so shaken we would probably slide into a recession. Unfortunately, there has been a lot of buzz in the intelligence community that a major attack may be coming. Unlike other isolated terrorist attacks, the next attack will probably be coordinated at several locations. Although this is only cautionary at this time, it constitutes a considerable economic threat that cannot be disregarded.

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

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