Area Economy

Local economy is on faster track than national numbers

October 17, 2014
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September is always a back-to-work month, and this year is no exception.

According to data collected during the last two weeks of September, our index of New Orders jumped to +27, up from +9 in August. Production rose to +29 from +22, also a respectable gain. Purchases edged up to +14 from +5. However, the “star” of the report is the Employment index, which rose to a three-year high of +34, up from +26.

As noted among comments from survey participants, some firms are starting to beg for qualified workers. The index of Lead Times moderated to +18, down considerably from +29, although several respondents noted delivery difficulties with key commodities.

Looking at our individual industry groups, none are currently experiencing significant difficulties. The automotive parts producers are still in full swing for the 2015 model year. Office furniture business remains positive and actually showed a little more strength in September. August was good for the industrial distributors, and so was September. For the capital equipment firms, the usual fall uptick appears to be taking hold.

Reflecting the stronger statistics, our indexes of business optimism improved modestly. After falling slightly last month, the Short Term Business Outlook index edged up to +26 from +20. The September index for Long Term Business Outlook posted another increase to +51, up from +42, which was up from +34 in July. We have no real explanation for the summer slump in this index, or what all the factors are that resulted in the shift these past two months. But better is better, and we hope the trend continues.

At the national level, the Oct. 1 report from the Institute for Supply Management, our parent organization, was not as strong. ISM’s index of New Orders backtracked to +15 from +24, somewhat atypical for “back to work” September. The Employment index backtracked to +6 from +13. ISM’s seasonally adjusted Index of Manufacturing came in at 56.6, down considerably from 59.0 registered last month. The Non-Manufacturing Index posted a smaller drop, falling to 58.6 from 59.6.

The U.S. statistics from Markit.com, the British international economics consulting firm, also reported moderation in September. Markit’s overall index eased to 57.5, down from 57.9. The Production index remained near a three-year high. The Employment index jumped to a 30-month high and was picked up by some Wall Street economists as evidence that the U.S. employment statistics should reflect the improvement. “Recent months have also seen a welcome revival in U.S. export growth, suggesting trade should also help boost the economy in the third quarter. GDP looks set to grow by at least 3 percent in the third quarter, with good momentum being sustained as we move into the final quarter of the year,” according to the report.

Other economic news has been a mixed bag. GDP for the second quarter was revised upward to 4.6 percent, but most of the gain from the second quarter is still regarded as an offset to the snow-bound negative first quarter. Consumer confidence fell. Durable goods orders were much lower than the previous month, but mostly attributed to a sharp drop in aircraft sales. The Dow Jones average slipped below its 50 moving average, but analysts were expecting a correction.

At the international level, JP Morgan’s Global Manufacturing PMI for September edged to 52.2 from 52.5. The Eurozone manufacturing sector continued to lose ground; the overall index slipped to 50.3 from 50.7. Germany, Austria and Greece fell below the 50.0 neutral mark. Only strong numbers from Ireland and the Netherlands prevented the Eurozone index from turning negative. There is no end in sight to the flattening European economy.

In a recent survey of 200 key economists around the nation, most are fairly confident about the continued recovery of the U.S. economy. Their overwhelming concerns are about the other major economies around the world. However, our two largest trading partners, Canada and Mexico, are not perceived to be problems. Exports to both are on the rise. The PMI for Canada came in at 53.5, and Mexico posted 52.6. The major concerns are centered on Europe, Brazil, China, South Africa, Russia, Turkey and other countries in the news.

Germany, of course, remains the linchpin in the European economy, and the PMI growth rate has slipped below the 50.0 mark and may turn more negative in the next few months. What has gone wrong? First, the U.S. business community continues to underplay the tension between Russia and the Ukraine. German businesspeople are not that far removed from the tensions of the Cold War, and there are political segments that would like to see the former Soviet Union return. For businesspeople, this is unsettling. A second factor relates to the sharply rising cost of electric power. To appease the Green Party, the government has shut down eight of its 17 reactors and pledged to close the rest by the end of 2022. In 2010, about 22 percent of Germany’s electric power was nuclear. About a quarter of Germany’s power now comes from renewable sources. However, except for hydroelectric, none of these renewables comes cheap. Furthermore, for most of Germany, electricity still comes from coal, and the plan to build 26 new coal-fired generation facilities is obviously controversial. The bottom line: The cost of electric power is rising rapidly, and industries that require large amounts of electric power are no longer competitive with the world marketplace.

Auto sales for September were 9 percent higher, and overall sales for the first nine months of 2014 have recorded a 6 percent gain. Chrysler and GM both rose 19 percent, but Ford declined by 3 percent. Toyota sales rose 2 percent, Nissan 19 percent, and Hyundai 4 percent. Honda gained 12 percent, but Volkswagen sales fell by 7 percent. For West Michigan, a major portion of our economic recovery has been based on the revival of the auto industry. We hope auto sales will plateau and not expand into a proverbial bubble.

There has been some stir about Ford deciding to move the headquarters for the Lincoln Division to New York City. Although the move has raised concerns, the economic impact for Michigan is virtually nil. We need to remember that Ford made a similar move in the late 1990s by moving Lincoln to Orange County in California, only to move back to Michigan a few years later. The bottom line is simple: The number of people actually moving to New York will be less than 75. For Michigan, such a move is more psychological than financial.

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

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