Area Economy

Industrial inflation continues to improve for West Michigan

November 21, 2014
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The strength of September has continued into October.

According to data collected during the last two weeks of October, our index of New Orders remained significantly positive at +26, insignificantly lower than +27 last month, and up from August’s +9.

The Production Index came in at +23, lower than the +29 reported last month, but still strong. Activity in the Purchasing Office edged up to +20 from +14. Just as last month, some of our firms are still unable to locate enough qualified workers. Hence, the Employment Index, which had risen to a three-year high of +34, retreated to +25. The Index of Lead Times moderated again to +8, down from +18.

Turning to individual industry groups, the office furniture business is seeing stronger sales. Mike Dunlap’s October survey reports an index of 57.58, the strongest since July 2007. This compares with the all-time record of 59.72 in the July 2005 report. For capital equipment firms, the fall uptick is in full swing. Some firms are rushing to make capital investments before the end of the year. Industrial distributors were generally positive. Last but not least, the boom continues for most of our auto parts producers.

Probably because of geopolitical turmoil, our indexes of business optimism slipped modestly in October. The Short Term Business Outlook index eased to +12 from +26, the lowest since its inception over a year ago. The Long Term Business Outlook retreated to +43 from +52. With numerous firms still reporting record sales, we continue to see the mood of most business firms in West Michigan remain positive.

According to the Nov. 3 report from the Institute for Supply Management, our parent organization, the national economy strengthened modestly in October. ISM’s Index of New Orders edged up to +20 from +15. The Employment Index, which backtracked to +6 in September, rose to +7 in October. The Production Index remained unchanged at +21. ISM’s seasonally adjusted composite Index of Manufacturing rose sharply to +59.0, largely because of statistical variations. In contrast, the Non-Manufacturing Index backtracked to 57.1 from 59.6.

The U.S. statistics from Markit.com, the British international economics consulting firm, reported a drop in the PMI to a nine-month low of 55.9, down considerably from 57.5. Although all index numbers above 50.0 are considered positive, the Production Index retreated to a seven-month low. The Employment Index remained near a 30-month high. According to the survey author, “the latest figures indicate that the recovery has lost some intensity at the start of the fourth quarter, reflecting subdued export demand from the euro area and key emerging markets. Meanwhile, a solid rate of manufacturing job creation was sustained in October, which provides an early indication that domestic labor market conditions have continued to strengthen through the final quarter of the year.”

At the international level, J.P. Morgan’s Global Manufacturing PMI for October remained unchanged at 52.2. Despite plenty of negative economic news, the PMI for Eurozone manufacturing sector rose modestly to 50.6 from 50.3. Italy, Austria, France and Greece remained below the 50.0 neutral mark, but Ireland, Spain and the Netherlands kept the index positive. Germany flipped back to positive growth at 51.4. However, no one is expecting a significant upturn in any of the European economies any time soon.

Because of political shifts, Germany has developed a confused policy toward green energy, making major investments in infrastructure to bring more wind-powered electricity to the industrial heartland, but at the same time building coal-powered facilities. Germany has announced the closure of all of its nuclear power plants over the next seven years, but 17 percent of the country’s power still comes from nuclear. At the same time, the U.S. is shipping to Germany more coal than at any time in our history. This confusion of policy has seriously inhibited expansion for industries that require large amounts of energy.

At least for the short term, Europe’s problems are actually benefitting the U.S. economy in several ways. First, demand for oil is down, so American consumers are celebrating lower gasoline prices. At the industrial level, most petroleum-based products are either stable or falling in price. The slower industrial economy in Europe and in Asia has yielded some modest price drops for big ticket commodities like copper, steel and nickel. Higher interest rates in the United States are drawing money away from Europe. All of this results in lots of European money finding its way into the U.S. stock market.

Whereas the U.S. economy remains sound, our major concerns are still the other economies of the world, namely Europe, Brazil, China, South Africa, Russia, Turkey, and any of the other countries that have recently reported trouble. Fortunately, the PMI reports for Russia, China and South Africa are still modestly positive. The Brazil PMI is slightly negative. For our major trading partners, Canada posted the strongest PMI in 13 months, and the report from Mexico came in at a 10-month high. In short, none of the weakness reported around the world should have a significant impact on the U.S. economy. If China, Europe and several other economies were to severely stumble, the U.S. could be drawn into the crisis, but present numbers portend no such problem.

Auto sales for October were 6 percent higher, and overall sales for the first nine months of 2014 have now accumulated to 6 percent, as well. Among the leading brands, Chrysler rose 22 percent, largely because of strong sales for Jeep and Ram vehicles. Ford, which is still in the process of retooling the F-150 pickup, declined by 2 percent. Overall, GM sales were flat. Toyota sales rose 7 percent, Honda edged up 6 percent, and Hyundai rose a modest 4 percent. Nissan’s U.S. division sales have now set records for 13 consecutive months. Even Volkswagen managed a 10 percent gain, although sales for the year are still off by 4 percent.

In other economic news, we continue to get updates on GDP from the Bureau of Labor Statistics. For the third quarter of 2014, the “advance estimate” of GDP increased at an annual rate of 3.5 percent.

In terms of industrial inflation, the picture continues to improve. For West Michigan, our index of prices retreated to +6, the lowest since January 2013. For the ISM national survey, the index came in at +7, which is also the lowest it has been in many months.

In summary, the West Michigan economy remains on a path of positive growth. With the Ebola problem now seeming to be contained, the mood toward the rest of the world has improved. Weakness in European and Chinese economies is still a distant concern for most people, and falling gasoline prices have put more money in the hands of consumers. The threat of a terrorist attack could derail our confidence, but for now, the economic road ahead is positive.

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

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