Area Economy

Automotive continues to drive West Michigan economy

January 9, 2015
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Seasonally slower, but still growing modestly. That’s the latest word on the West Michigan economy, according to the data collected in the last two weeks of December.

New Orders, our index of business improvement, came in at +13, just slightly lower than the +16 we reported last month. However, the Production index edged up to +19 from +12. The same was true for the Employment index, which came in at +23, up from +16. Activity in the purchasing offices edged slightly lower to +13, down from +16.

The main strength of the West Michigan economy continues to be automotive. All of our auto parts producers have reported a good 2014, and some are cautiously optimistic about 2015. Of course, the office furniture business has also contributed to a strong 2014, and most firms finished December on a positive note. As some buyers scrambled to use up their 2014 budgets, several of the capital equipment firms reported a surge in the closing days of the year. For the industrial distributors, December is often a slower month, and this December was no exception.

At the national level, the Jan. 2 report from the Institute for Supply Management, our parent organization, raised a flag of caution. ISM’s index of New Orders remained positive, but came in at +7, down significantly from November’s +23. The Production index took a similar dip, and eased to +7 from +23. ISM’s overall index drifted downward to 55.5 percent, a drop of 3.2 percent and the lowest the index has been since July.

Another view of the U.S. economy comes from, the international consulting firm based in London. Markit’s Purchasing Managers’ Index, or PMI, fell from 54.8 in November to 53.9.

Looking at international statistics, the JP Morgan Global Manufacturing PMI, released Jan. 2, eased modestly to 51.6 from 51.8. JPM’s index of New Orders fell slightly to 52.1 from 52.3. Countries reporting December weakness included China, Brazil, France, Italy, Austria, Russia and South Africa. In contrast, the PMIs for Ireland, Spain, Britain, Turkey and India were all above 50. The survey author notes the current numbers reflect “signs of stabilization,” and the near-term outlook for the world economy remains positive.

The debt situation in Greece has again become a problem. It appears some of the citizenry has grown “tired” of the austerity program. A far left political group stands a chance of taking over the government in the Jan. 25 election and rekindling the European currency crisis. At the last minute, wiser minds prevailed, and the current centrist government was formed. We can hope that wiser minds will again prevail Jan. 25. If not, the Europeans face a recurrence of the battle to restructure the Greek debt, and the possibility that the far left parties in other countries such as Spain and Italy may try to follow suit.

This month’s economic news was headlined by the unexpected drop in crude oil prices. In round numbers, oil is now half the price it was in June. Most of the drop is related to simple supply and demand. With the shale oil boom around the world, supply has crept up. At the same time, economic weakness in Europe as well other industrial countries has reduced the demand. Higher supply, followed by lower demand, result in lower prices.

The dollar is currently at an 11-year high while the euro is at a four-year low. Because oil is traded in dollars, a higher dollar results in lower oil prices here in the U.S.

Another element worth mentioning is the perceived decline in geopolitical tensions. Oil prices had risen steadily for most of the first half of 2014 despite all of the data showing increased supply and falling demand. Because the situation in Ukraine now appears to be at a stalemate, the impact has been to drain the speculation out of the market and push prices lower.

The average driver purchases about 800 gallons of gasoline per year, so a drop of, say, $1.50 per gallon puts about $1,200 back in the consumer’s pocket. Equally important, many American industries that rely on large amounts of petroleum have received a benefit as well, as evidenced by the airline industry, which is now on track to show some of the best profits in many years.

Unfortunately, there are many downsides to the lower oil prices. First, new oil exploration projects throughout the world have been curtailed and oil exploration people were laid off. With all of the new domestic oil and gas discoveries, we were making progress toward energy independence for the first time in decades, and that advancement will now begin to stall. A more important problem is that all commodity prices tend to be linked, and the prices for some other major commodities have been falling as well. Copper and lead are now about 15 to 20 percent lower than about a year ago. Iron ore is about a third of the price of four years ago. For the last six months, zinc and rice have been falling in price. The aggregate problem is that if too many smelters, mines, drilling rigs and mining equipment manufacturers are shut down, the drag on the international economy can be severe. For many months economists have warned about the perils of deflation, although their focus so far has been confined to consumer deflation. Industrial deflation can be just as dangerous.

In the United States, consumer inflation has been subdued for many years. Industrial inflation has stopped altogether and given way to deflation. Our local West Michigan index of Prices came in at 0, the lowest the index has been since July 2012. ISM’s index of Prices fell to -23, down from -11, the lowest the index has been since April 2009. At least some of this can be attributed to the drop in oil prices, and the price of oil falling is probably regarded as good news by some. However, the price of everything else in the industrial market falling at the same time is not good news.

Some of the good economic news this month came from the Commerce Department’s reported upward revision for third-quarter GDP from 3.9 percent to 5 percent. This follows a 4.6 percent gain in the second quarter, and puts the U.S. on track to turn in the best annual GDP performance since 2005. However, because the system for computing GDP was revised last year, some economists are concerned the numbers from 2013 and 2014 may not be directly compatible with those of previous years.

For 2014, the U.S. economy added about 3 million jobs, the best we have seen since 1999. Claims for jobless benefits are now running lower than at any time since 2000. Our West Michigan index of Employment has improved steadily for most of 2014 and currently stands at a very respectable +23. Despite some of our long-term economic problems, like the expanding deficits of the federal budget and some state and local budgets, the fundamentals for continued growth are in place for the first half of 2015.

It is the second half of 2015 that appears less certain. Almost all of the recessions in the past 70 years have started by something going wrong with the U.S. economy and spreading to the rest of the world. Whereas our domestic economy may be sound, it is possible the next recession could start overseas and draw the U.S. economy into the fray. Therefore, in addition to our own economic indicators, important factors to watch include the European and Chinese economies, and the political situation in countries like Greece, Spain and the Ukraine. However, industrial deflation and the continued fall of commodity prices may be the world economy’s greatest danger at this time.

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

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