Notes of caution seeping into the economic forecast
The West Michigan economy continues on a path of modest growth, although there is a hint of caution in the air.
New Orders, our index of business improvement, came in at +13, the same as the previous two months. The Employment index also remained unchanged at +19. Despite weather challenges, the Production index edged up to +18 from +13. Activity in the purchasing offices remained virtually unchanged at +16, down from +17.
Just like for January, many of our local industrial groups reported mixed results for February. The office furniture business remains positive, but sales are seasonally slow. It is worth repeating that Mike Dunlap’s January Furniture Industry Index came in at the second best level since July 2007. With auto sales still very positive, automotive parts producers continue to be optimistic. Capital equipment firms have turned flat and are now much more cautious. For the industrial distributors, the February results were mixed. While many comments from the survey participants remain positive, at least some respondents are sounding a note of caution.
The March 2 report from the Institute for Supply Management, our parent organization, posted a slight increase in business activity. ISM’s index of New Orders rose modestly to +11, up from +7, but still down significantly from November’s +23. The Production index also edged up to +11 from +9. New Export Orders remained negative at -3. However, the Backlog of Orders index flipped back to positive at +3.
Markit.com, the international consulting firm based in London, reported a slight upturn in the U.S. economy for the month of February. Markit’s PMI rose to 55.1, up from 53.9. The survey author writes: “The upbeat survey points to minimal impact from the adverse weather that affected many parts of the country during the month. While growth of manufacturing output remained below the peaks seen last year, the survey is broadly consistent with production rising at an annualized rate approaching 4 percent.”
At the international level, the March 2 JP Morgan report on Global Manufacturing still depicts a flat world economy. JPM’s index of New Orders remained unchanged at 52.3. The Production index rose to 53.3 from 52.9. These indexes constitute averages for the whole world, but the heaviest weights come from the U.S., Japan and China. Ireland’s PMI is now at a 182-month high of 57.5. Other positive reports were posted by Spain, Italy and Germany. However, France, Brazil, Greece, Russia and Austria remain negative. China, after several months below the breakeven point, flipped back to positive at 50.7 in February. While China is key to the health of the world economy, Canada is our largest trading partner. In February, lower prices for oil and other resources finally caught up with Canadian manufacturers, miners and exporters. The RBC Canadian manufacturing PMI fell to a four-year low of 48.7, down from 51.0 a month earlier.
Many of our survey participants commented about the negative impact of the West Coast dock strike and worker slowdown. The entire supply chain was impaired by slow deliveries as well as the necessity to search for other sources of supply and transportation modes. At least one of our local firms was facing the possibility of shutting down for lack of materials. Fortunately, on Feb. 23, the West Coast dockworkers concluded a tentative agreement for a five-year contract featuring even higher wages and benefits than the $1,200-per-day the average longshoreman now receives. It will take several months to clear the container backlog from the docks and return shipping to normal. Some manufacturers are making long-term plans to ship through other ports. With the new expansion of the Panama Canal opening in a few months, ports like Houston and Mobile will now be able to unload larger container ships. The West Coast ports have lost 7 percent of their business over the past seven years and will probably lose more in the future.
Turning to auto sales, February was another good month for the industry. Subaru posted an 18.5 percent gain, and Toyota’s sales rose 13.3 percent. For domestic nameplates, Chrysler led the way with an uptick of 5.6 percent and GM rose 4.2 percent. Ford lost 2 percent, held down by the Lincoln division. However, Lincoln is now only 3.6 percent of the company’s sales, and rumors are circulating that Ford may drop the division. Fortunately, many of our local auto parts suppliers have won contracts with the Japanese and Korean transplant companies. As noted in the past, at least some local firms are world competitive in price, quality and service. In terms of total, they can go toe-to-toe with Korean, Chinese, Mexican and Brazilian competitors.
Industrial deflation continues to be a two-edged sword. Price drops for most major commodities including oil, steel and copper have given many firms welcome relief. Although some suppliers have been slow to pass their cost savings along, many firms expect input costs to fall well below their estimates of a few months ago. Our local index of Prices for February fell to -22, down from January’s -16. The ISM index of Prices, which fell to -30 last month, remained at -30. The ISM national database shows the history of the Prices index since January 1948. Of those 805 monthly reports, only 21 logged an index of 30 or below. All occurred during recessions. However, in today’s world, we are in uncharted territory.
Typical for any period of deflation, many firms have decreased their input inventories in anticipation of lower prices in the near future. However, the West Coast dock problem simultaneously forced an increase in inventories for other firms. To complicate the calculus even further, some of the basic commodities like copper have been purchased for speculation. If the speculators purchased with borrowed money, they could be forced to sell their holdings into an already surplus market. In short, we do not yet know the impact of this convoluted round of industrial deflation, but because of the trillions of dollars involved worldwide, the situation requires continued scrutiny.
Looking ahead, rapid growth will be restrained by the sluggish world economy. The European economy remains marginal, but recent strength in the German economy bodes well as far as avoiding a recession in the Eurozone. The strong dollar continues to hurt our exports. Simultaneously, the strong dollar reduces earnings for our multinational companies. The situation in Greece is still uncertain, and the four-month reprieve to reach a debt refinancing agreement we hope will result in a compromise. However, the public oratory generated by both the new Greek government and European lenders may cause swings in the financial markets.
In general, the markets seem to be downplaying the uncertain geopolitical problems in Libya, Yemen, the Ukraine and other places around the world. Barring a geopolitical catastrophe or a terrorist attack, our economy still has enough momentum to carry us forward for the next few months. The second half of the year will depend on how the world financial community deals with industrial inflation and with Greece.
Brian Long, Ph.D., is director of supply chain management research at Seidman College of Business, GVSU.