Area Economy

Growth improvement continues for third month

June 5, 2015
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Still growing at a moderate rate. That’s the latest word on the local economy according to data and comments collected in the last two weeks of May.

New Orders, our index of business improvement, remained historically strong but backtracked to +31 from April’s +37. The Production index stayed virtually unchanged, rising to +29 from +28. The Employment index came in unchanged at +24. The Purchases index eased to +24 from +32.

The West Michigan economy has clearly shaken the mediocre performance of the winter months to show three solid months of strength. With the economic fundamentals for West Michigan still firm, the outlook for the next few months remains positive.

Reviewing this month’s respondents, most of our industrial groups are positive. Over the longer term, the undisputed group leader is still local auto parts producers. Some are at full capacity, and most are increasingly optimistic. But for this month, several reported being just “stable,” and one posted a small decline. For the office furniture industry, May was one of the stronger months in recent history. Part of the upturn is seasonal, but a couple of firms have clearly set sales records. Business for the industrial distributors has again turned mixed. For capital equipment firms, business conditions were spread across the entire spectrum, with one firm reporting very busy conditions, one reporting very poor conditions, and most of the others in between.

At the national level, the June 1 report from the Institute for Supply Management, our parent organization, continues to indicate the national growth rate is slowing. ISM’s index of New Orders edged lower to +15 from +18. The Production index followed a similar pattern, easing to +16 from +24. Good news came from the Employment index, which rose to +8 from +4. ISM’s overall index rose to 52.8, up from 51.5 in April.

A similar view of the U.S. economy comes from Markit.com, the international economics consulting firm. Although Markit’s overall index eased modestly to 54.0 from 54.1, New Orders continued to lag the performance of previous months.

The survey author noted: “With manufacturers reporting the smallest rise in new orders since the start of last year, the survey provides further evidence that the strong dollar is hurting the economy. Falling exports and slumping profits were two weak links in the economy during the first quarter and look set to act as ongoing drags in the second quarter.”

There was a small flurry in the economic news when the revision for the first quarter GDP came in showing a 0.7 percent loss. The initial estimate had been reported as a very modest 0.2 percent gain, so the revision is not large by past standards. Based on previous declines in the GDP, part of the decline is easy to explain. First, inventories — especially commodity inventories — declined at a rate more rapid than expected. Given the decline in the prices of most major commodities, it is logical to assume many firms have reduced their inventories. When commodity prices are again rising, firms will add to inventories, giving a small boost to the GDP numbers. Hence, noting the recent stability in some of the commodity prices, some economists are hoping some firms will add to inventories in the second half of the year, providing augmentation to GDP growth. Despite some of the doom and gloom prognostications that the second quarter GDP will also be negative, most forecasts are calling for modest growth.

Among the frustrations of many businesspeople is the obvious notion that empirical observations of business activity seem to have little relationship with the GDP reports. For instance, our growth rate in New Orders slowed in the first quarter but did not turn negative. No one likes to admit that the concept of GDP, born in the early 1930s out of a need to judge the level of business activity, might not be the single most important measure of economic activity.

Of more importance is oil. For the foreseeable future, we can’t do without it, and we have to try to live with whatever price the market hands us. We were reporting crude prices under $50 per barrel and gasoline under $2 per gallon a few weeks ago, and now there is talk that $60 is the new short-term norm. Sales for “fuel-inefficient” vehicles are soaring. In general, the markets are still responding to perceived changes in supply and demand. Given the current level of market volatility, any form of trouble in the major oil-producing countries would result in prices soaring overnight. Otherwise, we will probably see prices edge higher over the next few months as long as the rest of the world continues on a path of slow growth.

After falling sharply for the past year, commodity prices are beginning to moderate. Locally, our index of Prices came in unchanged from April at -14. At the national level, ISM’S index of Prices recovered to -1, up significantly from April’s -19 and February’s -30. In the steel industry, there is significant evidence that prices have bottomed out and are now starting to rise. Granted, many firms have benefitted from lower commodity prices in recent months. However, if the prices stay too low for too long, suppliers begin to permanently shut down capacity. When the market recovers, the available capacity is then much more limited, and prices soar until new plant and capacity can be rebuilt. In short, price stability is good for both buyers and sellers, and it now appears that the price moderation will continue for the next few months.

Auto sales continue to moderate, although the current level remains very profitable for the major firms. More importantly, our local auto parts suppliers also remain very profitable, and several are at full capacity. For the Detroit Three, Chrysler gained 4 percent, General Motors added 3 percent, and Ford lost about 1 percent. Honda gained about 1 percent, but Toyota edged down -0.3 percent for its first decline in 15 months. Sales rose 12 percent at Subaru, and Volkswagen shot up 8 percent for one of its best months in recent memory. Sales for the industry are now up 3.9 percent for the first five months of the year, slightly ahead of industry forecasts.

We are pleased to note our West Michigan index of Employment remains in double digits at +24. This index turned modestly positive in early 2014 and has shown consistent improvement for the past 14 months. The May 28 report from the Michigan Department of Technology, Management and Budget yielded more good news. Michigan’s official unemployment rate fell to 5.4 percent, even though the statistically “unadjusted” rate came in at 4.8 percent. We have 257,000 people on the official unemployment rolls, considerably lower than the 771,000 number in July 2009. Our best number in the past 40 years occurred in April 2000, when only 150,000 were reported unemployed. Among the jobless rates in the 83 Michigan counties, West Michigan continues to shine. Ottawa County posted the lowest unemployment rate of 3.1 percent, followed by third-place Kent County at 3.3 percent. Barry County took fifth place at 3.7 percent, while Allegan eased to 3.8 percent and Kalamazoo came in at 4.6 percent.

Where does the economy go for the summer? First, the national economy will probably continue on the same path of slow growth we have seen for many months. The world economy will also maintain slow growth, although countries with economies tied to mining, oil, or other extractive industries will continue to have difficulties. The West Michigan economy should continue to see above-average growth and falling levels of unemployment.

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

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