Late summer economy remains in slow growth mode
Growth returns to normal. That’s the latest word on the local economy, according to data and comments collected in the last two weeks of July.
New Orders, our index of business improvement, edged forward to +22, up from +19. The July Production index resumed the pace of previous months and rose to +26 from +16. Our closely watched index of Employment continued the positive trend of the past 18 months and edged up to +25 from +20. The index of Purchases remained positive but eased to +14 from +24. In part because of seasonality, the Finished Goods Inventory index increased to +16 from +9.
Overall, the six-year pattern of slow growth continues, although with a few minor adjustments.
Looking at our industrial groups, most are positive. A few firms with overseas customers have noted some reduction in sales.
Our local auto parts producers and the office furniture industry are still near full capacity and report business conditions to be stable or expanding. The summer pattern for industrial distributors remains mixed, however, with capital equipment firms generally flat compared to a few months ago. With the fall in oil and commodity prices, any firms tied to the extractive industries are having difficulties.
Business optimism has again faded a little over the past month. Our Long Term Business Outlook index eased to +40 from +44. The Short Term Business Outlook backtracked to +22 from +25. It appears geopolitical events have dampened the outlook for some respondents, even though the local economic picture remains much more positive.
The Aug. 3 report from the Institute for Supply Management, our parent organization, portrays a slower picture of growth for the national economy. For the third month in a row, ISM’s index of New Orders remained positive but edged lower to +5, down from +9. The Production index remained unchanged at +7. ISM’s overall index eased to 52.7 from 53.5, although any reading over 50.0 is still considered positive.
Slow growth for the U.S. is also the view from Markit.com, the international economics consulting firm. Markit’s overall index rose modestly to 53.8 from 53.6.
The survey author further noted: “Companies reported that the strong dollar once again hurt export competiveness, exacerbating already weak demand in many countries, especially emerging markets and Asian economies.”
According to the JP Morgan Global Manufacturing Report released Aug. 3, the international economy remains sluggish. Global PMI for July remained unchanged at 51.0. The numbers coming from countries like China, Indonesia, France and Greece continue to be a drag on the world economy.
The survey author further noted: “The most impressive growth rates are being seen in the Netherlands, Spain and Italy, the latter being notable in enjoying its strongest growth for over four years in July.”
Over the past month, an accord has been reached between the Europeans and Greeks over restricting the debt and instituting new austerity measures. In the 2012 restructuring, the interest rates on a huge portion the Greek debt were reduced to 1.5 percent, which resulted in a 40 percent loss in the net present value of the money borrowed in 2001-2006. The bondholders, most of whom were European citizens as well as European banks, were not happy, but it produced a long-term path out of the dilemma and an eventual recovery of the face value of the bonds. From an economic standpoint, the program seemed to be working. In the first three quarters of 2014, the Greek GDP grew at a rate of 2.3 percent, and forecasters estimated that 2015 GDP would rise about 3 percent. By late August 2014, interest rates had fallen to about 5.6 percent, still high compared to the rest of the world, but manageable.
As the economy headed toward apparent recovery, many Greeks apparently could not understand why “austerity” was still necessary. As the left-wing Syriza party took control in January, retirement age was dropped back to 58, and pensions reset at 80 percent. But then the debt payments started to come due. After brutal negotiations, a new agreement was reached in early July, and the markets seemed to breathe a sigh of relief.
However, the country has lost about 20 percent of its GDP, which will take many years to replace. The unemployment rate remains at 25 percent but is starting to edge up. Many Greeks have already moved their savings out of the country, leaving the banks undercapitalized. The World Bank’s estimate for 2015 GDP growth has gone from a positive 3 percent to a negative 3 percent.
Few observers think the Greek crisis is over. This month’s PMI from Greece came in at 30.2, the lowest of any PMI for any country in the last 75 years. A short-term solution has been reached, but more money is flowing out of the country in anticipation of another crisis. Granted, some money is coming in to the country to buy up land at “fire sale “ prices, but without new capital investment, the crisis will continue. On the other hand, there is still a slim hope that the new austerity measures will revive growth enough in 2017 and 2018 to lessen the impact of the next crisis.
In other recent economic news, the number of Americans filing new applications for unemployment benefits dropped to a seasonally adjusted 255,000 for the week ended July 18, its lowest level in more than 41 years. Part of the drop was attributed to the seasonal adjustment factors, which have assumed a significant number of workers filing because of annual “model changeover” in the auto industry. Another reason for the decrease in filings is a drop to a 38-year low for the worker participation rate. At 62.6 percent, worker participation in the U.S. has fallen far below other industrialized countries. Workers who have dropped out of the workforce don’t file for unemployment.
The July 25 report from the Michigan Department of Technology, Management and Budget confirms our survey statistics. For the past 18 months, our index of Employment has posted double-digit gains, despite the fact the recovery from the Great Recession is well over six years old. In terms of job growth over the past six months, Kent County has added about 13,000 new jobs, Ottawa County 6,000, and Kalamazoo County about 3,000. During the January-to-June period, Michigan added 114,000 jobs. However, the “official” number of unemployed workers for June rests at 261,000, well ahead of the 30-year record low of 167,000 recorded in March 2000.
Locally, almost all of our unemployment rates are below the current state level of 5.5 percent. Ottawa, Kent, Allegan and Barry counties continue to feature unemployment rates in the 4-4.5 percent range. Kalamazoo County came in slightly higher at 4.8 percent, as did Calhoun County at 5.4 percent. Van Buren County, still trying to recover from several significant job losses, remains high at 6.3 percent, even though the rate is 1.5 percent lower than July 2014.
Other economic news for the month came from the Department of Commerce. After twice reporting that GDP for the U.S. fell in the first quarter, the latest revision pegs the growth rate at a positive 0.6 percent. For the second quarter, the first estimate is that GDP grew at a rate of 2.3 percent. There will be more revisions to come, but slow growth is projected to continue.
Looking forward, West Michigan remains stable and growing, but manufacturing in the rest of the country is being impacted by the strong dollar and declining exports. If the trend continues, our local statistics will be pulled a little lower. The Puerto Rico default will hurt the bond market but have little impact on the industrial market. If world commodity prices continue to fall, the result will be more mine closures and losses in various metal portfolios around the world. With the Chinese PMI falling, China could be the enigma that draws the world into a global recession if the economy collapses. If the Chinese economy simply slows or turns flat, the U.S. should have enough momentum to stay out of a recession.
Brian Long, Ph.D., is director of supply chain management research at Seidman College of Business, Grand Valley State University.