Area Economy

West Michigan economy remains slightly ahead of national numbers

November 13, 2015
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Slow growth is still the best way to describe the West Michigan economy, according to data and comments collected in the last two weeks of October.

Our index of New Orders edged slightly lower to +9 from +13. The Production index retreated to +3 from +12. Activity in the purchasing offices rose modestly to +6 from 0. For the Employment index, it was gratifying to see the index flip back to positive at +5, up from -3.

Even though the West Michigan economy has flattened, we are still modestly better off than the U.S. economy as a whole. As long as sales for auto parts, office furniture and aerospace remain near record levels, the West Michigan economy should continue on the path of slow growth. In addition, most industrial businesses are as profitable as they have been in many years.

A note of caution comes from the data we collect for business confidence, however. The Short Term Business Outlook index backtracked to +4 from +11, a two-year low. Geopolitical events have continued to dampen the outlook. In contrast, our Long Term Business Outlook index moved up to +44 from +38.

Looking at individual industries, not much has changed. The automotive parts producers are still near full capacity, although the rate of plant expansion seems to have slowed. The office furniture business is still near an all-time high. The aerospace industry is smaller than automotive parts and office furniture, but new orders remain driven by the major players like Boeing and Airbus. One weak spot that may be emerging is the capital equipment industry, where foreign competitors are discounting prices because of the softer sales in China and Western Europe. Our industrial distributors reported business conditions to remain on track.

At the national level, the November report from the Institute for Supply Management, our parent organization, remained near flat. ISM’s index of New Orders returned to positive at +1, up from -3. The Production index rose infinitesimally to +2 from +1. The Employment index edged lower to -8, down from -3. ISM’s overall index eased to 50.1 from 50.2. However, ISM’s index of New Export Orders came in at -5, slightly better than the -7 reported last month. The strong dollar makes U.S. goods more expensive to the rest of the world, but so far, the bottom is not falling out of the export market as some pundits predicted.

A contrasting view of the U.S. economy comes from international economics consulting firm Markit.com. For October, the report posted the sharpest improvement in overall business conditions since April. The authors note stronger U.S. manufacturing performance is driven by faster rises in output, new orders and employment levels. Markit’s PMI rose to 54.1, up from 53.1 in September, well above ISM’s index of 50.1.

Internationally, the Nov. 2 report from the JP Morgan Global Manufacturing Index came in at 51.4, up from 50.7 in October. Business conditions for a few key countries like Ireland, Germany, Netherlands, Italy and Spain continue to post modest gains. Mexico, our second-largest trading partner, reported a PMI of 53.0 for the month, up from 52.1. After years of negative numbers, business conditions in France have finally flipped back to positive. The PMI for Canada, our largest trading partner, sank to 48.0, down from 48.6. Other countries like Greece, Russia, China, Turkey, Brazil, Indonesia and South Africa are pulling the numbers down for the international average.

The survey author noted: “Export orders showed the largest monthly gain for four months, which may help allay fears that weaker growth in China and other emerging markets is derailing the Eurozone’s recovery. Upturns are starting to look tired in countries that were performing strongly earlier in the year, with rates of growth slowing in Ireland and Spain. Tepid growth in Germany and an ongoing near stagnation in France left Italy as a somewhat surprising star performer.”

Although the October survey numbers are not spectacular, 2015 has been a very good year for West Michigan. Because Economics 101 tells us employment is an economic laggard, it is not surprising to see the unemployment update from the Michigan Department of Technology, Management and Budget continues to improve. For October, Michigan added another 10,000 new jobs. The “official” number of unemployed workers fell to 235,000. For West Michigan, most of the unemployment rates continue to stay well below the state rate of 5 percent. Ottawa County is at 3 percent unemployment, followed by Kent County at 3.1 percent, and Kalamazoo County at 3.7 percent.

No matter how the unemployment rate is calculated, the results are still just estimates. The 5 percent unemployment rate for Michigan is the “official” rate, but it is intended to be a guide, not an absolute number. For the BLS, this “official” statistic is labeled U-3, and constitutes the percentage of the labor force currently unemployed and actively looking for work. The broader measure, entitled U-6, is the “total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force, plus all persons marginally attached to the labor force.” For some proponents, this can be called the “real unemployment rate.” As of September, the U-6 number stands at 12.0 percent in Michigan, which is also a 12-year low. In other words, both U-3 and U-6 have been falling at approximately the same rate.

One of the important things to look at is the trend. One year ago, Michigan’s official rate was 5.9 percent. Because the methodology for calculating unemployment has not changed, it is safe to conclude the overall unemployment situation is improving. Because the methodology is the same for the entire state, comparisons can be made between various geographical governmental units based on the residency of the persons surveyed. Here’s the confusion: A person living in Kentwood (unemployment 2.9 percent) may work in Grand Rapids (unemployment 4.1 percent).

Another factor that is much more unsettling is the number of people who have simply dropped out of the labor force. If these people had not dropped out, all of our unemployment numbers would be much higher.

Auto sales for October came in at a SAAR rate of 18.2 million units, one of the strongest months in history. For the Detroit Three, GM gained 15.9 percent, Ford 13.4 percent and Chrysler 14.6 percent. Toyota added 13 percent, Honda 8.6 percent, Nissan 12.5 percent and Volkswagen 5.4 percent. Truecar estimates financial incentives rose 14 percent to $3,104 per vehicle last month compared to October 2014. Besides generous incentives, lower gasoline prices and record-low finance rates were cited as reasons for the strong performance. Just like most of 2015, the gains for many automakers were primarily centered on light trucks and SUVs.

The world economy still remains the greatest threat to the U.S. economy. Low commodity prices continue to be a two-edged sword, resulting in the extractive economies of countries like Canada and Australia softening, while industrial nations like Japan and Germany benefit from the lower costs. The U.S. economy is both industrial and extractive, so we are caught in the middle.

It is worth remembering the Federal Reserve reports, up until three months before the Lehman Brothers collapse, concluded the economy was on a strong footing. The economists on the Fed Board are supposed to be among the best and brightest and even they were blindsided. Let’s hope that it doesn’t happen again.

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

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