Local economy has enough momentum for the short term
December is often a month of slower sales and reduced production, but it took until February for West Michigan to return to the slow growth we have reported for most of the past seven years.
Although our statistics for January were incrementally positive, the data and comments collected in the last two weeks of February reflect the back-to-work tone of a post-holiday season.
New Orders rose to +14, up nicely from January’s +4. The Production index remained unchanged at +12. However, activity in the purchasing offices remained below par at -3, only slightly lower than the -1 reported last month.
The West Michigan economy continues to outpace the national economy and overall Michigan economy. Although some firms continue to feel the impact of global economic stagnation, many of our survey participants remain fairly optimistic about 2016 — at least for the first two quarters.
On Feb. 6, Mike Dunlap released his quarterly survey of the office furniture industry. The Dunlap Overall Index for January came in at 57.25, only a little below the record of 59.72 in July 2005. The Gross Shipments Index shot up to a record high, and the index of Raw Materials Costs came in at a record low.
Unfortunately, the respondents to our local ISM survey are not as optimistic. One noted that New Orders for the office furniture business are often slow in the Christmas season, but usually rebound in January. So far, that has not happened. Several of our office furniture firms are still waiting for new business to resume the upward trend. However, the market may have already hit its peak.
Our survey’s automotive parts producers turned in a mixed performance for February. Retail auto sales are still strong, and several of our local fabricators are still at full capacity. However, a couple of others are waiting for new business to materialize. The capital equipment industry is also mixed, depending on the industrial segment being served. One respondent reported seeing a slowdown in machine tool purchases and hearing that large machine tool companies are starting layoffs. In contrast, another local firm reported a record year for 2015. Possibly because of the weather, the local industrial distributors had a weaker-than-usual February. Finally, aerospace, another one of our cyclical industries, is still optimistic that the aircraft building boom will continue.
For February, the Institute for Supply Management, our national parent organization, reports the U.S. industrial economy is modestly positive. ISM’s index of New Orders rose to +6 from January’s +1. The ISM Production index returned to positive, rising to +7 from -5. The Employment index remains negative, but the rate of decline retreated to -3 from January’s double-digit -11. The index of New Export Orders remains negative at -7, about the same as last month’s -6.
At 49.5, ISM’s overall manufacturing index for February remains below the 50.0 break-even point for the fifth consecutive month. However, the index is significantly improved over January’s 48.2, which has resulted in some pundits projecting the index may soon turn positive. By contrast, ISM’s non-manufacturing index, currently at 53.4, has remained positive since the end of the Great Recession.
As always, a contrasting view comes from the U.S. survey conducted by Markit.com, the international economics consulting firm. For February, Markit’s PMI eased to 51.3, down from 52.4 but still higher than December’s 51.2. Although all of Markit’s indices are still positive, they reflect the slowest rate of growth in the past three years.
The survey author continues to voice a note of caution: “The February data add to signs of distress in the U.S. manufacturing economy. Production and order book growth continues to worsen, led by falling exports. Jobs are being added at a slower pace, and output prices are dropping at a rate not seen since mid-2012. The deterioration in the manufacturing sector’s performance since mid-2014 has broadly tracked the dollar’s rise, which makes U.S. goods more expensive in overseas markets and leads U.S. consumers to favor cheaper imported goods. With other headwinds including the downturn in the oil sector, heightened uncertainty due to financial market volatility, global growth worries, and growing concerns about the presidential election, it’s no surprise the manufacturing sector is facing its toughest period since the global financial crisis.”
The world economy continues to flatten. According to the JP Morgan Global Manufacturing survey of 31 nations released March 1, JPM’s index of New Orders eased to 50.4, down from 51.4; the Production index tapered to 50.2 from 51.5; the Global Purchasing Managers Index flattened from 50.9 to 50.0. The Eurozone PMI fell to a 12-month low, and France and Germany hover “close to the stagnation mark.” To no one’s surprise, Greece has fallen back into contraction.
Auto sales are still keeping the Michigan economy growing, so the February sales report from Automotive News was good news for our local parts fabricators. Historically, many of our local firms were tied into the Detroit Three, but several have made great strides in earning new contracts from firms like Toyota, Honda, Kia and Nissan. The sales leaders for this month include Ford at a whopping 20.2 percent, followed by Fiat-Chrysler adding 11.8 percent. Both firms attributed the overall sales increase to upticks in light trucks and SUV sales and acknowledged that lower gasoline prices are helping the industry. Honda’s sales rose 12.8 percent, Nissan added 10.5 percent and Toyota gained 4.1 percent. General Motors lost 1.5 percent, primarily because of a shift in sales strategy away from rental car sales.
Probably because of turmoil in the financial markets and the harsh political rhetoric, business optimism faded a little in this month’s report. Our Short Term Business Outlook index retreated to +19 from +24. For the Long Term Business Outlook, the pullback was to +40 from +48.
In other economic news, the dismal GDP report for fourth quarter 2015 was revised upward to 1 percent — a little better than the 0.7 percent reported in the Commerce Department’s initial estimate. Although the final estimate will not come until March 25, it is unlikely to vary much from the present number. The third and final estimate for the third quarter of 2015 came in at 2 percent, down modestly from 2.1 percent. If the fourth quarter estimate holds, the official GDP growth rate for 2015 will be etched in the record books as 2.4 percent, the same as 2014.
Where do we stand? Is another recession around the corner? All of the economists in the world have been trying to come up with a magic anti-recession vaccination for the past 200 years. Regrettably, the so-called “business cycle” has resulted in some kind of an economic downturn occurring about every six to eight years.
We are now seven years into the anemic recovery from the Great Recession, and some people believe that we are still not fully recovered. But recessions almost always have one or two main factors that trigger a bubble bursting. All eyes are on China, but some of the news there has been slightly more positive. The severe slump in oil prices may have run its course, and the threat of a worldwide “oil recession” may have been averted.
In a similar move, copper prices as well as prices for other nonferrous metals have recovered about 10 percent over the past two months. This is good news.
Although the economy always seems to be going up or down, it is possible that what may be unfolding is a third alternative: an economy that drifts sideways with a slim margin of growth. Some economists refer to this as a “growth recession,” implying economic growth is marginally positive, but wages are stagnant and unemployment drifts higher. An annual GDP growth rate of 1 percent would probably fit this category.
Several European countries experienced growth recessions in the 1990s, and it is possible the U.S. and the entire world could be headed for such a scenario. Either way, the present West Michigan economy has enough positive momentum to carry forward for a few more months.
Brian Long is director of supply management research at Seidman College of Business, Grand Valley State University.