Local economy keeps pace with state, national numbers
For this month’s report, it is gratifying to see the West Michigan economy continue to grow, even though the pace remains subdued. The data and comments collected in the last two weeks of April remain optimistic, although there remains a scattering of firms that are either flat or declining.
New Orders, our index of business improvement backtracked to +7, down from +15. By contrast, the Production index rose to a three-month high of +20, up from +16. Activity in the purchasing offices rose sharply to +14, up from +3.
For April, it can be noted the West Michigan economy approximately paralleled the performance of the national economy and the overall Michigan economy.
Reviewing our local industrial groups, near-record auto sales are still keeping auto parts suppliers operating at full capacity, even though a couple are reporting a slight hesitation. The office furniture business remains stable, and the spring season has resulted in significant improvements for some firms. Like last month, our industrial distributors were generally positive. Capital equipment firms continue to report widely mixed results.
For April 2016, the business sentiment of the local survey continues to be quite positive. The index that asks about the perception of the next three to six months, the Short Term Business Outlook, remained relatively stable at +34, down from +37. For the outlook for the next three to five years, the Long Term Business Outlook, the index rose to +49 from +44. Given the pessimistic numbers we reported six months ago, the current mood is much more confident.
Good news comes from Mike Dunlap’s quarterly survey of the office furniture industry. Most of the statistics came in just a few points below the all-time records set about 12 years ago. “The industry continues to grow steadily. Obviously, the smaller to mid-sized companies are growing faster than the top five. The overall index is strong and definitely above the 54.79 survey average.”
The national report from the Institute for Supply Management, our parent organization, reported a small but significant improvement for April. New Orders rose to +21 from +20. The Production index edged higher to +22 from +17. The Employment index, which has been negative for the past six months, returned to positive at +5, up from -4. However, because of statistical weighting, ISM’s overall index retreated to 50.8 from 51.8.
By contrast, the U.S. survey conducted by Markit.com, the international economics consulting firm, remains more cautious. Despite a modest increase in New Orders, the rate of expansion was the weakest since December 2015. The final U.S. manufacturing PMI came in at 50.8, down from 51.5 in March and only slightly above the 50.0 no-change threshold.
The world economy continues to show signs of flattening. According to the JP Morgan Global Manufacturing survey of 31 nations released May 2: New Orders edged lower to 50.4 from 51.4; the Production index eased to 50.4 from 51.3; the Global Purchasing Managers Index edged lower to 50.1; Eurozone PMI posted a very modest increase to 51.7 from 51.6.
Auto sales for April posted a gain of 3.5 percent, and the seasonally adjusted annual rate rose to 17.42 million, slightly below the 17.5 million forecast but up sharply from the March pace of 16.56 million and 16.77 million in April 2015. The strong sales are attributed to lower gasoline prices, near-record cash incentives, favorable finance offers, pockets of pent-up demand and a reasonably stable national economy. Sales rose 3.6 percent at Ford, 5.6 percent at Fiat-Chrysler, 14.4 percent at Honda, 3.8 percent at Toyota and 12.8 percent at Nissan. General Motors lost 3.5 percent, and Volkswagen lost 9.7 percent because of continued fallout from the emissions scandal.
For unemployment statistics, most West Michigan reporting units are at least a full percentage point better off than a year ago. The Kent County unemployment number for March came in at 3.3 percent, Ottawa County at 3.2 percent, and Kalamazoo County at 3.7 percent. The employment picture is the best it has been since the recovery began seven years ago.
For our local survey, the index of Employment remains positive at +11, slightly lower than the +14 reported for March. As long as the Employment index remains positive, we should expect to see some modest improvement in our local unemployment rates. However, the industrial sector alone cannot be counted on to unilaterally drive the unemployment rates lower.
Although many factors fostered the Great Depression 85 years ago, the trade war ignited by Smoot-Hawley tariffs is often cited as a significant factor. The Economist magazine, a British publication, worries a new trade war could be spawned by the political rhetoric of the 2016 presidential election. The editors complain that all of the top presidential candidates in both parties favor new trade restrictions, presumably to “protect American jobs.” This language harkens back to Smoot-Hawley, and raises the prospects of potential trade wars breaking out with some of our major trading partners.
As of March 1, the Department of Commerce imposed tariffs of 266 percent on some Chinese steel imports. So far, the Chinese have not responded. Based on past history, some response is almost inevitable. For all of 2015 and most of 2016, our index of Prices has been sharply negative. However, for March and April, the index has returned to positive, rising to +14 and +6, respectively.
Although most of the basic commodities prices are no longer falling, the big problem is the recent imposition of tariffs on Chinese steel has resulted in almost every size, shape and grade of steel going up in price. For the office furniture and automotive industries, the lower steel prices were good for the bottom lines of major firms and parts producers. However, higher steel prices are probably here to stay, at least as long as the world economy stays out of trouble.
Coming on the heels of a tepid 1.4 percent growth rate for the fourth quarter of 2015, the first quarter of 2016 GDP release from the Commerce Department was a disappointment. Although the initial report of 0.5 percent growth is “preliminary,” it still portends the best we can hope for is more slow growth for the next few months.
We continue to balance the good news with the bad. Subject to the obvious limitations, our local unemployment rates have returned to near-full employment. The national ISM index remains marginally positive, and local statistics have resumed the pattern of slow growth. However, numerous countries have slid into recession, and European growth, while still positive, is disappointing in view of the central bank’s accommodative monetary policy.
The PMI from China remains negative, but since the government news agency seized the survey from HSBC about four months ago, we wonder whether the real numbers might be even weaker. A recent Wall Street Journal article questions the efficacy of economic data coming from India. Right now, it appears that the U.S. economy is going sideways, and the slow growth we have seen for the last seven years may get even slower. Locally, as long as auto sales and office furniture sales remain strong, West Michigan should continue to outpace the overall U.S. economy, but there is no prospect for faster growth.
Brian Long, Ph.D., is director of supply management research at Seidman College of Business, Grand Valley State University.