Industrial economy ebbs toward negative territory
Flat. That’s the latest word on the West Michigan economy, according to data from the last two weeks of May.
New orders, our index of business improvement, backtracked to 0, down from +7 in April. The production index retreated to +4 from +20. The index of purchases gave back most of its previous gain to come in at +7.
The report for West Michigan is slightly weaker than for the national economy and the overall Michigan economy. However, one month never constitutes a trend.
For local industrial groups, even though auto parts suppliers are operating at full capacity, new orders seem to be slow coming in. The office furniture business remains stable, and some smaller firms are setting records. May sales for industrial distributors came in mixed, with some firms very strong but others in an unexpected lull. Capital equipment firms continue to report widely mixed results.
It is no surprise that the business sentiment numbers from our local survey came in a little less upbeat. The perception of the next three to six months, the short-term business outlook, edged down to +24 from +34. Although +24 is not a strong number, it is still much better that the +4 reported in October when the mood was much more pessimistic. The long-term business outlook for May, for the next three to five years, eased modestly to +42 from +49.
The nationwide May report from the Institute for Supply Management remains positive, although less positive than April. New orders backtracked to +15, down from +20. The production index tapered to +4 from +20. ISM’s employment index hung onto a +2 gain. ISM’s overall index rose to 51.3 from 50.8, a modest gain.
Another view of the U.S. economy comes from the monthly survey by Markit.com, the international economics consulting firm. Markit’s index of new orders continues to weaken, and inventory numbers keep reflecting more caution. The final U.S. manufacturing PMI registered at 50.7, marginally down from 50.8 in April but still ahead of the 50.0 break-even threshold.
The survey author opined: “For those looking for a rebound in the economy after the lackluster start to the year, the deteriorating trend in manufacturing is not going to provide any comfort.”
The world industrial economy now appears to be officially flat. According to the JPMorgan Global Manufacturing survey of 31 nations released June 1, new orders edged lower to 50.2, down from 50.3. The production index eased to 50.1 from 50.4. JPM’s Global Composite purchasing managers index edged lower from April’s 50.1 to the break-even point of 50.0. The Eurozone PMI came in at 51.5, a very modest decline.
After many months of price relief, our local index of prices depicts a return to industrial inflation. For May, our index rose to +18, up significantly from April’s +6. Almost every grade and type of steel is now substantially costlier than just a few months ago, and the analysts predict more price increases over the next few months. The return of crude oil prices to nearly $50 has resulted in most oil-related commodities going up in price. West Michigan is the home for many plastic extruders, many of which report most varieties of plastic are rising in price. With the rise of diesel fuel prices, the respite of lower transportation costs has now run its course.
To most observers, auto sales appear to have hit a speed bump. According to the report from Automotive News, overall sales fell by 6.1 percent compared with May 2015. Although some of the drop can be attributed to fewer selling days, sales have risen only 1.1 percent for the first five months of 2016. Because of a shift in sales strategy away from fleet sales, GM posted an 18 percent decline. Other major brands recorded declines as well: Toyota dropped 9.6 percent, Ford 6.1 percent and Honda 4.8 percent. For domestic brands, Fiat-Chrysler eked out a 0.9 percent gain, primarily because of several hot-selling Jeep lines.
On June 3, the U.S. Bureau of Labor Statistics released one of its most pessimistic reports in months. As many commentators have noted, the May report could be a statistical fluke. The monthly survey by the Census Bureau considers a person to be unemployed only if they are actively looking for work. Although the standard unemployment rate fell to 4.7 percent in May, only 38,000 new jobs were added. The real surprise came from the 458,000 workers who dropped out of the workforce altogether and are not accounted for in unemployment numbers.
There are lots of reasons why the labor participation rate is now at 62.1 percent compared to around 66 percent before the Great Recession, but a significant portion of our “improved” unemployment numbers stem from people exiting the workforce — not from a better economy. In fact, even at 94.7, the University of Michigan’s Index of Consumer Sentiment is well below levels seen in the boom periods of the 1980s and late 1990s. The mood of many consumers is still funky.
In employment, West Michigan still outpaces most of the state. Ottawa County unemployment fell to 2.7 percent, the lowest rate of Michigan’s 83 counties. Close behind in fourth place came Kent County at 2.9 percent. Kalamazoo County posted fifth at 3.3 percent. Because the data are not seasonally adjusted, annual spring hiring can be credited for much of the gain from the previous month. But year over year, most reporting units are still better off by about 0.5 percent or so.
Michigan still claims to have about 80,000 technical jobs that cannot be filled because of a lack of qualified applicants. Even for unskilled jobs, some employers offering as much as $13 per hour are still having difficulty finding viable new employees.
Many U.S. economists and most European economists continue to worry a trade war may be brewing. The U.S. still has not gotten much of a reaction to the 266 percent tariffs on Chinese steel imposed by the Department of Commerce a few weeks ago. Europe has imposed new tariffs on Chinese steel, and the Chinese ministry retaliated with new tariffs on European steel imports. If a trade war starts to expand beyond steel, there will be significant economic consequences.
As we enter summer, where do we stand? Many major economic forecasters continue to warn of a possible recession, although the mood has recently turned less pessimistic because some stronger-than-expected spring stats. It’s possible the U.S. economy could slide into a pattern of very slow growth in the range of 1 percent and avoid an official recession.
Brian Long, Ph.D., is director of supply management research at Seidman College of Business, Grand Valley State University.