Area Economy

Hopes for decreased regulation, lower taxes fuel economy

March 10, 2017
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For West Michigan, the 2017 rally continues for the industrial markets.

According to the latest survey conducted during the last two weeks of February, New Orders, our index of business improvement, bounced to plus-25, up significantly from plus-8 in last month’s report. The Production index rose to plus-17 from plus-8. Activity in the purchasing offices, the index of Purchases, jumped to plus-19 from plus-6. The February index representing Finished Goods Inventories edged up to plus-5 from 0. The fear of more price increases drove the Raw Materials Inventories index up to plus-21 from plus-11.

All of this bodes well for the overall West Michigan economy for the first quarter of 2017. In fact, if March turns out to be as good as February, the GDP for the first quarter of 2017 should be very positive. Although many of our industrial groups are showing signs of topping out, the overall West Michigan economy should remain positive for the foreseeable future.

Looking at individual industrial groups, the auto parts suppliers continue to raise concern over the recent softening in auto sales but remain positive about the 2017 outlook. For the office furniture industry, a few of the firms are continuing to set sales records, although many signs still point toward sales topping out. The capital equipment rally that started in January still is moving forward. The performance for the industrial distributors continues to be positive for some firms, but others are seasonally stagnant.

Following the pattern of improving sales and production statistics, it is not surprising to see the business sentiment numbers for February continue to improve. The Short Term Business Outlook, which asks local firms about the perception for the next three to six months, rose to plus-37 from plus-28. Looking out three to five years, the Long Term Business Outlook remained unchanged at plus-47. All of this reflects a noticeable improvement over the pre-election statistics a few months ago.

The March 1 report from the Institute for Supply Management, our parent organization, came in very positive. New Orders, ISM’s index of business improvement, rose to plus-32, up sharply from plus-16 in January and plus-12 in December. The Production index jumped to plus-27 from plus-14. The Employment index remained unchanged at plus-8. ISM’s overall index for February accelerated to 57.7, up significantly from 56.0.

The February survey of the U.S. conducted by Markit, the British economics consulting firm, remained positive. However, the growth rate for New Orders moderated from January’s 28-month peak, alongside a slightly slower increase in the Production index. The Markit PMI for the U.S. came in at 54.2, down slightly from 55.0 in the January report.

Comments from Chris Williamson, the chief business economist at Markit, have turned quite positive, given that most of his 2016 comments were very cautious:

“Even with the latest slowing, the goods-producing sector is still on course for its best quarter for two years, representing a markedly improved picture compared to this time last year. Growth is being driven by robust domestic demand, stemming in turn from buoyant consumers and increased investment spending by the energy sector in particular. Manufacturing is far from booming, however, as the strong dollar means near-stagnant exports continue to act as a drag on growth.”

The March 1 report from the JPMorgan Global Manufacturing survey of 31 nations continued to be optimistic. JPM’s overall index rose to a 69-month high of 52.9 in February, up slightly from 52.7 in January. This index has remained above the neutral 50.0 mark for 12 successive months, quelling fears that a world recession might be brewing. Euro-area manufacturing production and new orders both rose at the quickest rates since April 2011.

David Hensley, the survey author, further noted:

“Euro-area manufacturers are reporting the strongest production and order book growth for almost six years, in what’s looking like an increasingly robust upturn. Companies clearly expect the good times to persist. This year has seen firms more optimistic about the future than at any time since the region’s debt crisis.”

More good news comes from the Index of Small Business Optimism tabulated by National Federation of Independent Business. The index came in at the highest level since December 2004 and follows the largest month-over-month increase in the survey’s history. It is important to note about 60 percent of all new jobs are generated by small businesses.

According to NFIB’s chief economist: “The stunning climb in optimism after the election was significantly improved in December and confirmed in January. Small business owners like what they see so far from Washington. The continued surge in optimism is a welcome sign that economic growth is coming. The very positive expectations that we see in our data have already begun translating into hiring and spending in the small business sector.”

It was good to see the February Employment index for West Michigan edge up to plus-12 from plus-6. Double-digit growth for the index has returned for the first time since August. At the national level, the ISM index of Employment rose to plus-8 after posting negative numbers for most of 2016. Many industrial firms still are struggling to find new workers who are both qualified and dependable. Hence, as we approach full employment, it is not surprising to find the unemployment rates among our West Michigan reporting units are no longer falling like they were a year ago. For instance, the latest unemployment report for Kent County came in at 2.9 percent, well below the state rate of 5 percent. However, the report is slightly higher than the 2.7 percent rate from a year earlier. We can hope the unemployment rate will show modest improvement in coming months, but the inability of many firms to fill the 80,000 job openings throughout the state will probably keep unemployment rates from falling much further. As we have noted in the past, it is frustrating the education system currently is doing little to close this gap. The lowest rate for Kent County in the past 20 years came in at 2.1 percent, so there still is room for improvement.

One of the current threats to the profitability of our local industrial firms continues to be the recent surge in prices for a wide variety of commodities. Our local index of Prices moderated to plus-27 from plus-30, but the list of major commodities rising in price continues to grow. At the national level, ISM’s index of Prices came in at plus-36, well ahead of the single-digit reports for most of 2016. Among the “big ticket” worrisome commodities that have jumped in price over the past few months are hot- and cold-rolled steel, rubber, copper, brass and most types of plastic resins. Over the past two years, the U.S. dollar has strengthened by about 20 percent compared to the average of other major world currencies. Whereas a strong dollar may be an element of national pride, it makes export sales less competitive and raises the cost for many of our key industrial commodities. Unfortunately, the Federal Reserve’s probable increase in interest rates will result in the dollar rising even further in value.

The sales statistics for automobiles have continued to moderate, and the year-over-year sales for February eased by 1.1 percent. Our automotive parts suppliers in West Michigan continue to be cautious, although one respondent noted the drop in sales has so far been very orderly. Furthermore, several of our local firms have been successful in developing new business with the Japanese and Korean transplant companies around the world. Looking at February sales for the Detroit Three, Ford posted a decline of 4 percent, followed by a 9.9 percent drop at Fiat-Chrysler. General Motors posted an offsetting increase of 4.2 percent. Among the other major brands, Honda rose 2.3 percent, Nissan added 3.7 percent and Subaru gained 8.3 percent. The big loser was Toyota, which reported a drop of 4.4 percent.

Most of our state, local and national statistics continue to improve. Even the world economy continues to show modest improvement. The term “Trump Rally” has been applied to the stock market, which has risen about 17 percent since Election Day. Overall, there is a new wave of optimism, partially driven by expectations for decreased regulation and lower taxes. As we have noted in previous reports, large corporations like General Electric are able to take advantage of the myriad tax loopholes to bring their taxes down well below the widely publicized statutory rate of 35 percent. A few years back, all of these loopholes resulted in GE paying no federal income tax at all. Small businesses, on the other hand, are almost never afforded this kind of favorable treatment and end up paying taxes very close to the 35 percent rate. It is therefore understandable the possibility of rates falling to 15 percent or even 20 percent has generated a lot of excitement. But for the Trump Rally to continue, we need to see some evidence by mid-summer that lower taxes are going to happen.

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

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