West Michigan economy shows no sign of backing down
Despite the signs several of our local industries are topping out, West Michigan business conditions remain positive.
According to the latest survey conducted during the last two weeks of March, New Orders, our index of business improvement, moderated to 21, down slightly from 25. However, the Production index bounced to 31, up significantly from the 17 we reported for February. Activity in the purchasing offices, the index of Purchases, rose to 25, up from 19. Probably because of the stronger sales reports, the March index representing Finished Goods Inventories index dropped from 5 to minus 9.
The unexpectedly strong Production index apparently caused some firms to drive the Raw Materials Inventories index down to 9 from 21. However, the fear of more price increases still is causing some firms to continue building inventory. Overall, the first quarter of 2017 for West Michigan has ended on a strong note. At this time, the West Michigan economy shows no sign of backing down.
Turning to individual industries, some auto parts suppliers still are concerned about softening in auto sales. However, those firms supplying light truck and SUV components remain much more optimistic, as do firms that are successfully selling to the numerous transplant manufactures around the world.
About 14 percent of the world’s office furniture is made in West Michigan, and the spring season is opening on a positive footing for most firms, as well as their Tier I suppliers. The capital equipment rally that started in January may have run its course, although some firms still are positive. The performance for the industrial distributors continues to be mixed.
The pattern of economic improvement has helped to maintain positive outlook for West Michigan. For March, the Short Term Business Outlook, which asks local firms about the perception for the next three to six months, registered a small uptick from 37 to 39. Looking out three to five years, the Long Term Business Outlook retreated modestly to 42 from 47. Although a few respondents are somewhat pessimistic, most of the comments for March remain optimistic.
The April 3 report from the Institute for Supply Management, our parent organization, continues to show considerable strength. New Orders, ISM’S index of business improvement, rose modestly to 35 from 32. However, the Production index backtracked to 21 from 27. This month’s best news came from ISM’s index of Employment, which jumped to a six-year high of 16, up from 8. Because of statistical variations, ISM’s overall index for March eased to 57.2, down from 57.7. But 57.2 still is a very strong number.
The March survey of the U.S. conducted by Markit, the British economics consulting firm, came in a little less robust. Although still positive, the growth rate for the New Orders and Production indexes moderated from January’s 28-month peak. The Markit PMI for the U.S. came in at 53.3, down slightly from 54.2.
Comments from Chris Williamson, the chief business economist for Markit, have again turned cautious:
“The post-election resurgence of the manufacturing sector seen late last year is showing signs of losing steam. Output growth slowed to a six-month low in March, optimism about the outlook has waned and hiring has slowed accordingly. While the survey data suggest the goods-producing sector enjoyed a relatively good first quarter on the whole, the loss of momentum seen in February and March bodes ill for the second quarter.”
The March 1 report from the JP Morgan Global Manufacturing survey of 31 nations continued to expand “at a solid pace.” JPM’s overall index remained at a 69-month high of 53.0. This index has now remained above the neutral 50.0 mark for 13 successive months. Although soft spots around the world in countries like Greece and Brazil still are a drag, the Eurozone continues to exceed expectations.
David Hensley, the survey author, further noted:
“The global manufacturing sector recorded its fastest rate of quarterly expansion for almost six years over the first quarter as a whole. The latest PMI survey suggests little change in March, with rates of expansion in New Orders and Production at or near February’s highs. Furthermore, the 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.”
Good news continues to come our way from the Index of Small Business Optimism tabulated by National Federation of Independent Business. The index came in at one of its highest readings in 43 years and follows the largest month-over-month increase in the survey’s history. It is worth repeating about 60 percent of all new jobs are generated by small businesses. But this optimism can fade quickly if nothing happens in Washington.
According to Juanita Duggan, NFIB’s president and CEO:
“It is clear from our data that optimism skyrocketed after the election because small business owners anticipated a change in policy. The sustainability of this surge and whether it will lead to actual economic growth depends on Washington’s ability to deliver on the agenda that small business voted for in November. If the health care and tax policy discussions continue without action, optimism will fade.”
The 2016 campaign is long over, but we still hear the call for more jobs. About 85 percent of all jobs come from the private sector, so it was good to see our Employment index for West Michigan edge up to a two-year high of 21. It is worth repeating many industrial firms still are struggling to find new workers who are both qualified and dependable.
Why, then, are the unemployment numbers for West Michigan rising? For instance, the latest unemployment report for Kent County came in at 3.6 percent, well below the state rate of 5.3 percent, but slightly higher than the 3.3 percent year-over-year rate. It seems counterintuitive, but the biggest single reason for this increase is actually positive. The economy finally has improved enough that many workers are re-entering the workforce. It is worth remembering that the “usual” unemployment rate (U-3) that is reported at the state and local levels every month only considers people who are working or actively looking for work to be considered part of the workforce. The U-3 unemployment rate for Michigan currently stands at 5.3 percent, but the Michigan U-6 rate, which includes discouraged and marginally attached workers, stands at 10.3 percent. Some pundits call this the “real” unemployment rate.
One major threat to the profitability of our local industrial firms continues to be industrial inflation. After moderating last month, our local index of Prices jumped to 39 from 27. For the first time in over six years, not a single firm reported a significant level of falling prices. The list of major commodities rising in prices has exploded from a handful of commodities in January to about 50 in the March survey. At the national level, ISM’s index of Prices rose to 41, well ahead of the single-digit reports for all of 2016.
Because West Michigan is the center for many injection molding firms, we received many reports of significant price increases for almost every type and grade of plastic resin. Although rising feed stock prices have been cited as a reason for the price increases, some buyers suspect price collusion. Steel, another key industrial commodity for many of our local firms, also is rising in price, partially because of new import tariffs implemented about six months ago. Currency fluctuation also has contributed to industrial inflation, given that the dollar has strengthened by about 20 percent compared to the average of other major world currencies. Based on higher import costs, this has resulted in raw commodities like copper, aluminum and nickel rising in price.
Because of the year-over-year sales drop in light vehicle sales for March, automotive parts suppliers in West Michigan continue to be cautious. Looking at March sales, Ford posted a decline of 7.2 percent, followed by a 4.4 percent drop at Fiat-Chrysler. General Motors posted a modest increase of 1.6 percent. Among the other major brands, Honda eased 0.7 percent, Nissan added 3.2 percent and Subaru gained 11.3 percent. Toyota reported a modest drop of 0.4 percent. All of this added to a 1.7 percent drop for the entire industry. The firms are blaming higher interest rates and falling used car prices, but market saturation also is a factor. Dealer inventories at GM currently are running at 98 days, and the company recently announced plans to cut inventories to about 70 days by the end of the year. This move will result in reduced production schedules for several local firms supporting some of the GM lines. However, light truck and SUV sales probably will continue to be positive.
Where do we go from here? Clearly, most of our state, local and national statistics continue to improve. But the “Trump Rally” that has driven the stock market about 17 percent higher since Election Day may have run its course. Post election, there has been a new wave of optimism, partially driven by expectations for decreased regulation and lower taxes. But the reality is now setting in that many of these changes may be months or even years away from being implemented. For the rally to continue, we need to see some kind of progress fairly soon.
Brian Long, Ph.D., is director of supply management research at Seidman College of Business, Grand Valley State University.