Area Economy

Lower auto sales could pose threat to West Michigan economy

June 9, 2017
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Yes, the news still is good. The latest survey of the West Michigan industrial economy conducted during the last two weeks of May remains fairly positive, even though concerns have been raised about falling auto sales.

New Orders, our closely watched index of business improvement, came in at 27, just a little below last month’s two-year high of 35. However, the Production index remained positive but backtracked to 19 from 29. Activity in the purchasing offices, the index of Purchases, remained virtually unchanged at 24. May’s Finished Goods Inventories index rose to 8, up considerably from April’s minus 4. The fear of more price increases for some commodities helped to drive the Raw Materials Inventories index up to 19 from 16.

Looking at individual industries, most auto parts suppliers are turning a watchful eye to the summer shutdown schedules of many of their key customers. May is usually a good month for the office furniture business, and this year is no exception. However, the office furniture industry continues to show signs of topping out. The capital equipment market remains mixed, but the bias for this month is to the down side. The performance for the industrial distributors continues to be mixed, too, even though summer maintenance schedules are now in full swing.

It was good to see business optimism picked up for May. Our West Michigan index of the Short Term Business Outlook, which asks local firms about the perception for the next three to six months, posted a small uptick from 32 to 33. Looking out three to five years, the Long Term Business Outlook jumped to 46 from 35.

At the national level, the June 1 report from the Institute for Supply Management, our parent organization, continues to project moderate growth. New Orders, ISM’s index of business improvement, eased modestly to 25 from 27. Partially because of the season, the Production index backtracked to 19 from 31. ISM’s overall index for May advanced slightly to 54.9 from 54.8.

The May survey of U.S. manufacturing conducted by Markit.com, the British economics consulting firm, remains positive, but less robust. New Orders moderated to the slowest pace since September 2016. The Markit PMI for the U.S. came in at 52.7, down fractionally from 52.8.

Chris Williamson, the chief business economist for Markit, remains cautious: “Manufacturing growth momentum continued to ebb in May, down to its weakest since just before the presidential election. Manufacturing output, order books and employment all grew at only modest rates as sluggish sales prompted firms to scale back hiring. Exports sales remained especially lackluster, hampered in part by the relatively strong dollar. The survey also brought signs of companies becoming more cautious about holding inventory.”

The May report from the JPMorgan Global Manufacturing survey of 31 nations remained positive, although the pace slowed to a six-month low. Among the noteworthy nations covered by the survey, positive results were reported by Germany, Austria, Ireland, Netherlands, Spain, the United Kingdom and the U.S. Countries posting modestly negative results include Thailand, Greece and China. JPM’s overall index came in at 52.6, down slightly from 52.7 in April, but still above JPM’s long-run series average of 51.4.

The survey author summarized his current perspective: “The global manufacturing sector continued to expand in May, achieving further steady growth. The underlying dynamics of the survey, such as fuller order books, rising employment and positive business sentiment, also bode well for the future performance of manufacturing. The Eurozone upturn is developing deeper roots as factories enjoy a spring growth spurt. Demand for goods is growing at the steepest rate for six years, encouraging manufacturers to step up production and take on extra staff at a rate not previously seen in the two-decade history of the PMI survey. Germany is leading the upturn but is by no means the only engine of growth. Solid upturns are being recorded in other countries, such as the Netherlands, Austria, Spain, Italy and Ireland. While France is lagging behind, it is nonetheless enjoying its best quarter for six years.”

The West Michigan employment picture, always a hot button issue, continued to show significant improvement in May. Of the 83 counties in Michigan, the latest data from Michigan’s Department of Technology, Management and Budget awards Ottawa County with the lowest unemployment rate of 2.1 percent, followed closely by 2.4 percent for Kent County. Kalamazoo County came in at a rate of 2.8 percent, a 17-year low. However, the monthly survey sample used by the Census Bureau to extract these numbers is fairly small, and the data are not seasonally adjusted. Furthermore, it is worth remembering the standard unemployment statistics that are regularly quoted in the news are based on members of the workforce who are actively looking for work. If discouraged and involuntary part-time workers are added, the “real” unemployment rate is almost always much higher.

For our local survey, the West Michigan index of Employment remained positive but backtracked to 13 from last month’s two-year high of 25. Many firms still are adding staff, but the pace is slowing. ISM’s index of Employment remained unchanged at 11. As we have noted for many months, the Michigan economy continues to suffer from the inability of many firms to find and hire workers with the necessary technical skills.

The month of May brought good news from the battle with industrial inflation. After posting a six-year high just last month, the West Michigan index of Prices backtracked to 25 from 38. In a similar move, ISM’s index of Prices dropped to 21 from 37. JPMorgan’s International index of Prices came in at 55.1, which is well above the break-even point of 50.0, but considerably lower than the 59.0 we reported last month. In particular, big-ticket commodities like steel, nickel, copper and aluminum appear to be moderating in price.

From the May report from Automotive News, it is fortunate for our local auto parts suppliers that the decline in light vehicle sales appears to be moderating. Looking at the Detroit Three, General Motors posted a decline of 1.3 percent, followed by a 6.4 percent drop at Fiat-Chrysler. Ford flipped back to positive with a modest 2.3 percent gain, largely based on a jump in light truck sales. Among the other major brands, Honda eked out a 0.9 percent gain, Nissan rose 3.0 percent and Subaru came in with a significant gain of 12.1 percent. Toyota eased by 0.5 percent. For the entire industry, sales were down 2.0 percent, marking the fifth consecutive monthly setback for U.S. sales.

The quandary for the West Michigan economy continues be automotive. Whereas we do not assemble cars or trucks in West Michigan, our local auto parts producers continue to employ a large number of workers. For these firms, production schedules can be altered on a daily basis to conform to assembly schedules around the world. But new car inventories on dealer lots have now swollen to a 90-day supply, well above the ideal level of 60 days. Historically, July and August used to be a production hiatus called “model changeover” for the auto industry, but hot-selling brands in today’s market often have limited the production pause to a few days. In today’s world, for auto lines that are not selling well, the hiatus has now been used to balance dealer inventories. In a couple of months, some assembly lines may go down for as much as three weeks, potentially resulting in additional shutdowns in the supply chain here in West Michigan.

If auto sales continue to slide, will it herald the onset of a new recession? The general answer is no, simply because the auto parts producers are only one piece of the West Michigan economy. Unlike automotive, there is no sign of an inventory bulge in the office furniture business, and many of our local firms expect the second half of 2017 to be nearly as good as the first half. For many months, we have been concerned that the automotive “bubble” might break, but the backtracking in auto sales has so far been fairly orderly. We also are not seeing any other industries that are having trouble at this time, but slower auto sales will result in slowing the West Michigan economy.

In summary, there still is no sign of an impending recession, but the tax cut promised by Washington now appears to be months away. Although year-over-year auto sales waned for the fifth month in a row, the decline has been fairly orderly so far. We have been fortunate that we have had no major terrorist attacks in any U.S. city, so consumers continue to go out to concerts, sporting events and shopping malls with little apprehension. If all of these trends continue, the second half of 2017 should continue to show the same modest growth pattern we have seen for the past eight years.

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

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