Area Economy

‘Orderly’ automotive sales decline keeps economy rolling

July 14, 2017
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Yes, the West Michigan industrial economy remains on track.

According to the monthly survey conducted during the last two weeks of June, New Orders, our index of business improvement, came in at 31, a modest improvement over last month’s report of 27. In a similar move, the Production index edged up to 26 from 19. Activity in the purchasing offices, the index of Purchases, remained virtually unchanged at 22.

Perhaps because of the season, June’s Finished Goods Inventories index drifted back to neutral at 0, down from 8. The moderating of price increases helped bring the Raw Materials Inventories index down to 11 from 19.

Turning as we always do to the individual industries in West Michigan, slower auto sales have resulted in most auto parts suppliers showing signs of leveling off, but no major firm has reported a significant drop in sales. In fact, a couple of firms have seen an uptick in quoting activity. The office furniture industry continues to show signs of topping out, but no decline appears to be on the horizon. Because of the apparent topping out for some of our local industries, the capital equipment market remains mixed, and the bias still is to the downside. For the industrial distributors, the summer maintenance schedules have given some firms a slight boost.

Given the continued rise in global and domestic uncertainties, it was not surprising to see part of our monthly look at business optimism modestly backtracked for June. The West Michigan index of the Short Term Business Outlook, which asks local firms about the perception for the next three to six months, remained virtually unchanged at 34. Looking out three to five years, the Long Term Business Outlook eased to 37 from 46. However, both indices remain very positive, and the anecdotal comments from our survey participants confirm we remain on the right track as of June.

At the national level, the July 1 report from the Institute for Supply Management, our parent organization, posted a significant increase. New Orders, ISM’S index of business improvement, edged up to 30 from 25. Much as we had hoped, the Production index shook off the springtime blues and rose to 27 from 19. ISM’s overall index for June jumped 2.9 percentage points to 57.9, its highest level since August 2014.

A different assessment of the U.S. manufacturing economy comes from the monthly survey conducted by Markit.com, the British economics consulting firm. For June, Markit’s indexes of New Orders, Production and Employment remain positive but continue to slow from the previous month. The Markit PMI for the U.S. came in at a nine-month low of 52.0, down from May’s reading of 52.7.

Chris Williamson, the chief business economist for Markit, remains cautious: “Manufacturers reported a disappointing end to the second quarter with few signs of growth picking up anytime soon. The PMI has been sliding lower since the peak seen in January, and the June reading points to stagnation at best in the official manufacturing output data. Forward-looking indicators, notably a further slowdown in inflows of new business to a nine-month low and a sharp drop in the new orders to inventory ratio, suggest the risks are weighted to the downside for coming months.”

At the international level, JPMorgan’s Global Manufacturing survey of 31 nations remains positive but fairly flat. Optimistic results for June from Austria, Germany and China helped boost the indexes, but offsetting lackluster reports from the U.S., Japan and the U.K. kept the Global Manufacturing Index unchanged at 52.6.

The survey author summarized his current perspective: “The Global Manufacturing PMI was unchanged in June and continues to point to solid, steady gains in global industry at mid-year. At the same time, firming new orders and broadly based production gains across consumer goods and business equipment suggest factory output is well supported heading into the second half of the year.”

For Europe, the picture continues to brighten. Markit’s June PMI for Europe came in at a six-year high of 57.4, up from May’s 57.0. The PMIs for Austria, Germany and the Netherlands are now at 74-month highs. Even Greece flipped back to positive after many months of stagnation.

Chris Williamson, chief business economist at Markit, commented: “Eurozone manufacturing growth gained further momentum in June, rounding off the best quarter for just over six years. At current levels, the PMI is indicative of factory output growing at an annual rate of some 5 percent, which in turn indicates the goods-producing sector will have made a strong positive contribution to second quarter economic growth. Exports continue to play a major role in driving the expansion, increasing in recent months at rates not seen for six years, buoyed in part by the weak euro. Optimism about the year ahead has risen to the highest level for at least five years, backlogs of orders are building up at the fastest rate for over seven years and factories are reporting near-record hiring as they struggle to deal with the upturn in demand. As such, the manufacturing sector is clearly in an expansion mode and looks poised for continued robust growth in coming months.”

For West Michigan, the employment picture continues to be a bright spot for local economy. Of the 83 counties in Michigan, the latest data from Michigan’s Department of Technology, Management and Budget shows Ottawa County with the lowest unemployment rate of 2.6. Kent County ties for third place at 2.8 percent, but Kalamazoo County’s ranking slipped to 10th place at a rate of 3.3 percent. That’s still not bad, given that the current Michigan unemployment rate stands at 4.2 percent. For our West Michigan survey, the index of Employment bounced back to 23 from 13. In a similar move, ISM’s index of Employment edged up to 17 from 11. Despite the pleas from many industrial firms, skilled tradesmen in almost every category still are in short supply.

The battle with industrial inflation continues to subside. Locally, the West Michigan index of Prices backtracked to 15 from 25. In a similar move, ISM’s index of Prices dropped to 10 from 21. Looking back a couple of months, ISM’s lofty March index of 41 was driven by price increases in most big-ticket commodities like steel, nickel, copper and aluminum. Although most major commodities now appear to be moderating in price, uncertainty still looms over the steel markets because of import tariffs being threatened by the Trump administration.

According to the June report from Automotive News, we still are seeing erosion in the sale of cars and light trucks. Dealer inventories still are bulging with unsold 2017 models, and record high dealer incentives are not having the same stimulus impact of previous months. It is obvious that slow auto sales must eventually result in cutbacks for our local auto parts suppliers. So far, none of our local firms seems to be panicking.

The Michigan auto suppliers still are disproportionately tied to the Detroit Three, all of which took a bigger hit than the rest of the industry. General Motors posted a decline of 1.7 percent, while Fiat-Chrysler suffered a 7.4 percent drop and Ford pulled in 3.8 percent lower. However, many local suppliers have wisely begun cultivating the transplant markets, where the June results were different. Among the major foreign brands, Honda eked out a 0.8 percent gain, Nissan rose 2 percent and Subaru came in with a significant improvement of 11.7 percent. Toyota posted a 2.1 percent gain, but Hyundai-Kia took a sharp 14.9 percent hit. For the entire industry, sales were down 2.9 percent, marking the sixth consecutive monthly setback for U.S. sales. Of course, the good news is the decline in auto sales has been remarkably orderly.

As Morgan Stanley’s Adam Jonas noted: “The debate at this point is not whether or not the cycle will get worse, but rather if the cycle will be more of a gradual erosion, or if the cycle is in imminent danger. Data points indicate more of a steady erosion within the deeper part of the U.S. auto cycle, with the industry still solid on an absolute basis …”

In summary, the Washington gridlock now means promised tax cuts appear to be months or even years away. International tension with North Korea and other parts of the world continue to be a drag on both business and consumer confidence. We remain hopeful large consumer incentives will help clear the bloated inventories of unsold cars, and that the sales decline will remain orderly. Otherwise, the economic outlook for the rest of the summer looks very positive.

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

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