Area Economy

Most signs point toward positive 2018 economic outlook

December 22, 2017
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Despite the Thanksgiving break and deer season, November usually is a productive month, and this year was no exception.

According to the data collected in the last two weeks of the month, New Orders, our index of business improvement, rose to 20 from October’s 11. In contrast, the Production index backtracked slightly to 17 from 20. In a similar move, our index of Purchases eased to 18 from 22. Perhaps because of tax considerations, the index of Finished Goods Inventory displayed more liquidation and fell further to minus-9 from minus-2. In contrast, the Raw Materials Inventories index jumped to 12 from minus-8. Because of a growing list of shortages, our index of Lead Times for November remained stuck at 28, well ahead of the 25-year average of 4.

Looking at individual industries, the November performance for most groups was mixed. Despite the modest softening in auto sales, the local auto parts producers remain surprisingly strong, even though they continue to voice concern about possible slower auto sales in 2018. It is currently the slow season for the office furniture sales, and the industry still appears to be topping out at the present level. Some of the smaller office furniture firms still are expanding. For most industrial distributors, November was one of their better months. A plateau also seems to be forming for the capital equipment industry, but recent changes in the tax law could result in improved conditions in 2018.

Locally, business optimism remained positive but little changed. Our November index for the Short-Term Business Outlook, covering three to six months, eased modestly to 28 from 30. However, the Long-Term Business Outlook edged slightly higher to 49, up from 45.

More optimism came from the Conference Board’s Index of Consumer Confidence. U.S. consumer confidence increased more than expected in October to 125.9, the highest mark since December 2000. Americans appear to be growing more confident about the economy and the job market. Business confidence, also reported by the Conference Board, remains near a 10-year high.

At the national level, the industrial economy remains very strong. The Dec. 1 report from the Institute for Supply Management, our parent organization, remained near record levels but backtracked modestly. ISM’s index of New Orders held steady at 22, just slightly below the 26 reported two months ago. The Production index responded to the recent surge in orders and rose to 25 from 19. ISM’s Employment index remained virtually unchanged at 16. Following a summer of disastrous hurricanes, ISM’s index of Supplier Deliveries finally has returned to a more normal level of 10. Strong business conditions, however, have resulted in ISM’s Inventories index remaining at minus-6. ISM’s overall index for October eased modestly to 58.2, down from 58.7. It is worth repeating the entire ISM report is very strong by historical standards.

IHS Markit.com, the British economics consulting firm, also conducts a monthly survey of the U.S. industrial economy that sometimes differs with the ISM report. Just as last month, Markit’s November report came in strong, but not quite as robust as the report from ISM. The Markit.com indexes of New Orders and Production both rose at a significant rate. Markit’s overall PMI edged modestly lower to 53.9 from 54.6.

The world economy continues to be on track, as well. The JPMorgan Global Manufacturing PMI released Dec. 1 came in at 54.0, the survey’s highest level since March 2011. New Orders, JPM’s index of business improvement, posted a significant jump to 54.9, up from 53.7. Flat performances in countries like China, South Korea and Russia were more than offset by the other 31 countries in the survey.

For the Eurozone, the good news keeps on coming. November saw another record-setting upswing to the highest level in the 20-year history of the survey. Germany, Netherlands, Austria, Italy, Ireland and France all reported near-record expansion. Even beleaguered Greece managed a modest growth index of 52.2. There’s only been one month (April 2000) in the entire 20-year history of the survey with a higher PMI reading.

For auto sales, November posted a modest surprise. Industry-wide auto sales rose by 1.1 percent, the second month of the year that year-over-year sales were positive. One analyst noted higher fleet sales for some brands, as well as more positive consumer confidence as reasons for the small uptick. For the Detroit Three, Ford gained 7.6 percent, but Fiat-Chrysler lost 3.8 percent and GM backtracked 2.9 percent. Of the major brands, Nissan led the way with a hefty 18.1 percent increase and Honda improved by 8.3 percent. Toyota backtracked 3.1 percent.

Another major economic event is coming in the form of the massive overhaul of business taxes recently passed by Congress. Many of the smaller corporations employing about 300 people will feel the main impact. These firms have been taxed at an effective rate painfully close to the statutory 35 percent because they cannot afford the huge staff of tax lawyers and accountants to maneuver the same loophole afforded to the major corporations.

Because West Michigan now will be the cheapest place in the world to do certain types of business, we should look for an influx of investment, especially from foreign firms already located in our state. But we currently do not have enough trained workers to fill the openings we already have. At long last, the worker shortage ultimately will force many firms to raise wages to attract people from around the world to come to West Michigan to work. Some firms will be forced to pay what the market demands, rather than the “going rate” posted on some obscure computer website.

Unfortunately, more workers coming to West Michigan will result in aggravating the shortage of housing in some parts of the region. The driving force behind the housing shortage clearly is the increase in employment. According to the employment statistics provided by the state of Michigan website, Ottawa County has had a 20 percent increase in employment over the past 10 years. Kent County is not far behind with a 15 percent gain. This compares with a gain of 5.4 percent for the nation as a whole and a 0.5 percent gain for all of Michigan. In Ottawa’s case, the natural growth in the population for the past 10 years obviously was far below 20 percent. Hence, 20 percent more people drawing paychecks means the area has had a worker and population influx. It is not a surprise to find homebuilders have had a hard time keeping up with demand.

In recent news, GDP for the U.S. third quarter was revised upward to 3.3 percent from 3.0 percent. Although it received little press, the same report from the Bureau of Labor Statistics noted GDP for Michigan grew at a 5.5 percent rate. There is no consensus among economists, but 3.0 percent growth generally has become regarded as a minimum rate required for long-term growth in the U.S. In the recovery from the Great Recession, there have been several quarters in which GDP came in well above 3.0 percent. Good quarters always have been offset by weaker quarters, however, and we have not had a single year that equaled or exceeded 3.0 percent growth since the recovery began eight years ago.

The local economy remains positive and shows no signs of retreating as we head into 2018. Although many of our local industries are showing signs of topping out, the current plateau still is very profitable and stable. As a result of the recently enacted tax reform package, further economic expansion may be in the offing. The shortage of skilled workers in some professions also may result in wages beginning to rise more rapidly.

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

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