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West Michigan economy continues three-month surge
Considerably stronger. That’s the latest word on the West Michigan economy, according to data collected in the last two weeks of May.
As you may recall, February was fairly flat, but March and April posted considerable improvement. May has turned out even better. New Orders, our index of business improvement, rose to +35 from +31, a two-year high. The Production index came in at +35, only slightly higher than last month’s +34. The Employment index, which had backtracked modestly last month to +22, rose to +28.
Looking at individual industrial groups, there is still little doubt the auto parts suppliers are underwriting the strength of the Michigan economy. Auto sales remain strong, resulting in production schedules continuing to be revised upward. As noted last month, some of the smaller office furniture firms are seeing stronger sales. Larger office furniture firms, however, are just beginning to see a modest uptick, leaving behind the lackluster sales of the past few months. Our local capital equipment firms are still holding their own. Just as last month, most of the industrial distributors found May to be pretty uneventful.
Now for the bad news. The national industrial economy is not nearly as strong as our local economy, according to the June 3 report from the Institute for Supply Management, our parent organization. ISM’s index of New Orders backtracked to +6 from +14, while the Production index eased to +9 from +19. The Employment index came in at +4, down from +9. Although all of these numbers are modestly positive, ISM’s “seasonally adjusted” overall index turned negative to 49.0, down from 50.7. Since 50.0 is the breakeven point, this is the first negative report since November 2012 and the weakest number since June 2009. The survey author placed the blame for the weaker performance on the sluggish economy at both the national and internationals levels.
Although the consumer market is partially offsetting the weakness in the industrial market, some economists are saying we cannot expect much improvement in our domestic economy until the world economy picks up. By contrast, Markit.com, the British economic firm, posted a U.S. industrial survey index of 52.3, up modestly from 52.1. Markit’s U.S. index of New Orders came in at 53.3, up from 51.5. The survey author credited the strength in New Orders to stronger demand in the domestic market, even though the U.S. export index remained virtually unchanged. However, the survey author repeated his warning that a slowdown could still be at hand.
At the international level, the June 3 JP Morgan international manufacturing report is very modestly positive, and actually saw some marginal improvement in May. JPM’s Global Manufacturing PMI edged slightly higher to 50.6, up from 50.4. New Orders rose to 51.4 from 50.8. Japan, Germany, Brazil, the U.S. and U.K. reported modestly higher levels of new business. However, in the 17-nation Eurozone, only Germany posted a modestly positive report, and many of the Olive Belt countries in Europe continue to pull the statistics lower.
In the economic news for this month, the first quarter GDP report estimate was revised downward from 2.5 percent to 2.4 percent. Given that most of the industrial sector (except for automotive) was starting to slow in early 2013, most of the strength came from consumer spending. Too much of this spending went on credit cards, however, so growth projections for the second quarter do not look as strong.
Will the Fed take away the punch bowl? This, of course, refers to the current round of quantitative easing, also known as QEIII, and implies the figurative printing of more money in an attempt to continue to keep interest rates low. Because of the recent uptick in mortgage rates and the rise in long-term treasuries, concern has been raised that the era of easy money may be drawing to a close. As noted in previous reports, the Fed’s policy of low interest rates has resulted in forcing the other major currencies of the world to lower their rates as well. Because of the huge number of money managers and hedge funds all over the world trying to maintain a good return for their investors, many have been forced to look beyond CDs, bonds, treasury notes and other “institutional” investments. The result has been rolling rounds of speculation among the big ticket commodities such as copper, tin, zinc, oil and most of the major grains. Most importantly, it has also driven the stock market to record territory, and until recently, bolstered blue chip stocks with good dividends. Hence, if it becomes obvious that interest rates are on their way up, the stock market will fall until the price/earnings ratios of the stocks and their respective dividends reflect a more comparable value.
On the international stage, new concerns have been raised about the true economic health of China. The questionable numbers the Chinese government disseminates purport GDP growth to still be around 7 percent. However, the HSBC survey of purchasing managers came in with a composite growth rate of only 50.9 percent. Needless to say, this kind of a number is totally inconsistent with an economic growth rate anywhere near 7 percent. However, the biggest worry is that the Chinese growth miracle may have run its course, and that a downturn may be at hand.
As previously noted, our index of Employment came in very positive for this month. Although there is a lag factor in the state unemployment reports, the latest gains for most of West Michigan were gratifying. Of the 83 Michigan counties, Kent came in with the third lowest unemployment rate at 5.6 percent, followed by fifth-ranked Ottawa at 5.9 percent and seventh-ranked Kalamazoo at 6.2 percent. Thejobless rate in the Holland-Zeeland “High Productivity Corridor” fell to 2.6 percent from 2.8 percent. No matter how these numbers are compared to the unemployment rates for the world, nation, or even rest of the state, it is easy to conclude that West Michigan is doing much better than average.
For automotive parts suppliers, business keeps booming, even though we are now in the traditional slow season for production. Except for General Motors, which has a few too many cars in dealer lots, the traditional summer auto plant shutdown is quickly fading away. With tight inventories, rising sales and customers flocking to big, profitable vehicles, the Detroit Three can no longer afford to halt production for two weeks. Indeed, auto sales are still the driving factor behind our West Michigan economy, and the industry posted a sales gain of 8 percent for May. Among the Detroit Three, Ford gained 14 percent, Chrysler 11 percent and GM 3 percent. Among the transplants, Nissan gained 25 percent, Mazda 19 percent and BMW 10 percent. Traditional transplants like Honda and Toyota grew 5 and 3 percent, respectively.
Finally, it should be noted that a couple of other economic sectors are contributing to our recent economic good fortune. First, there has been a modest uptick in office furniture sales, especially among smaller firms. Second, the housing market continues to show significant improvement. For local firms that supply new home construction, this is especially good news. Indeed, for the first time in many years, skilled carpenters and home craftsmen are in short supply.
Brian G. Long, Ph.D., is director of supply chain management research, Seidman College of Business, Grand Valley State University.