Area Economy

This year’s economy should improve at steady pace

January 10, 2014
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Continued modest growth. That’s the word on the West Michigan economy, according to data collected for the month of December.

New Orders, our index of business improvement, eased to +5 from +16. There are no surprises here as the retrenchment is partially seasonal, given that December is a holiday month. The Production index also retreated, but at +10 is still in line with Decembers in the past. The Employment index, which had dropped to 0 as recently as October, remained positive at +9.

For our “outlook” statistics, there was little change. The Short Term Business Outlook index eased to +27 from +29, and the Long Term Business Outlook index remained unchanged at +53.

Nationally, the report is a little stronger. The Jan. 2 report from the Institute for Supply Management, our parent organization, indicated New Orders for ISM’s manufacturing index edged up to +20 from +18. Again, probably because of the holiday season, the Production index eased to +12 from +19. ISM’s Employment index remained unchanged at +6. The PMI, ISM’s overall manufacturing index, eased to 57.0 from 57.3, but is still near a seven-month high.

At the international level, the JP Morgan international manufacturing report turned in the best performance since February 2011. JPM’s Global Manufacturing PMI (purchasing managers index) rose to 53.3 from 53.1, while for Eurozone, business conditions continued to improve in all of the major economies except Greece and France. With a PMI of 57.0, the Netherlands turned in the best performance. The uptick also accelerated in Germany, Spain, Austria and Ireland. Even the PMIs for the troubled economies of Spain and Italy flipped back to positive. For other major countries around the world, the December results were modestly positive. These indicators portend that the modest growth of the world economy will likely continue for the first half of 2014.

Just as we do every year, it is time to look ahead at the factors that will define the 2014 economy:

Automotive:We like to point to the success of many industries, yet the fact remains that Michigan’s recovery from the Great Recession has heavily relied on automotive strength, just as West Michigan profits from the firms that produce automobile parts. The past year turned out to be stronger than industry projections, although much of the gain was again attributed to “pent-up demand.” Sooner or later, supply will catch up with demand, and the industry should stabilize at a SAAR rate of about 15 million vehicles per year. December sales slowed down more than expected. Even if auto sales would flatten at the present level, however, most firms are comfortably profitable. In addition, we should not underestimate the improved potential for exporting North American vehicles worldwide. Because of the improved price and quality of components produced by some of our local auto parts fabricators, prospects are growing for more business with the transplant companies and other auto manufacturers around the world.

Industrial inflation: With the Chinese economy modestly improving and Western Europe just barely positive, the world demand for most commodities is still quite low. However, if the worldwide economy edges up, so will commodity prices. Therefore, there is a high probability that most commodity prices will probably end the year higher than today. We would not anticipate any wild increases unless there is some kind of supply disruption.

Consumer inflation:With the continued slow rate of economic growth, consumer inflation is unlikely to be a problem in 2014. In fact, most economists concede a nominal rate of inflation of about 2 percent is actually good for the economy. The current rate of 1.2 percent is well below average, and shows no sign of running away in 2014.

Interest rates:For 2014, rates will still be held artificially low by Federal Reserve policy, although it appears the Fed is trying to taper the policy of quantitative easing — and not spook the financial markets. Rates have already risen from historic lows, and it appears they will edge up as the year goes along. Chances are the same marginal increases will prevail into 2015 and beyond. It is worth remembering that as long as the world financial markets continue to accept low rates for more and more U.S. government bonds, we have nothing to fear. However, there are lessons to be learned. When the Greeks saw 2007 interest rates go from about 3 percent to 18 percent in a matter of a few months, the financial world was struck with the conclusion they would never be able to pay back their debt or even the interest if they continued spending far more money than the treasury took in. We see this as the real “fiscal cliff” we will have to face some day if we do not change course.

Real estate:The oft-quoted reports on the Case-Shiller index of home prices have been positive for 17 consecutive months. Home prices in most of the major markets rose considerably for 2013, which contributes to a more positive fiscal outlook by most homeowners. However, mortgage rates are starting to rise, and much of the pent-up demand has been satisfied. The shortage of newer homes for sale will continue to fuel housing starts, especially in West Michigan. Because the wave of foreclosures and bankruptcies continues, the housing market recovery for existing homes will remain geographically spotty. This means pockets of abandoned houses will plague older cities and towns.

Unemployment:It appears very likely that unemployment rates for the U.S., Michigan and West Michigan will continue to slowly decline in 2014. The tendency for small businesses to freeze hiring and avoid expansion will keep unemployment levels much higher than they should be. Shortages will continue for trained technicians in many fields. Unemployment for 18- to 24-year-olds and unskilled workers will remain high.

Obamacare:Will Obamacare derail the 2014 economy? Politically, it is one of the worst messes in recent history. However, even if rhetoric grows louder, most of the economic fallout will be seen in declining consumer confidence and caution from small businesses. Large firms have already figured out how they will respond as the mandates unfold, but small businesses are less certain. Hence, the Affordable Care Act will be the inhibiting factor for what could have been one of our best economic years in a long time. In the final analysis, Obamacare will not drive us into a recession unless the political situation grows much worse. Except for hospitals, drug companies and other medical firms, the health care law does not impact the supply chains of most companies.

Overall economy:The cantankerous atmosphere in Washington will keep everyone on edge, resulting in little getting done as the election approaches. Housing prices will continue to rise but at a slower pace than 2013. Growth in residential and commercial construction will help the employment situation. Other local industries, like aerospace and office furniture, appear to be poised for modest growth. Worldwide, the economy will continue to improve slowly, as long as a major war or political upheaval doesn’t get in the way.

The European debt situation is still a problem, but as long as no political faction upsets the austerity programs some countries have put in place, Europe should look forward to an improved 2014. Warnings have been issued about the precarious debt situation in China, but as long as the Chinese PMI from HSBC remains positive, 2014 should not be the year the country comes unglued. At the current pace, China should remain our third best customer. However, an economic collapse in China would take the U.S. and the rest of the world into another recession.

For 2014, new firms moving into the area will add to the growth for West Michigan. All of our local economic development offices have numerous projects waiting in the wings. Some could add hundreds of new jobs. Being prudent, we shouldn’t count the proverbial chickens before they hatch.

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

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