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Pent-up demand may fuel solid second quarter
Much stronger growth returns. That’s the latest word on the West Michigan economy, according to the data collected during the last two weeks of April.
New Orders, our index of business improvement, bounced to +40, up from+27. The Production index posted a more modest gain, and rose to +28 from +23. The Employment index remained in double-digit growth, but backtracked to +13 from+19.
Activity in the purchasing offices, our index of Purchases, remained unchanged at +19. With the coming of spring, the index of Finished Goods Inventory flipped to -7 from+8, reflecting pent-up demand for goods sitting on the shelves. The Raw Materials inventory index tapered to +8 from +13, primarily because of stronger production schedules and less fear over weather-related deliveries. For the individual industry groups, it almost goes without saying that our stronger statistics mean that there are no segments that are doing poorly, although there are exceptions within each group.
Automotive parts suppliers remain strong, although a couple firms backtracked because of the particular components they were making. The “integrated” office furniture companies turned in a stronger performance, and smaller firms also are doing well. A couple of industrial distributors reported a “blah” month, but most reported business conditions to be the same or stronger than in March.
Much as we suspected, some capital equipment firms saw business conditions improve, partially because we are now back in “decision” season. We know big decisions are often not made in the summer when many people are on vacation or in the month of December. The winter months are not stimulating. Hence, the period between Easter and June is often when decisions are made.
The national economy posted a more modest increase for April. According to the May 1 report from the Institute for Supply Management, our parent organization, ISM’s manufacturing index of New Orders rose modestly to +25, up from +22. The Production index edged up to +27 from +22. However, ISM’s Employment index posted one of the best gains in months, rising to +18 from +6. Added together, ISM’s overall manufacturing index rose to 54.9, up from 53.7.
In the service sector, the ISM non-manufacturing index fared much better and escalated to 55.2 from 53.1. In confirmation, economic forecasting firm Markit’s non-manufacturing remained high at 55.0, although April’s report came in slightly below last month’s 55.3.
Markit also reported a modest increase in the manufacturing sector. The New Orders index rose to 58.9 from 58.1. New Exports rose to 51.7 from 51.1. Order Backlogs edged up to 55.2 from 54.5. Markit’s Production index rose to a three-year high of 58.2, up from 57.2. With statistical modifications, Markit’s PMI eased modestly to 55.4, down from 55.5. The author’s overall view of the U.S. economy is that the April data “indicated a strong start to the second quarter of 2014.” Another interesting observation confirms large manufacturers (over 500 employees) continue to record the steepest output growth as well as job creation. The survey further notes a slower pace in the service sector may moderate the second quarter GDP growth rate.
The results for the world economy are not as positive. According to JP Morgan’s May 2 report, world manufacturing activity decelerated in April. JPM’s global PMI backtracked to 50.5 from 51.1 in March.
The unrest in Ukraine has taken a toll on business confidence. The U.S. and other countries are growing marginally, but many are decelerating. Europe continues to be in sharp contrast, however.
Markit’s Eurozone manufacturing PMI rose to 53.4, up from 53.0. For individual countries, Ireland posted a 38-month high PMI of 56.1, indicating the worst of the monetary crisis is over. The PMI for Italy came in at 54.0, a 36-month high. A PMI of 51.1 for beleaguered Greece tells us the long recovery from the devastating six-year slide might be starting.
Industrial inflation pressures remain on the down side. Our local index of Prices fell to +7 from +15, reflecting declines in many key commodities around the world. ISM’s index eased to +13 from +18. JPM’s world index of Prices fell sharply to 50.3 from 53.2. At least part of the downward pressure on prices can be attributed to slower business conditions in some countries around the world, including China. Some steel has been higher because of supply chain problems in the harsh winter, but these price pressures should now subside. Other recent economic news has focused on the apparent slow GDP growth rate for the first quarter of 2014. At 0.1, it is obvious the disruptive winter weather had an impact.
Since this is just the first estimate of growth, it is possible the next revision will show a better number. Furthermore, with spring now upon us, the pent-up demand may result in a very solid second quarter. Business optimism still remains positive, although some of our numbers are not quite as strong as a few months ago.
In our survey’s two categories relating to the short- and long-term business outlook, the Short Term Outlook index rose to +35 from +34, but the Long Term Outlook index backtracked to +44 from +58. In addition, comments from survey participants tell us many of our companies are at full capacity, and several are setting all-time records. Others are anticipating better business conditions heading into the summer.
As we review the employment numbers, West Michigan continues to fare better than the rest of the state. Among the unemployment rates in the 83 Michigan counties, Kent County again reported the second lowest in the state, followed by Ottawa County at No. 3. Kalamazoo County eased to fifth place. Between February and March, almost all of the counties in our area posted minor improvements in unemployment. For Michigan, the unadjusted rate fell to 8.0 percent from 8.5 percent. This brought the seasonally adjusted rate down to 7.5 percent from 7.7 percent, the lowest Michigan’s unemployment has been since March 2008.
Auto sales for April continued to be positive and remain the driving force behind Michigan’s recovery. According to the April report from Autonews, car and light truck sales were up 8 percent for the month.
Because of the harsh winter, the stronger sales make up for the marginal reports in the first three months of the year. Year to date, industry sales are only up 3 percent. For the major firms, Nissan led the way with an 18 percent sales increase, followed by Chrysler’s gain of 14 percent and Toyota’s 13 percent surge. Despite negative publicity, GM’s sales rose 7 percent. Ford’s sales fell 1 percent, partially because of a downturn in fleet sales. American Honda posted a modest 1 percent gain. Volkswagen continues to slide, losing 1 percent, despite a 19 percent gain from the Audi brand. The Volkswagen brand is now down 10 percent for the year, primarily because of troubles at the dealership level.
Last year’s European financial crisis appears to be healing, and the PMI reports are mostly positive. The HSBC April report from China remains modestly negative at 48.1, but the March report was slightly lower. There is now hope the Chinese economists are fixing at least some of the problems. Worldwide, growth may be slowing, but West Michigan is doing very well.
Brian Long, Ph.D., is director of supply chain management research at Seidman College of Business, Grand Valley State University.