Area Economy

West Michigan’s economy continues modest growth trend

February 6, 2015
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Modest growth continues. That’s the latest word on the West Michigan economy, according to data collected in the last two weeks of January.

Our index of business improvement, which we call New Orders, remained unchanged at +13. The Production index retreated to +13 from +19. In a similar move, the Employment index eased to +19 from +23. However, activity in the purchasing offices edged up to +17 from +13.

Although numbers remain positive, many of our local industrial groups reported mixed results for January. The automotive parts producers continue to do well, but some firms have reported certain segments have flattened out or declined. Some segments of the office furniture business have also turned mixed, partially because of the rush toward the end of the year to use up budgets, which shifted sales to December from January.

Mike Dunlap’s January furniture industry index came in at the second-best level since July 2007, however. In general, smaller office furniture firms are outpacing their larger counterparts. Among capital equipment firms, January sales for some came in stronger than expected. For industrial distributors, results were mixed.

The Feb. 2 report from the Institute for Supply Management, our parent organization, repeated the caution that the national economy appears to be growing at a slower pace. ISM’s index of New Orders remained unchanged at +7, but down significantly from November’s +23. The Production index remained in single digits, but edged up to +9 from +7.

Two of ISM’s indexes, Backlog of Orders and New Export Orders, turned negative for the first time in many months. ISM’s overall index drifted downward to 53.5 percent, a drop of 1.6 percent. The survey author notes the slowdown in export orders brought on by the strong dollar has had an impact on some industries., the international consulting firm based in London, has a similar perspective of the U.S. economy. Markit’s Purchasing Managers Index remained unchanged at 53.9, which confirms the slowing noted in the ISM report.

The JP Morgan report on Global Manufacturing, also released Feb. 2, continues to depict a stagnant world economy. However, most of JPM’s December statistics came in modestly higher. Adding everything together, the overall PMI rose to 51.7 from 51.5. Countries doing better included Germany, Spain, the Netherlands and Ireland, while France, Greece, Russia and Austria were lagging.

Gasoline prices appear to be stabilizing at around $2 per gallon. Many consumers apparently do not think the lower prices will last much longer because surveys show motorists are opting to save at least part of the new liquidity rather than spend it. For many industrial customers, however, lower prices for most petroleum products have resulted in windfall cost savings. Over the past few months, the prices of numerous oil-based products have fallen by 5 percent to 10 percent. Because of lower diesel prices, freight and other transportation costs have fallen. Despite the cost savings, most firms are not investing in new plants or equipment, at least for the short run.

The index of Prices for January fell to -16, the lowest since recovery from the Great Recession began. More troubling is the ISM index of Prices, which fell to -30. The ISM database shows the history of the Prices index for 805 months since January 1948. Of those 805 monthly reports, only 21 logged an index of -30 or below. All of those 21 reports occurred during recessions.

It is uncertain what this means because we are in uncharted territory. We have industrial prices falling, but no recession.

Since our last report, the Greek government has been taken over by a far left party that promises to eliminate the austerity program. The interest rate on Greek bonds has risen to about 11 to 12 percent, compared to the 5 percent rate of six months ago when the economic situation seemed to be stabilizing. The creditors (primarily German) are still insistent that the Greek government honor the previous agreement, setting the stage for a major confrontation. Most observers feel there is room for some compromise, but the egos and personalities that will need to find common ground make predicting an outcome almost impossible. For Greece, the worst case would be to default, which would almost certainly be followed by the “Grexit,” i.e., the exit from the Eurozone currency back to the 2,500-year-old Greek drachma. If this were to occur, it would create a few months of tension in the financial markets. A military junta took over the government in 1967 and did not offer free elections again until 1974. If the internal situation seriously deteriorated as a result of the Grexit, it is speculated the military would take control again.

In other economic news, it has been widely reported that unforeseen problems are now developing because of the U.S. dollar, which has been rising in value. The strong dollar has made our exports more expensive to the rest of the world, resulting in lower demand. In a different light, the currency escalation has hurt the income statement for firms with overseas operations. This includes about half of the S&P 500. As the dollar rises, all U.S. goods cost more for foreign buyers. Conversely, foreign goods become cheaper, putting pressure on our domestic producers to keep prices low — or lower. The Federal Reserve had been planning to slowly raise interest rates later in the year, but doing so may exacerbate the situation.

A pleasant surprise from late 2014 has been the steady improvement in the West Michigan unemployment numbers. The Kent County jobless rate fell to 3.4 percent, the lowest in 17 years. Ottawa County came in at 3.6 percent. With the current national unemployment rate of 5.6 percent and the state of Michigan level of 6.3 percent, these statistics are clearly positive.

For auto sales, January turned out to be one of the strongest months in recent years. Leading the pack of major brands was General Motors, up 18.3 percent, followed by both Ford and Toyota gaining 15.6 percent. Closely behind came Nissan, up 15.1 percent, followed by American Honda adding 11.5 percent. Chrysler finished up 10.8 percent. Most analysts credited the stellar performance to the sharp fall in gasoline prices because most of the uptick was attributed to light truck sales. GM’s light duty truck sales were up 42 percent over last year, boosted by the introduction of two midsize pick-up trucks. GM’s sales of SUVs were up 36 percent. Honda’s CRV posted a 27 percent increase.

Other factors contributing to the strong sales report included generous year-end incentives and relaxed credit standards.

Looking ahead, the economic weakness in Europe and other countries continues to be a concern. The United States stands alone as one of the few major countries showing positive growth, but we do not know how much longer we can carry the flag. A significant recession in the rest of the world would eventually spill over into the United States. However, our economy continues to have enough momentum to carry us forward for the next few months. European stagnation may dampen our domestic economy, but it would take a full-blown European recession before the U.S. would be drawn in.

Last but not least, we must pay attention to industrial deflation. Having some industrial prices come down may be a good thing for the short term, but having all industrial prices fall could spell economic trouble.

Brian Long, Ph.D., is director of supply chain management research at Seidman College of Business, GVSU.

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