West Michigan economy poised for a positive summer
The West Michigan growth rate continues upward. That’s the latest word on the local economy, according to the data and comments collected in the last two weeks of April.
New Orders, our index of business improvement, rose to +37, up from March’s +29 and significantly higher than the +13 in February. The Production index remained strong but backtracked to +28 from +35. The Employment index came in virtually unchanged at +24. Activity in the purchasing offices eased to +32, down from +35.
Overall, the West Michigan economy has shown two months of considerable strength, making the summer outlook very positive.
Fortunately, most of our industrial groups are continuing to show improvement. As noted last month, our local auto parts producers continue attracting new business from around the world. With the seasonally slow period past, the office furniture segment posted a stronger performance for April. Industrial distributors had a very good month. For capital equipment firms, the month of April yielded mixed results.
West Michigan business optimism remained fairly steady for April. Our Short Term Business Outlook index remained unchanged at +32. The Long Term Business Outlook index posted a slight retreat to +42, down from +46. In general, our survey participants have remained upbeat for most of the past 18 months.
The Institute for Supply Management, our parent organization, reported a modest upturn in the national business activity for April. ISM’s index of New Orders advanced to +18, up from +12. The Production index also posted a modest gain, rising to +24 from +18. ISM’s index of New Export Orders flipped back to positive for the first time in five months. The ISM Employment index rose modestly to +4 from +2. However, the Backlog of Orders index remained negative at -1.
The May 1 report from Markit.com, the international consulting firm, reported a slightly different picture for the United States. Markit’s Purchasing Managers Index eased to a three-month low of 54.1, down from 55.1, but still well ahead of the 50.0 threshold. The survey author notes:
“With manufacturing output growth slowing to the weakest seen so far this year and exports falling for the first time since November, the survey results raise worries that the dollar’s appreciation is hurting the economy.”
At the international level, the May 4 report from JP Morgan showed global manufacturing remains flat. It was disappointing to see the index of New Orders decline a full point to 51.1. In a similar move, the world Production index eased to 51.7 from 53.3. Canada continues to suffer from falling commodity prices. China posted a PMI drop to 48.9 from 49.6 a month earlier. Countries like Greece, Russia and Brazil continue to experience economic difficulties, but countries like Ireland and Spain, once economic trouble spots, continue to show significant economic progress. JPM’s overall international index retreated to 51.0, down from 51.7.
This month’s big economic news came from the U.S. Department of Commerce report that the first quarter GDP for the U.S. came in at a scant 0.2 percent increase, down from the 2.6 percent gain reported in the fourth quarter of 2014. Comparisons were made to the -2.4 percent growth decline for the first quarter of 2014, but it was difficult to blame the winter weather for all of the weaker performance. Although it seems fairly certain the GDP numbers for the second quarter will show improvement, the estimates from the various reporting entities vary widely.
The aftermath of the West Coast dock strike continues to disrupt the operations of some of our local firms. Although we had hoped operations for most firms would have returned to normal by now, several production facilities are still reporting difficulties receiving materials. For some, this crisis will result in a review of the risks associated with their international supply chains.
Auto sales are still on the rise, and the May 1 report from Automotive News indicated a 4.6 percent increase for the April sale of cars and light trucks. Because of falling gasoline prices, almost all of the gains can be attributed to the truck and SUV segments of the market. The annualized sales rate (SAAR) retreaded slightly to 16.5 million units, although among the major manufacturers, only Honda reported a slight decline. Sales at GM rose 5.9 percent, 5.4 percent at Ford and 5.8 percent for Chrysler. Toyota gained 1.8 percent, Hyundai added 1.3 percent, Nissan gained 5.7 percent and Volkswagen rose by 3 percent. Honda lost 1.8 percent, primarily because management still refuses to participate in sharp discounting. In fact, Honda’s average April incentive discount amounted to about $1,800, compared with Chrysler’s average of $3,400 per vehicle.
One of the recurring threats to the world economic order is the possible collapse of negotiations for the debt bailout for Greece. Some analysts feel the withdrawal of Greece from the European currency is already built in to the current markets. If this is the case, we may experience only a temporary shock to the world’s financial markets if such an event happens. In fact, Greece is a relatively small country, with a population smaller than Michigan.
Industrial deflation continues to be a potential long-term problem. Right now, most of our local firms are benefiting from the lower prices of almost all major commodities such as copper, steel and plastic resins. However, in the industrial market, one firm’s gain may be another’s loss. Steel mills, mines and oil rigs are being shut down all over the world, bringing about the potential of long-term damage to the supply chain. Because the Michigan economy is not built around any of these primary industries, we will probably see little negative impact.
In the April 23 report from the Michigan Department of Technology, Management and Budget, it was gratifying to see the unemployment rates for West Michigan continue to fall. Among the jobless rates in the 83 Michigan counties, Ottawa County posted the second-lowest rank of 3.6 percent, followed by third-place Kent County coming in at 3.8 percent. Kalamazoo County took fifth place at 4.3 percent, Allegan eased to 4.5 percent, and Barry came in at 4.6 percent. With the official state unemployment rate at 5.7 percent, West Michigan remains better off than the rest of the state. The bottom line is simple: Michigan still has 267,000 people on the “official” unemployment rolls. That said, the official number of Michigan unemployed in March a year ago stood at 363,000. It seems obvious we are moving in the right direction.
As we move toward the summer months, the momentum remains positive. However, we are always subject to the risk of geopolitical events. The Fed’s threat to increase interest rates, tentatively scheduled for June, now appears to be deferred to September. Hence, there is at least a 95 percent probability the recent economic improvements we have been experiencing will continue for the rest of the summer season.
Brian Long, Ph.D., is director of supply chain management research at Seidman College of Business, Grand Valley State University.