Short-term confidence index is gaining momentum
After seeing the reports for the West Michigan industrial economy soften at the end of 2015, it is gratifying to report the local economy is again gaining strength.
The data and comments collected in the last two weeks appear to be paralleling the post-holiday growth we reported last month. New Orders, our index of business improvement, rose to +15 from +14. The Production index edged higher to +16, up from +12. Activity in the purchasing offices turned back to positive at +3, up from -3.
The West Michigan economy continues to outpace the national and overall Michigan economy.
Looking at individual industries, strong auto sales are still keeping our local auto parts suppliers humming. Although a couple of firms reported a slight hesitation, most firms were very positive. The office furniture business remains stable, and some specialty firms are reporting an unexpected upturn. Industrial distributors were generally positive; however, capital equipment firms reported widely mixed results.
Many survey participants remain fairly optimistic about 2016, and this month’s survey reflects a much more positive attitude than last month. The biggest gain came in the Short Term Business Outlook, which asks about the perception of the next three to six months. Citing improved sales and less worry about the direction of the world economy, the index rose to +37, up from February’s +19, and significantly higher than the +4 reported last October.
For the outlook for the next three to five years, the Long Term Business Outlook index rose to +44 from +40. Although well below the +60 recorded two years ago, the mood is still clearly positive.
The April 1 report from the Institute for Supply Management, our national parent organization, delivered a significant bounce for March. New Orders rose to +20, up from +6. The Production index jumped to +17, up from +7. For the first time in six months, ISM’s overall index flipped back across the 50.0 break-even line to 51.8.
By contrast, the U.S. survey conducted by Markit.com, the international economics consulting firm, is cautious, even though Markit’s PMI edged up to 51.5 from 51.3. Manufacturers noted that generally improving global economic conditions have helped to offset some of the negative influence on export sales resulting from the strong dollar.
The survey author noted: “March’s survey highlights sustained weakness across the U.S. manufacturing sector, meaning that overall growth through the first quarter slowed to its lowest since late 2012. Subdued client spending patterns within the energy sector, ongoing pressure from the strong dollar, and general uncertainty about the business outlook were cited as factors weighing on new order flows in March.”
The world economy improved slightly in March. According to the JP Morgan Global Manufacturing survey of 31 nations released April 1, JPM’s index of New Orders edged up to 51.2 from 50.4. The Production index rose to 51.2 from 50.3. The Global Purchasing Managers Index edged up to 50.5 from last month’s 50.0. The Eurozone PMI posted a small uptick to 51.6 from 51.2.
Auto sales for March posted a gain of 3.1 percent, but the seasonally adjusted annual rate fell to a 13-month low of 16.56 million — well below forecasts of 17.3 million. Among the Detroit Three, Ford sales rose 7.8 percent, Fiat Chrysler gained 8 percent, and General Motors eked out an increase of 0.9 percent because of declines in Buick and Cadillac sales. Toyota lost 2.7 percent, but Honda gained 9.4 percent.
Overall, virtually the entire sales increase for the industry has come from the sale of light truck and SUVs, and inventories for most small cars are starting to build up. A few months ago, almost no one anticipated gasoline falling to the current levels, resulting in consumer preferences shifting away from fuel economy and back to the gas guzzlers.
In late March, the U.S. Department of Commerce posted a third and final revision for the GDP estimate for the fourth quarter of 2015. From the dismal initial estimate of 0.7 percent, the GDP was upgraded to 1 percent. On March 25, the number was upgraded to 1.4 percent. Looking at past estimates, it appears the Commerce Department’s first estimates are regularly off by the proverbial country mile, and the fourth quarter revisions for 2015 are a good example. The overall GDP for 2015 can now go in the record books as 2.4 percent, the same as 2014. Hence, the economy is still performing below the post-war average rate of 3 percent.
For unemployment statistics, there is good news. Our local index of Employment remains in double digits at +14, up significantly from December’s -3. The “official” unemployment rate in Michigan now stands at 4.8 percent, a 15-year low. Again, the “official” rate is subject to the limitations of what the numbers really mean. Our latest U-6 — which some call the real unemployment rate — continues to be 11.4 percent for Michigan, which is also a 14-year low.
Overall, most West Michigan reporting units are a full percentage point below where they were a year ago. The February Kent County unemployment number came in at 3.2 percent, Ottawa County at 3.1 percent and Kalamazoo County at 3.6 percent. The recovery is finally taking hold, and the employment picture is the best it has been since the recovery began seven years ago. We should see some additional improvement over the next few months, although we can’t expect to go down another full percentage point over the next year. Also keep in mind Michigan's workforce is about 400,000 workers lower than 16 years ago.
In the industrial market, another significant event has been unfolding in the markets for the major commodities and raw materials. Over the past two years, we have watched the price of some grades of steel fall by 40 percent to 50 percent, copper drop 40 percent, aluminum 30 percent and oil as much as 70 percent. For the sellers of these commodities, business conditions have been a disaster. For some of the smaller oil exploration companies, bankruptcy is the only alternative.
Along with oil, however, we have recently seen an uptick in the prices of most of the major commodities. ISM’s index of Prices flipped back to positive at +3, up from -23 last month and considerably higher than the -33 reported in January. Our local index of Prices also turned positive at +11, up from -20.
This is a significant reversal in just one month. Granted, the rising prices for these commodities will not be good for the bottom lines of many local firms, even though most increases have been fairly minor. But from the standpoint of the overall world economy, the turnaround in commodity prices has helped reduce the odds of a worldwide recession.
In summary, the purchasing managers’ reports at the local, national and international levels have turned more positive over the past month. Commodity prices have apparently bottomed out, which will hopefully allow business conditions for these industries to stabilize. Some of the economic news coming out of China has helped to relieve the world’s anxiety about a possible recession. We hope all of these current trends will continue.
Brian Long, Ph.D., is director of supply management research at Seidman College of Business, Grand Valley State University.