Signs point to slow growth – but that’s better than recession
A little stronger. That’s the latest word on the West Michigan economy according to the data and comments collected in the last two weeks of July.
New orders, our closely watched index of business improvement, rose modestly to +10, up from +6 in June but well ahead of the +0 reported in May. In a similar move, the production index advanced to +18, up from +11. The index of purchases, which tracks activity in purchasing offices, jumped to +14, up from -7. Perhaps in anticipation of higher prices, the inventory indexes representing both finished goods and raw materials continue to show inventory accumulations well above normal.
For our local industrial groups, the office furniture business remains stable with no significant problems on the horizon. Most firms are approaching capacity, and others are booming. Although West Michigan’s auto parts suppliers are still doing well, there is now considerable evidence that the market is topping out. Like most summer months, July sales for the industrial distributors came in mixed. For the capital equipment markets, July sales also were mixed.
The business sentiment numbers from our local survey are still positive, although the pattern continues to zigzag. The Short Term Business Outlook, which asks about the perception of the next three to six months, remained positive but edged lower to +16 from +26. The Long Term Business Outlook for July, which covers the next three to five years, rose modestly to +39 from +35.
The Aug. 1 report from the Institute for Supply Management, our parent organization, remains little changed from June. New orders, ISM’S index of business improvement, came in at +12, only a point lower than last month. The production index backtracked to +8 from +11. For the third consecutive month, ISM’s anemic employment index remained unchanged at +2. ISM’s overall index edged lower to 52.6, down modestly from 53.2, but still ahead of the 50.0 break-even point.
International economics consulting firm Markit.com posted a slightly more positive view of the U.S. economy for July. New orders came in at a nine-month high, and production, employment and purchases all posted modest improvements.
Markit’s chief economist further noted: “The stronger manufacturing PMI survey data for July fuel (suggests) that the sector will act as less of a drag on the economy in the third quarter after a disappointing first half of the year. Having signaled the sector’s worst performance for over six years in the second quarter, and contributing to sluggishness in the economy that was later seen in the soft GDP numbers, the improvement in July suggests that manufacturers and exporters will have helped lift the economy at the start of the third quarter. Job creation has also picked up and hopefully is a sign that producers are seeing a brighter picture, successfully coping with a strong dollar and have put the worst of the energy sector’s restructuring behind them.”
Internationally, the JPMorgan Global Manufacturing survey of 31 nations released Aug. 1 was again slightly more optimistic. JPM’s index of new orders edged higher to 51.4 from 50.7. The production index increased to 52.1 from 50.4. The JPMorgan Global Composite Purchasing Managers Index rose higher to 51.0, up from 50.4.
The survey author and chief economist for Markit further noted: “Growth of output and new orders both accelerated in July, a sign that the sector is breaking out of the sluggish trend seen through the opening two quarters. Mild improvements in employment and new export orders following recent declines are also steps in the right direction.”
If we can trust the numbers, the Chinese industrial economy, which has been negative for the past 18 months, appears to be on the mend. The Caixin China General Manufacturing PMI came in at 50.6 for July, up by 2 points from the reading for June, marking the first expansion since February 2015. If these data are correct, we can take China off the “worry list” for systemic problems that could upset the world economy.
Turning attention to industrial inflation, more than half of the world’s steel is produced in China, and the producers are finally starting to take some of the capacity offline. In this month’s report, nearly every grade and type of steel is still rising in price. Fortunately, prices for other key commodities like aluminum and copper have not followed suit. At +12, the West Michigan index of prices remains well below the 25-year average.
For automotive sales, we recall that the June report came in with a modest 2.4 percent gain after a 6.1 percent sales dip in May. The July report from Automotive News declared the anemic 0.5 percent industry sales growth to be “clear evidence that the industry is plateauing.” For the Detroit manufacturers, Ford sales declined 3.0 percent and GM slipped1.9 percent, but Fiat Chrysler eked out a 0.3 percent gain. For the other major brands, Toyota eased 1.4 percent, Nissan gained 1.2 percent and Honda had one of its best months of the year, rising 4.4 percent. Ford has now projected lower earnings for the rest of the year and announced a cost-cutting program. Firms supplying Ford will be “invited” to participate.
The employment picture for the West Michigan industrial economy remains positive. For the July survey, our index of employment edged up to +14 from June’s +12. Given that this index temporarily turned negative last September, the double-digit growth we have seen for the past few months is welcome news. Of the 83 Michigan counties, Ottawa County unemployment now stands at 3.3 percent, the second lowest in the state. Kent took third place at 3.4 percent. Allegan sixth at 3.6 percent, and Kalamazoo 11th at 3.9 percent. Compared with the rest of the state, these numbers are very good.
Last month’s major story in economics was about the Brexit. Because of the surprise vote outcome, the stock market spiraled into a panic until wiser minds prevailed. After a few days, the reality set in that the present trade agreements will all remain in place for the next two full years, allowing plenty of time for readjustment. For most of Europe, the post-Brexit purchasing managers surveys were unaffected. However, the U.K. composite index fell from 52.4 to 48.2, its lowest level since February 2013. The August report from the U.K. should recoup at least part of the loss.
The average annual postwar GDP growth has been about 3 percent per year, a level that has not been reached since 2008. In this month’s economic news, the second quarter GDP came in at a lackluster 1.2 percent, and the first quarter was revised downward to 0.8 percent. Some say that this is evidence of a weakening economy, even though slow growth is clearly preferable to negative growth — i.e., a recession. Many economists no longer feel that GDP should be regarded as the primary indicator for economic health.
Because of the complex flows of money among world financial institutions, measurement has become increasingly difficult. The U.S. economy is now deeply linked to the rest of the world by financial markets that can translate changes in milliseconds. The proliferation of multinational supply networks make it more difficult to measure which country should be credited for economic growth.
In summary, the July reports from the local, national and international purchasing surveys are all higher. The odds of sliding into a recession in the next few months have lessened considerably. However, worldwide economic growth has slowed to a crawl. For the major countries, none of the PMIs is especially strong. Canada and Mexico, our two largest trading partners, have PMIs of 50.6 and 51.8, respectively. It is possible that the United States and the rest of the world may be in for a period of very slow growth. Unlike the slow growth of the past seven years, this growth pattern could be even slower.
Brian Long, Ph.D., is director of supply management research at Seidman College of Business, Grand Valley State University.