New orders reach a 16-month high as business improves
As we move into the fourth quarter of 2016, the West Michigan industrial economy continues to expand.
According to the latest survey conducted during the last two weeks of September, New Orders, our index of business improvement, came in at a 16-month high of plus 23, up significantly from August’s plus 6. In a similar move, the Production index rose to plus 24 from August’s anemic plus 6. Activity in the purchasing offices, the index of Purchases, returned to a positive reading of plus 15, up from negative 3. Following an unusual amount of inventory accumulation in August, the September indexes representing both Finished Goods Inventories and Raw Materials Inventories came back to normal.
For most of our industrial groups, September was a good month. Typical of the back-to-work nature of the post-Labor Day mindset, most industrial distributors reported an uptick for the month, as fall maintenance work begins. Most of the auto parts suppliers were positive, although a couple signaled a note of caution because of softening auto sales. The office furniture industry continues to show evidence of topping out, but overall business conditions still remain positive. Just like last month, the capital equipment industry remains checkered because of the large variations from industry to industry.
It is fortunate the business sentiment numbers for September remain very positive. The Short Term Business Outlook, which asks local firms about the perception of the next three to six months, bounced to plus 28, up nicely from plus 15. The September index for Long Term Business Outlook retreated to plus 41 from plus 46 but remains strong.
After a weak report for August, the September report from the Institute for Supply Management, our parent organization, returned to normal. New Orders, ISM’s index of business improvement, came in at plus 7, up from negative 4. In a similar move, the Production index returned to plus 4, up from negative 3. However, ISM’s Employment index remained weak at negative 3. ISM’s overall index rebounded to 51.5 from 49.4, well above the all-important 50.0 break-even point. Much as we expected, last month’s reading was most likely a statistical fluke.
A slightly different view of the U.S. economy comes from the Oct. 3 report from Markit.com, the British international economics consulting firm. The seasonally adjusted Markit PMI for September came in at 51.5, identical to ISM’s PMI reading, and a little slower than August’s 52.0. New Orders, Employment and Purchases were positive, but the pace continues to slow. Chris Williamson, Markit’s chief economist, further noted: “Manufacturing growth slowed to a crawl in September, suggesting the economy is stuck in a soft patch amid widespread uncertainty in the lead up to the presidential election. The survey saw firms pulling back on expanding production and focusing instead on cost cutting, as inflows of new business slowed to the weakest seen so far this year.”
For the world economy, the JPMorgan Global Manufacturing survey of 31 nations released Oct. 3 continues to depict a world economy stuck in slow growth. JPM’s index of New Orders remained above the all-important 50.0 break-even point and edged higher to 51.4 from 51.0. The Production index declined to 51.9 from 52.0. The JPMorgan Global Composite Purchasing Managers Index edged up to 51.0 from 50.8. Among the major economies of the world, the Northern European countries, such as Austria, Germany, the U.K., and the Netherlands are growing, but France and Greece continue to present negative PMIs. Other countries posting negative PMIs include South Africa, South Korea, Turkey and Brazil. The PMI for China came in at the break-even point of 50.0.
The survey author further noted: “The September PMI is signal that the global manufacturing sector remained in a low growth gear at the end of the third quarter, though the survey has registered some improvement in recent months. Based on the global PMI, it appears that global output growth is firming modestly from a 1 percent pace to a 2 percent pace. The consumer goods PMI remains quite elevated, consistent with good gains in retail sales, whereas the investment goods PMI is sending a message that capex growth remains slow.”
For September, it can be said industrial inflation is almost nonexistent. Locally, our index of Prices came in at 0, down from August’s plus 2, and well below last month’s plus 12. At the national level, ISM’s index of Prices remained unchanged at plus 6. Indeed, most industrial commodities remain remarkably stable. The list of commodities either rising in price or in short supply is the smallest it has been in the 27-year history of our local survey. Steel is a component in many manufactured products, from toys to cars to water coolers, so it is encouraging to see the sharp upticks in prices have subsided and even reversed in some instances.
For our local automotive parts suppliers, the future naturally is dependent on the automotive sale numbers that come out every month. Ford, General Motors, Fiat Chrysler and Honda posted modest U.S. sales declines in September, while Toyota and Nissan advanced. Industry volume slipped for the second straight month but only by 0.7 percent. However, almost 62 percent of the sales were for light trucks, while traditional cars accounted for only 38 percent of the September totals. Low gasoline prices have resulted in consumers ignoring fuel economy in favor of bulk and comfort. Cash incentives for September hit a record high of $3,923. With dealer inventories growing, sub-prime loans again are being pushed.
The editor for Automotive News further noted: “After a six-year run of U.S. sales gains, some analysts and automakers believe sales have peaked. Other executives and analysts — citing low interest rates, easy credit terms, steady job growth and high consumer confidence — say there is more room to run.”
The September Employment index for West Michigan rose to plus 9 from plus 6 but remained below the growth rate of the previous 10 months. Of the 83 Michigan counties detailed in the report, Ottawa County’s unemployment rate of 3.0 percent is tied for the lowest in the state. Allegan County took second place at 3.3 percent, and Kent County also had a 3.3 percent reading. All of the local reporting units in West Michigan continue to post year-over-year improvements, but the changes are now very small as we approach full employment. The shortage of qualified workers continues to be a major problem for many industrial firms.
In other economic news, the second quarter GDP was revised upward to 1.4 percent from 1.2 percent. The first-quarter growth rate of 0.8 percent remained unchanged. As a result, the IMF cut the U.S. estimate for overall growth in 2016 to 1.7 percent. There is hope the third quarter will come in slightly higher than the first two quarters, but few pundits expect strong growth to return anytime soon. The economy has grown at a 2.1 percent annual rate since the U.S. recovery began in mid-2009, which is well below the 3.0 percent average annual rate since World War II.
Brian Long, Ph.D., is director of supply management research at Seidman College of Business, Grand Valley State University.