Following flat finish, expect modest growth for first quarter
December often is a slow month for many industrial firms, and December 2016 was no exception. According to the latest survey conducted during the last two weeks of December, New Orders, our closely watched index of business improvement, came in at minus-5, considerably below the index of plus-23 posted as recently as September, but comparable to last year’s equally reticent reading of minus-1.
Most of our other key indexes were modestly positive. The Production index eased to plus-3 from plus-4. Activity in the purchasing offices, the index of Purchases, remained positive but edged lower to plus-3 from plus-6. Unlike the inventory spikes we reported in August, the December indexes representing Finished Goods Inventories continued to edge modestly lower to minus-7, down from minus-2. The Raw Materials Inventories returned to positive at plus-4, up from minus-12 in November. Hence, we conclude the West Michigan economy for December was fairly flat. We can expect the January numbers to reflect the back-to-work mood of the new year. But many of our industrial groups are showing signs of topping out, so growth for the first quarter will probably be modestly positive.
Looking at individual industrial groups, it is not surprising to see many of our firms downshift to a slower pace in December. The auto parts suppliers continue to raise concern over the recent softening in auto sales. For two of our survey respondents, new quotation requests are down considerably. In the office furniture industry, most signs point toward sales topping out, although business conditions still remain positive. The bias for the capital equipment industry now is on the down side. Typical of most Decembers, performance for the industrial distributors was modestly lower.
The business sentiment numbers for December improved moderately. The Short Term Business Outlook, which asks local firms about the perception of the next three to six months, rose to plus-20 from plus-12. In a similar move, the Long Term Business Outlook edged higher to plus-45 from plus-34. From the anecdotal comments, at least some respondents feel the postelection mood has resulted in a more optimistic outlook for 2017. Changes proposed by the new administration will come much slower than implied by the pre-election rhetoric. Hence, the business environment will be reasonably stable. But the postelection mood clearly has changed from uncertainty to optimism.
At the national level, the December report from the Institute for Supply Management, our parent organization, turned in a decidedly positive direction. New Orders, ISM’s index of business improvement, came in at plus-12, up from plus-5 in November and plus-4 in October. The Production index rose to plus-11 from plus-9. ISM’s Employment index remained modestly positive at plus-3. ISM’s overall index for December registered 54.7 percent, a significant increase of 1.5 percentage points from November. As we noted in several recent reports, about half of all the PMIs worldwide are less than two points above the 50.0 break-even. The U.S. PMI now is above average.
An equally strong report comes from the survey of the U.S. economy conducted by Markit, the British economics consulting firm. Increases were reported in New Orders, Employment and Purchases. The Markit PMI for the U.S. came in at 54.2, just a shade below the ISM’s index of 54.7. Comments from Chris Williamson, the chief business economist at Markit, clearly have turned from bearish to bullish:
“U.S. manufacturing is enjoying a strong end to 2016, showing further signs of pulling out of the soft patch seen earlier in the year and putting the sector on the starting blocks ready for a further upturn as we move into 2017. The pace of growth signaled by the PMI in December was the strongest for almost two years. The combination of improving current demand and optimism for a further upturn in 2017 prompted companies to build inventory and boost capacity. The latter was reflected in the largest rise in factory payroll numbers for one and a half years.”
The year-end assessment from the JPMorgan Global Manufacturing survey of 31 nations reported modest optimism for improvement in the world economy. JPM’s index of New Orders once again edged higher to 53.8 from 53.1. The Production index advanced to 53.8 from 53.4. The JPM Global Composite Purchasing Managers Index rose to 52.7, a 34-month high. Among the major economies of the world, the strongest PMI reports are coming from the Netherlands (57.3), the U.K. (56.1), Germany (55.6) and Spain (55.3). At 53.5, the PMI for France now has been positive for three straight months. The October PMI for China came in at 51.9, well above the break-even point. However, Greece, Brazil, Turkey and South Korea continue to be a drag on the world economy.
David Hensley, the survey author, further noted: “With rates of expansion in production and new order volumes having gathered pace during the latter part of 2016, the sector will start 2017 on a solid footing with positive momentum building and job creation accelerating.”
According to some reports in the business media, industrial inflation showed signs of recurring. JPM’s December index of Prices jumped to 61.0, a five-year high. Our local index of Prices rose to plus-21, up from plus-11 in November. Most of the increases can be attributed to the recent increase in oil prices. In addition to fuel, many industrial products derived from oil, such as plastic resins, are now up about 10 percent since June. In addition, steel prices have been rising for the past three months, largely because of the decline in Chinese imports. The 266 percent tariff we imposed on some grades of Chinese steel apparently is having an impact.
As we have noted numerous time in previous reports, the sales statistics for automobiles fuel the growth for our numerous automotive parts suppliers in West Michigan. As a result of some auto firms pushing generous incentives, the December light vehicle sales rose by 3.4 percent. Ford posted a miniscule gain of 0.1 percent, while General Motors fared better with a 10-percent boost. For the other major brands, Honda rose 6.4 percent, Nissan added 9.7 percent, Toyota edged up 2 percent and Subaru gained 12.3 percent. Analysts attribute most of the gains to massive fleet orders as several manufacturers attempt to show record year-end sales. However, dealer inventories now have edged higher than normal, and without the aid of a few additional large fleet sales, most analysts believe new car sales have topped out. As a result, the 2017 outlook for our local parts suppliers will relate to the specific lines of cars they are supporting. Over half the sales reported in December were for light truck and cross-over vehicles. Sales for regular cars and fuel-efficient compacts have continued to decline, partially because of low-cost gasoline.
Where does the economy go in 2017? At the beginning of 2016, we faced numerous statistics that pointed toward a downward trend for the economy. The stock market took a nasty hit, and it appeared we could be in the early stage of another recession. But that was last year. For 2017, we have a whole host of positive factors that predict a strong first quarter. Some of these factors include:
- Consumer confidence recently has recovered to a 15-year high.
- Auto sales may taper off in 2017 but still will remain strong.
- Housing prices finally have recovered to the pre-crisis peak.
- The GDP gain for the third quarter of 2016 came in strong at 3.5 percent.
- The ISM national purchasing managers index for December jumped 1.5 points to 54.7. The index had been negative earlier in the year.
- The PMI for China rose to 51.9 from 50.9, which is now the third month of positive growth. Like the ISM, the index had been negative.
- Canada, our largest trading partner, has returned to positive growth and posted a PMI of 51.8.
- The global PMI, now at 52.7, is considerably improved over the past year.
- The stock market now is in record territory.
- Business confidence in our local survey, as well as other surveys, generally is positive.
On the down side, just like last year, external factors constitute the biggest risks to the U.S. economy. Many analysts still note the Chinese economy has not been totally fixed. One major problem is a massive real estate bubble, not unlike the U.S. in 2007, which could result in a financial crisis as economists have warned for years. The U.S. would not be immune to these effects.
On another note, the British magazine Economist warned all of our presidential candidates last March to be careful not to start a trade war. If the Trump administration improperly upends our trade with the rest of the world, we could be drawn into a Hawley-Smoot backlash like we experienced in 1930.
Finally, every recession in recent history has had some kind of a trigger that “broke the bubble.” Most recently, we saw this with the sudden collapse of mortgage loan markets, as we slid into the Great Recession. In 2000, we saw the collapse of the “.com” euphoria. The 1990 recession was blamed on the savings and loan crisis. In 1973, the trigger was the Arab oil boycott. Today’s question: What is the next bubble, and when?
Brian Long, Ph.D., is director of supply management research at Seidman College of Business, Grand Valley State University.