Auto sales slump finally trickles down to suppliers
After six months of disappointing car sales, the impact on our local auto parts suppliers finally is being felt by the West Michigan economy.
It’s not a collapse, just a modest tapering of the growth rate; and growth is still growth. According to the survey conducted during the last two weeks of July, New Orders, our closely watched index of business improvement, came in at eight, considerably below last month’s robust 31. A little less of a drop was felt by the Production index, which eased to six from 26. Activity in the purchasing offices, the index of Purchases, tapered to 12 from 22. Inventories remained stable and well managed, with our index of Finished Goods rising to five from zero, and the Raw Materials Inventories index edging lower to four from 11.
Looking at individual industries in West Michigan, the business conditions for the auto parts suppliers has turned mixed, primarily based on the specific car or truck lines that the survey respondents are supporting. Some firms still are very strong, but others have been forced to cut production because of slow vehicle sales. The office furniture industry still is stable, and the bias remains on the upside. The capital equipment market remains mixed, and the slowdown in the auto parts industry has resulted in the cancellation of further expansion by some firms. For the industrial distributors, the bias is to the upside largely because of summer maintenance schedules. For nonindustrial firms, many segments of the West Michigan tourism industry are poised to have a record year, and the agricultural industry will have a good year as well, assuming the weather for the remainder of the season cooperates.
Fortunately, our survey of business optimism increased in July. The West Michigan index of the Short Term Business Outlook, which asks local firms about the perception for the next three to six months, remained virtually unchanged at 33. However, the Long Term Business Outlook bounced to 50 from 37, our best reading in almost three years. So far, the local economy appears to be shrugging off the slower auto sales, perhaps because the impact still has not been noticed by most of our local auto parts suppliers.
The Aug. 1 report from the Institute for Supply Management, our parent organization, remained strong, but ISM’s index of New Orders backtracked to 21 from 30. The Production index also eased to 20 from 27. Following the same pattern, the Employment index remained firmly in double digits but slowed modestly to 14 from 17. ISM’s index of Inventories came in flat at zero, which generally depicts the anticipation of market stability.
The monthly survey conducted by IHSMarkit.com, the British economics consulting firm, reported some significant improvement over last month’s report. New Orders grew at a solid pace, bouncing off a nine-month low. Markit’s indexes of Production and Purchases also posted increases. The IHS Markit PMI for the U.S. came in at 53.3, a considerable improvement over the nine-month low of 52.0 reported last month.
Chris Williamson, the chief business economist for Markit, sounded a note of guarded optimism: “The second half of the year got off to a good start for U.S. manufacturers, with the health of the sector improving at the fastest rate in four months. However, although rising, the survey indices remain consistent with only very modest increases in comparable official data, such as manufacturing output, durable goods orders and payroll numbers. Clearly, the manufacturing sector remains stuck in a low gear, though it is at least gaining momentum and hopefully will shift up a gear as we move through the second half of the year if demand continues to improve. IHS Markit expects GDP growth to accelerate to a near 3 percent annualized rate in the third quarter, fueled by gains in consumer spending and business investment, which should benefit manufacturing.”
Looking at the economy for the rest of the world, JPMorgan’s Global Manufacturing survey of 31 nations remained mixed for July. About half of the Asian nations covered by the survey posted a contraction, including India, South Korea, Indonesia, Malaysia, Thailand and Myanmar. Growth remained positive but slower in China, Japan, Vietnam and the Philippines. New Orders rose to 53.6 from 53.3. JPM’s international PMI edged slightly higher to 52.7 from 52.6.
It is no secret the European economy looked fairly grim just a few years ago, and the euro was teetering on the brink of falling apart. Today, the European economy is clearly outpacing the rest of the world. At long last, all countries in the Eurozone are now positive. Austria, Germany and the Netherlands continue to report the strongest growth. Countries such as France and Italy, which were weak for many years, now have begun reporting modest growth. Although Greece’s index of 50.5 still is not strong, it may indicate that the long-awaited recovery may have begun.
Williamson commented: “The survey indicates that manufacturing output was growing at an annual rate of approximately 4 percent at the start of the third quarter, sustaining the best growth spell that the region has seen for six years. Germany clearly remains a major driver of the upturn, with only neighboring Austria and the Netherlands enjoying faster rates of expansion. But this is a broad-based revival nonetheless, with even Greece enjoying its first back-to-back monthly improvement in manufacturing conditions for three years.”
The Commerce Department released the estimate for the second quarter GDP with little fanfare, perhaps because this first statistic is always referred to as an “advanced estimate.” At an estimated growth rate of 2.6 percent, the economy for the April-June period reflects general consensus of slow but steady economic progress. The final number for the first quarter of 2017 was revised to 1.2 percent, which reflects the pattern we have seen for the past seven years. Of course, the usefulness of GDP, a measure developed in the 1930s to try to reduce the health of the economy to a single number is arguably less significant than in past years when the economy was far less complicated.
Looking at some of the good news, the West Michigan employment picture still is very positive. Locally, our index of Employment came in at 20, well in line with the double-digit upticks we have seen throughout 2017. The latest data from Michigan’s Department of Technology Management and Budget shows the estimated unemployment rate for June, the latest month available, at 3.2 percent from Kent County, 3.7 percent in Kalamazoo County, 3 percent in Ottawa County and 3.8 percent for the entire state. Because these numbers are not seasonally adjusted, the influx of high school and college graduates bumps the numbers higher than those reported in May. However, compared with a year ago, the unemployment rate for most reporting units in West Michigan has improved by about a half percentage point. But the call from many industrial firms grows louder every month that industrial America cannot find enough workers at almost every level. In general, the reason for the exorbitant high unemployment among the 18-25 age group is the failure of the education system to prepare them for today’s economy. Sadly, there is no end in sight for this problem.
For the sixth straight month, auto sales for July are lower. The 6.9 percent drop is the largest so far this year, although most of the decline came from a 15 percent drop in the sale of sedans (regular cars) versus a 1.9 percent drop in light trucks and SUVs. With the production of 2017 models now over, analysts still are worried about the bloated dealer inventories, which are much higher now than they were before the Great Recession. Compounding the problem is the large number of vehicles coming off lease. From a consumer standpoint, retired lease vehicles are about half the price of a new vehicle, usually have fairly low mileage and still are under warranty. This obviously dents new car sales but also brings down the prices in the entire used car market. Looking at the sales numbers reported for July, GM sales led the race to the bottom dropping 15.4 percent, followed by Fiat-Chrysler falling 10.5 percent and down Ford 7.4 percent. Among the major foreign nameplates, Nissan fell 3.2 percent, VW 5.8 percent and Honda 1.2 percent. Only Toyota managed a gain of 3.6 percent.
In summary, despite some problems, the Conference Board’s July Index of Consumer Confidence still managed to hit a 16-year high. Locally, the Long Term Business Outlook came in strong, posting a three-year high. The decline in auto sales justifiably concerns our local auto parts suppliers, but so far, the decline remains fairly orderly. At least some local firms have been cushioned by new business obtained from the transplant companies. Furthermore, any slump in the auto parts business by itself will slow the West Michigan economy but not push us into a recession.
Brian Long, Ph.D., is director of supply management research at Seidman College of Business, Grand Valley State University.