Is today’s industrial economy as good as it gets?
For the past couple of years, growth in the West Michigan economy has been a little sluggish in the fall.
For instance, New Orders, our index of business improvement, dipped to minus-1 in November 2015 and dropped much more abruptly to minus-13 in October 2016 on the eve of a contentious presidential election. According to the West Michigan survey conducted during the last two weeks of October 2017, New Orders remained positive at 11 but declined from the 21 reported in September.
In contrast, the Production index posted a modest gain, rising from 17 to 20. In a similar move, activity in the purchasing offices, our index of Purchases, rose to 22 from 14. The index of Finished Goods Inventories remained fairly stable at minus-2, down from 0. However, the Raw Materials Inventories index dropped to minus-5 from 5, probably because the recent hurricanes and stronger business conditions have drained a lot of inventory. Because of shortages, the index of Lead Times for October remained stretched at 28, considerably higher than our 25-year average of 4.
Looking at individual industries, there is little change to report for October. Most of the auto parts suppliers are maintaining their present status, although some have voiced concern about the slower auto sales. However, no one is suggesting the need for any kind of a layoff. A similar mood is noted among the office furniture firms, and the industry appears to be topping out at the present level. Given that expansion is slowing in both automotive and office furniture, so is the pace of business for the capital equipment fabricators and dealers. For the industrial distributors, October was generally a good month.
In this month’s report, business optimism had little change. The October index for the Short-Term Business Outlook, which asks local firms about the perception for the next three to six months, eased modestly to 28 from 30. However, the Long-Term Business Outlook edged slightly higher to 49, up from 45. The negative rhetoric from Washington and the continued threats from North Korea seem to be taken in stride.
At the national level, the industrial economy remains very strong. The Nov. 2 report from the Institute for Supply Management, our parent organization, remained near record levels but backtracked a little from last month’s lofty highs. ISM’s index of New Orders eased to 22 from 26. The Production index tapered to 19 from 21. Responding to the stronger sales and production reports in recent months, the Employment index edged up to 19 from 18. Because of difficulties in the supply chain for delivering materials and services to meet production schedules, ISM’s index of Inventories slid to minus-5 from October’s 5. ISM’s overall index for October eased to 58.7, down from 60.8. However, the index still is very strong by historical standards.
The report on the U.S. industrial economy from IHS Markit.com, the British economics consulting firm, also came in stronger for October. The Markit.com indexes of New Orders and Production both rose at a significant rate. Markit’s overall PMI edged up to 54.6 from 53.1, the best performance since the beginning of the year.
Chris Williamson, the chief business economist for Markit, is finally starting to be more optimistic.
“U.S. manufacturing stepped up a gear at the start of the fourth quarter, boding well for higher factory production to support robust economic growth in the closing months of 2017,” he said. “Production volumes jumped higher on the back of a substantial improvement in order book inflows, in part due to supply chains returning to normal after the hurricanes but also reflecting a combination of strong underlying demand. Factory jobs growth has also picked up to one of the strongest levels since the global financial crisis, underscoring the improvement in optimism about future trading among manufacturers.”
An old saying portends that a rising tide floats all boats, and most of the major economies of the world continue to rise. Hence, the JPMorgan Global Manufacturing PMI released earlier this month boasted a 78-month high of 53.5. JPM’s index of New Orders rose to 54.2 from 53.8. This is a significant move, given the survey covers 31 countries and all of the major industrial firms in the world.
For Europe, the PMI rose to an 80-month high. Germany, Austria, Italy and the Netherlands filed the strongest reports in almost 12 years. With new leadership in France, October’s PMI came in at a 29-month high. Even Greece eked out modest growth with a PMI of 52.1.
Williamson commented: “October’s PMI was the highest since February 2011 and the second-highest in over 17 years. The overall performance of the manufacturing sector so far this year has been the strongest since 2000. It’s especially encouraging to see employment growing at a survey-record pace as firms seek to boost capacity in response to fuller order books. Export order growth remains encouragingly solid, suggesting little impact from the strengthening of the euro this year, and domestic demand continues to improve across the region. However, with inflows of work rising at an increased pace, factories and their suppliers are struggling to meet demand. Outstanding orders rose to a degree never before exceeded in the survey’s 15-year history.”
Industrial inflation continues to be a cause of concern for many firms. Locally, our index of Prices came in at 28, well above the 25-year average of 15. For the ISM report, the Prices index remained significantly high at 37. Using an index of 50 as a break-even point, JPM’s index of Prices rose to 61.3 from 60.9. All of the numbers offer a clear sign world prices are rising for most of the major industrial commodities. Except for some grades of steel, most major industrial commodities, such as aluminum, brass, copper, zinc, caustic soda, corrugated boxes and most types of plastic resins, now are rising in price with no immediate relief in sight. However, it is important to note that so far, the surge of industrial inflation has not spilled over to the consumer sector. If and when it does, it is almost certain the Fed will begin raising interest rates at an accelerated pace.
Although it is encouraging to see our local index of Employment still is double-digit positive at 14, the employment-shortage cry continues to grow louder every month. In fact, about one-quarter of the firms in our local survey report being understaffed. Although technical training is required for some of the vacant jobs, even the $16-per-hour unskilled jobs still are not being filled. The problem of personnel shortages has caused some firms to defer expansion. Especially in the case of a few local automotive parts fabricators, business has been profitable and money is available to purchase new equipment. However, finding enough new people to run the new equipment is a problem.
Looking at automotive, it was no surprise to see the Automotive News October sales report for cars and light trucks continued the downward pattern that started at the beginning of the year. This month’s industrywide decline was a scant 1.1 percent, which confirms the premise the decline in auto sales has been very orderly. Of the major brands, Nissan led the way upward with an 8.4 percent uptick, followed by Ford at 6.4 percent, Toyota adding 1.1 percent and Honda gaining a scant at 0.9 percent. Fiat-Chrysler dropped 13.2 percent, GM lost 2.2 percent and Hyundai-Kia shed 12.6 percent. The market shift in favor of SUVs, trucks and crossovers continues to accelerate. For instance, GM posted a 24 percent decline in sedan sales, which was offset by trucks and crossovers.
The other economic news that has come out over the past month generally has been very positive. The “official” unemployment rate has fallen to 4.1 percent. That’s only a breath away from the 20-year low of 3.8 percent. The U-6 unemployment rate, which some people call the “real” unemployment rate, has fallen to a 30-year low of 7.9 percent. The initial estimate of GDP for the third quarter came in at 3.0 percent, reflecting the additional strength we have seen in all of our other economic statistics. Hence, the local economy is good, the national economy is good and the international economy is good. This may be as good as it gets.
Brian Long is director of supply management research at Seidman College of Business, Grand Valley State University.