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2017 tax cuts have run their course for many firms
For the West Michigan industrial economy, September was strong, October was stronger and November was our best month of the year. According to the data collected in the last two weeks of November 2018, New Orders, our closely watched index of business improvement, edged higher to 38 from 36. In a similar move, the Production index, which was already fairly robust, edged up to 33 from 30. Activity in the purchasing offices, the index of Purchases, rose to 36 from 32.
Just as last month, several of our survey participants are concerned about the impact of the tariff wars, especially regarding imports from China. But almost no one is forecasting any type of impending doom.
Individual industries: Although auto sales continue to soften, our West Michigan auto parts suppliers continue to report positive business conditions and remain cautiously optimistic about the first half of 2019. The 2017 tax incentives may have run their course for at least some of the capital equipment firms. Business conditions remain strong for most of our industrial distributors.
Office furniture: A cautionary warning to our local economy comes from Mike Dunlap’s quarterly survey of the office furniture industry. The Dunlap Quarterly Gross Shipments Index eased to 60.37, down significantly from the survey’s 13-year high of 66.86 set just three months ago. The Capital Expenditures Index eased to 52.31, down considerably from the all-time high of 64.74 posted in April 2017. Both of these indexes clearly indicate that the “sugar high” for office furniture sales brought on by the 2017 tax reform package has run its course.
Fortunately, Dunlap’s Personal Outlook Index remains strong at 64.81, well above the survey’s overall average of 58.84. The industry is clearly profitable at the current level, but the expansion for this phase of the business cycle for office furniture is apparently over.
The U.S. economy: According to a report from the Institute for Supply Management, our parent organization, the national industrial economy posted a modest gain for November. New Orders, ISM’s index of business improvement, came in at 17, up nicely from October’s 9. The Production index was virtually unchanged at 18. The Employment index gained three points to 15. ISM’s overall index rose to 59.3, well ahead of the expectations of most analysts.
The British international consulting firm IHS Markit.com offers a slightly different view of the U.S. economy. The seasonally adjusted PMI for November retreated slightly to 55.3 from October’s four-month high of 55.7. New Orders increased “… at a sharp and accelerated pace in November.” The positive results were attributed to new product launches as well as the strongest new export demand in nine months. Job growth came in the second highest in all of 2018. Chris Williamson, chief business economist at IHS Markit, further noted:
“Despite the headline PMI slipping to a three-month low, November saw manufacturers enjoy another encouragingly solid month of improving business conditions. Dig deeper behind the headline number and the picture brightens further. New orders rose at the fastest rate for six months, prompting manufacturers to continue to expand capacity to meet demand. The pace of job creation remained among the highest seen over the past decade. The survey acts as a reliable guide to the official manufacturing data and suggests that factory output is growing at an annualized rate of around 1.5 percent so far in the fourth quarter, providing a material but by no means impressive contribution to GDP. As such, the data corroborate the flash PMI’s signal that the economy will likely see growth slow to a 2.5 percent rate in the fourth quarter. In a further sign that growth has peaked, business optimism about the year ahead waned to the lowest for over a year, albeit with the proportion of companies expecting output to be higher in a year’s time outnumbering those expecting a decline by 36 percent to 3 percent.”
The world economy: The JPMorgan Monthly Global Manufacturing index encompassing 43 nations remained unchanged at a 23-month low of 52.0 in November. Among the largest nations covered by the survey, manufacturing business conditions improved in the U.S., the eurozone, Japan, China, the U.K., Brazil and India. Deteriorations were seen in South Korea, Italy, Taiwan, Mexico, Poland, Turkey, Thailand and Malaysia.
For November, the eurozone’s overall manufacturing index eased to 51.8, down from 52.0 in October. Although still above the break-even point of 50.0, the pace has continued to slow for most of 2018. The PMI for Italy sank to a four-year low of 48.6, signaling continued uncertainty over the newly elected populist government.
The 56.1 PMI reading for the Netherlands remains the strongest for the eurozone group, although the pace has eased considerably over the past two years.
Williamson noted: “Manufacturers reported that demand is now falling in Germany, France and Italy, while only modest growth was recorded in Spain. The darker outlook is linked to trade wars and tariffs as well as intensifying political uncertainty and has led to increased risk aversion and a commensurate cutting back on expenditure, notably for investment. Producers of investment goods such as plant and machinery reported the steepest drop in demand in November, with reduced capital spending by companies compounded by on-going disruption of business in the autos sector. Hopes that the soft patch may prove short-lived are countered by business optimism about prospects for the year ahead remaining among the gloomiest seen since the sovereign debt crisis in 2012, suggesting companies are bracing themselves for further weak demand in the coming months. The survey also indicates that households could rein in spending if companies continue to pull back on hiring, adding to downside risks to the outlook.”
Michigan unemployment: According to the latest report from Michigan’s Department of Technology, Management and Budget, Michigan’s “headline” unemployment rate for October (the latest month available) edged down to 3.9 percent, well below the 4.7 percent reported for October 2017. Total statewide employment grew by 30,000 workers compared to October 2017, and the number of people unemployed decreased by 39,000.
West Michigan unemployment: In our latest survey, the index of Employment remained virtually unchanged at 25 but well ahead of the survey’s 25-year average of 8. Just as last month, the unemployment rate for most of our reporting units still is about 1 full percentage point below 2017.
Like many past reports, at 2.5 percent, Ottawa County took the honors for the lowest unemployment rate among Michigan’s 83 counties. Kent County came in second place at 2.6 percent. At 3 percent, Kalamazoo County’s rate still is well below the statewide average. A few West Michigan cities like Kentwood boast a 2.5 percent rate.
However, it is worth repeating that the current low unemployment numbers we are reporting are as good as we can expect for the near future. From Economics 101, it should be remembered that the employment statistics are laggards, and we are usually well into a recession before the unemployment statistics start to turn negative.
Automotive: November’s bad news from the automotive sector came from the General Motors announcement to close three plants associated with small car production and lay off 14,000 workers, presumably to get ahead of the predicted slump in auto sales for 2019. Sales numbers for small cars and even traditional sedans have been falling for most of the past four years, and GM management thought it was in the best long-term interest of the company to cut costs now and not hold on to false hope like they did in 2008.
Ford already announced plans to phase out the domestic production of most sedans over the next several years and concentrate on SUVs, trucks and crossovers. However, Ford has not announced any significant layoffs. According to Jeremy Acevedo, manager of industry analysis at Edmunds: “November’s sales slowdown signifies a new normal that we can expect … likely into 2019. Although sales remain at a healthy level, factors such as increasing market saturation, rising transaction prices and elevated interest rates continue to create headwinds for the industry overall.”
Bolstered by fleet sales, U.S. light-vehicle sales for November were only off by 0.5 percent, yielding a seasonally adjusted sales rate (SAAR) of 17.55 million — well above the forecasted rate of 17.3 million. For the Detroit Three, GM posted a fairly modest decline of 1.4 percent, Ford lost 7.1 percent, but FCA gained 16.8 percent because of significant surges for the Jeep and Ram nameplates. Among the other major nameplates, Honda shed 9.5 percent, VW gave up 8.3 percent and Nissan tanked by 18.3 percent. Toyota sales eased modestly by 0.6 percent.
Industrial inflation: Despite the slower pace of the world economy, our local index of Prices for November edged up to 46 from October’s 33. However, ISM’s national index of Prices dropped significantly to 21 from 43.
In a less dramatic move, the JPMorgan international pricing index eased to 58.6, down from 61.1. At least some key industrial commodities like aluminum, zinc, fuel and some grades of steel are slowly falling in price. However, many grades of plastic resin still are rising in price despite the recent declines in petroleum prices.
GDP: The second estimate for the third quarter of 2018 came in unrevised at 3.5 percent. Because of the falling prices for some commodities and pessimism promulgated by some forecasters, current fourth quarter estimates are now running about 2.9 percent.
Business confidence: Most of our local firms remain cautiously optimistic, although others continue to cite uncertainty about the impact of the Chinese trade war and the gradual easing of auto sales.
West Michigan’s index for the Short-Term Business Outlook for November, which asks local firms about the perception for the next three to six months, ticked up to 28 from 26. This index had been at 51 just nine months ago. The Long-Term Business Outlook, which queries the perception for the next three to five years, rose to 29 from last month’s record low of 24. Most of our survey participants have been through at least one recession and are beginning to worry about how long the current expansion can continue to run.
Summary: The 2017 tax cuts may have run their course for many firms, but the economic momentum going forward remains positive. The softening world economy and the pessimistic outlook by some of the automotive firms now are pointing toward a slower pace for the West Michigan economy going into 2019.
The expansion of the office furniture industry has apparently run its course, although most firms remain positive. Unless trade talks with China break down, there is no apparent problem in the short term that will upset the economy for the first half of 2019. However, if any sign of weakness does pop up, we will see many firms start to decrease spending and reduce or stop hiring new people. Hence, growth for the second half of 2019 may be subdued.
Brian G. Long, Ph.D., is director of supply management research at Seidman College of Business, Grand Valley State University.