Guest Column

Hints of slower growth, but (some) optimism rebounds

May 24, 2019
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Although the West Michigan economy is still chugging along like it has been for the past 10 years, anecdotal evidence is mounting that the pace may be slowing.

According to the data we collected in mid-April, New Orders, our index of business improvement, remained modestly positive but backtracked to 13 from 17. However, the Production index ticked up to 11 from 5. The index of Purchases also rose to 16 from 4.

The national industrial economy retreated slightly in April, according to the May 1 report from the Institute for Supply Management, our parent organization. New Orders, ISM’s index of business improvement, remained positive but eased to 12 from 24. The Production index flattened to 12 from 16. ISM’s index of New Export Orders fell below the break-even point to minus-1 from March’s 3, and the index of Imports slid to minus-1 from 2. Although still above the 50 break-even threshold, ISM’s overall index eased significantly to 52.8 from 55.3.

The view of the U.S. economy from IHS Markit, the British international consulting firm, is slightly more optimistic. Markit.com’s seasonally adjusted PMI for March edged higher to 52.6 from 52.4. The statistics were modestly aided by improvements in the survey’s New Business and Factory Output indexes. However, the index of business confidence, as well as most of the survey’s other measures, remain below the series trend as well as the average statistics for 2018.

Most estimates for first quarter U.S. GDP were coming in at a little less than 2%. Hence, the 3.2% growth reported by the Commerce Department on April 26 was a pleasant surprise. However, analysts were quick to point out several statistical quirks that implied the trend will not continue for the rest of 2019.

The second quarter Blue Chip consensus is now pegged at 2.6%, and the closely watched Atlanta Fed best guess now has been raised to 1.6%. According to the numbers in our local survey, 2.5% appears to be a good guess for second quarter GDP.

JPMorgan’s Global Manufacturing index, a compilation of the purchasing managers’ reports from 43 nations, remains “lackluster.” China, the world’s second-largest industrial economy, remains flat. The April Caixin PMI for China backtracked to 50.2 after declaring that the 50.8 posted a month earlier constituted a new wave of optimism for the tariff-beleaguered economy.

JPM’s overall index eased to 50.3 from 50.5, although both New Orders and Output drifted marginally higher. The Employment index eased to 50.4, only four ticks away from the 50 breakeven. Because all of the indexes are weighted by GDP per country, the positive performances from larger economies like the U.S., China, Brazil and the U.K. help raise the average. However, the sub-50.0 scores from Germany, France, Italy, Japan and South Korea continue to pull the averages lower.

The uncertainty of the Brexit battle continues to weigh on all the European countries. The April IHS Markit PMI manufacturing index for the eurozone came in at 47.9, slightly better than the 47.5 reported for March. The 44.4 PMI of Germany, the largest country in the eurozone, remains the biggest loser, although Austria and Italy also are posting negative PMIs. The “fire sale” rally continues in Greece, resulting in a PMI jump from 54.7 to 56.6, a 19-year high. The Netherlands, Spain and Ireland still are positive but not nearly as strong as they were a few months ago.

According to the latest report from Michigan’s Department of Technology, Management and Budget, Michigan’s “headline” unemployment rate for March (the latest month available) remained unchanged at 4%, but well below the 4.4% reported for March 2018. Comparing March 2019 to March 2018, total statewide seasonally adjusted employment grew by 41,000 workers. The unemployment ranks declined by 16,000.

Although one month can never be construed as a trend, it was disappointing to see our local index of Employment slide from 15 to a 27-month low of 4. However, unemployment always is an economic laggard, resulting in most of our West Michigan counties continuing to post very good unemployment numbers. According to the most recent data released by Michigan’s DTMB, the unemployment situation in most of our West Michigan counties still is very good. Of the 83 counties in Michigan, Ottawa County continues to report the lowest unemployment rate of 3%. Kent County comes in second at 3.1%. Among the other large West Michigan counties, unemployment rates in both Kalamazoo and Calhoun are above the state average at 4.4%. Regrettably, the current numbers are about the best we can expect in the current business cycle. The only good news is that the labor shortage that has plagued many firms may soon start to subside.

As expected, U.S. auto sales are continuing to fall, but the decline so far remains fairly orderly. According to the May 1 report from Automotive News, sales for the industry dropped a rather modest 2.3% in April, pushing the industry’s Seasonally Adjusted Annualized Rate (SAAR) down to 16.41 million units. Analysts continue to cite rising interest rates, tighter credit and rising vehicle prices as the apparent reasons for the drop in sales.

The biggest growing concern among the industry forecasters is the bulging inventories on the lots of many dealers. Although we are entering the prime spring selling season, it will require some significant financial incentives to clear the dealer lots in the few short weeks before the 2020 models begin arriving. Many of our local parts producers are still primarily “Tier 1” suppliers to the Detroit Three, so we tend to watch these firms more closely.

April sales for GM declined 2.6%, Fiat-Chrysler eased by 6.1% and Ford lost 4.7%. Among the other major nameplates on the downside, Toyota shed 4.4%, VW lost 3.7% and Mazda plunged 14.5%. On the upside, Subaru added 7.7%, Hyundai-Kia gained 1.7% and Honda eked out a 0.2% win.

For April, our local index of Prices retreated significantly to 10 from 21. The slowing world economy has brought the prices for many major commodities down over the past year, resulting in the April JPMorgan international pricing index easing to 53.2 from 53.4. ISM’s national index of Prices backtracked appreciably to 0 from 9.

Given that the data was collected in mid-April, business confidence rebounded in response to optimism in the April news cycle touting a potential new agreement with China. The West Michigan index for the Short-Term Business Outlook for April, which asks local firms about the perception for the next three to six months, bounced to 19 from 8.

However, the respondents remain cautious about the softening world economy and unresolved Brexit problem. The index for the Long-Term Business Outlook, which queries the perception for the next three to five years, came in marginally higher at 29, up from 28.

Just as last month, many firms appear to be settling in for a period of slower growth.

Although there are some significant signs that growth is slowing, there still is no sign that we are about to slide into a recession. We know the world economy is slowing and this slowdown will ultimately have at least some impact on our domestic economy. However, various industries are starting to grow “bubbles,” which we hope will not all break at once.

Unlike the dot-com bust or the housing crisis, there is no apparent major catalyst for a recession at this time. The ongoing trade dispute with China could generate a significant slowdown or even a recession if the war drags on. By contrast, the “sugar high” from the tax cuts may have run its course, but some residual benefit still is in the mix. Most major capital projects are planned and executed over a long-term cycle, such as five years. These same major projects tend to have long and productive supply chains that stimulate growth in perpetuity. Assuming the tax cuts are not repealed by the next administration, at least some of the benefit of the 2017 tax legislation could be felt for years to come, making the U.S. the cheapest place in the world to do business.

Brian G. Long, Ph.D., is director of supply management research at Seidman College of Business, Grand Valley State University.

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