Data in ISM report suggests recession could be imminent

Auto suppliers might keep region humming — for a while.
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According to Director of Supply Chain Management Research at Grand Valley State University Brian G. Long, the economy in West Michigan has flattened.

The Institute for Supply Management of Greater Grand Rapids released a report Aug. 8 suggesting inflation has peaked. This may sound like good news for consumers, but several other indicators show signs of a weakening economy. 

But is it a recession?

A recession was long defined as two consecutive quarters of economic contraction. Long said the term “recession” has evolved to include factors such as income, employment, unemployment, industrial production, capital investment and consumer spending. He said he is 80% sure we are heading into a recession, just not there quite yet. 

Long drew his conclusion from analyzing worldwide, national and local data.

On the global scale

New orders are down and job creation has flattened. According to the Purchasing Managers Index for the United States’ largest trading partners — Canada, Mexico and China — purchases have decreased significantly.

The price of natural gas in Europe is about eight times higher than the price of natural gas in the U.S., which is four times higher than it was just a few months ago.

Sales are lower than anticipated, which has led to a significant decline of new orders and exports spawning the largest rise in inventory of finished goods ever recorded.

Commodities like copper, steel, lead, zinc and oil have fallen in price. That may sound like good news, but historically, price drops for most major commodities are an indicator of a coming recession.

Supply chain woes on the world scale show signs of waning, as evidenced by shortened lead times and delivery times, but these improvements may simply reflect a decrease in the pace of demand, Long said.

At the national level

The Purchasing Managers’ Index is a monthly report of economic activity based on a survey of purchasing managers at more than 300 U.S. companies.

On the national level, the New Orders Index for July came in at -3, down from last month’s +1, the lowest report since the end of the most recent  recession, according to a report by the Institute for Supply Management.

“The only time that the New Orders Index has turned negative is at the beginning of four of the last seven recessions,” the report states.

Chris Williamson, chief business economist at S&P Global, said, “With the exception of pandemic lockdown periods, July saw U.S. manufacturers report the toughest business conditions since 2009.”

West Michigan economic activity

Referencing compiled information from the Index of New Order, Production Index, Index of Purchases and the Index of Lead Times for the West Michigan region, Long said:

  • New orders fell to -3 in July from June’s +26.
  • The Production Index (or what some economists call “output”) eased significantly, from +31 to +7.
  • Index of Purchases are down 2 points, from +12 in June to +10 in July.

In addition, higher commodity prices and rapidly rising transportation costs continue to restrict profitability and continuous talk of recession could be a factor contributing to a decline in expansion plans for most businesses in the region, he said.

Consumer sentiment

“For our West Michigan survey of the industrial economy, the Short Term Business Outlook Index for July, which asks local firms about business perception for the next three to six months, posted at -2, slightly below June’s reading of +3, and well below the April reading of +20,” he said.

“The Long Term Business Outlook Index, which looks at perception for the next three to five years, rose to +12. The recent performance of both indices still is running well below our averages for the past eight years.”

July’s University of Michigan Consumer Sentiment Index edged up to 51.5 following June’s record low of 50.0.

Automotive demands may save the day

The pandemic produced a bottleneck in the supply chain for new cars, so demand in that arena remains high and likely may fuel the local auto parts suppliers for many months ahead, he said.

Chip shortages caused idled assembly lines, however, which has impacted auto sales.

While the resulting decline in auto production continues to be a drag on the West Michigan economy, the demand for automobiles remains strong and may be emboldened by the CHIPS and Science Act.

According to a statement from Gov. Gretchen Whitmer’s office, signing the CHIPS and Science Act is aimed at lessening the nation’s dependence on microchips from places like China and will result in the investment of “billions” of dollars into the state’s communities and create tens of thousands of “good-paying jobs.”

Rising interest rates and low consumer sentiment are keeping many potential buyers out of the market. At the same time, higher fuel prices and rising price points for even used vehicles are making affordability a greater challenge.

All that aside, Long said, a steady demand for autos may keep Michigan’s economy afloat. New vehicles still are in limited supply due to COVID-era manufacturing slumps and it’s unlikely the supply will return to normal in the near future.

Surprisingly, July sales at Ford rose 36.8% from June, Long said, but Ford was the only major brand to post a significant gain.

“Keep an eye on inventories. Many firms have been building larger inventories to cover for supply chain disruptions and higher commodity prices,” he said. “If we get into an economic downturn and higher prices and supply disruptions are no longer a problem, they are likely to go back to JIT (just-in-time) inventories and exhaust their surplus — pulling billions of dollars out of the economy.”

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