Growing, but still slowing. That’s the latest word on the West Michigan economy, according to the data and comments collected in the last two weeks of September.
New Orders edged up to +13 from +5. In a similar move, the Production index rose to +12 from +3. Activity in the purchasing offices dropped to +0 from +12. Regrettably, for the first time since 2009, our index of Employment turned modestly negative at -3, down from +7 in August and down even more from +25 in July.
As always, one month is never a trend. We know the world and U.S. economies are continuing to slow, so it stands to reason we can expect some flattening at the local level.
Despite many new types of firms coming to West Michigan, we are still heavily dependent on automotive parts producers, office furniture and aerospace for growth. All three of these industries reported stable conditions for September. Some of our capital equipment firms are starting to feel the pinch from foreign competition and are no longer as optimistic. As a group, our industrial distributors reported business conditions for September to be the same as August.
Another note of caution comes from our data on business confidence. The Short Term Business Outlook index remained positive but backtracked to +11 from +16. Although the index is still slightly positive, this reading constitutes a two-year low. In contrast, our Long Term Business Outlook index remained unchanged at +38. Just as last month, it appears geopolitical events have continued to dampen the outlook for some respondents.
At the national level, the October report from the Institute for Supply Management, our parent organization, has turned virtually flat for the first time in five years. ISM’s index of New Orders retreated to -3 from +1. The Production index eased to +1 from +5. The Employment index also flipped negative to -3, down from +1 in September. ISM’s overall index eased to 50.2 from 51.1. The breakeven point is 50.0.
Confirming the ISM statistics, the international economics consulting firm of Markit.com reported the second-lowest level of activity since October 2013 for the U.S. Weaker export sales remained a drag on total new orders, and respondents reported another slowdown in employment growth. However, Markit’s overall September index still came in at 53.1, well ahead of the diffusion index breakeven point of 50.0 and well ahead of ISM’s 50.2.
According to the Oct. 1 JP Morgan Global Manufacturing Report, JPM’s overall index came in at 50.6 in September, down from 50.7 in August. In addition to the U.S., the PMI for key countries like Ireland, Germany, Netherlands, Italy and Spain are modestly positive. Mexico and Canada, our largest trading partners, are hovering flat. Other countries like Greece, Russia, France, China, Turkey, Brazil, Indonesia and South Africa are pulling the numbers down.
“The global PMI indicates the manufacturing sector remained in very low gear in September, due to sluggish final demand and ongoing inventory adjustments. These impacts are also starting to cross over into the labor market, leading global employment PMI to fall below 50 for the first time in over two years.”
Although the PMI indexes are now positive for all of the Eurozone countries except Greece, the prospect for the next few months is not overly optimistic.
“Despite unprecedented central bank stimulus and substantial currency depreciation, the Eurozone manufacturing sector is failing to achieve significant growth momentum and even risks stalling again.”
This month’s unemployment update from the Michigan Department of Technology, Management and Budget continues to be optimistic. For September, Michigan added about 8,000 new jobs, and the “official” number of unemployed workers fell to 242,000. This constitutes the smallest number of unemployed workers since 1996. However, it does not include the disenfranchised workers who have dropped out of the workforce, or those who are working at part-time jobs who would like to move to full time.
Most of the unemployment rates for our local counties are now well below the state and national averages: unemployment in Ottawa County is at 3.2 percent, Kent County 3.4 percent, and Kalamazoo County 4 percent. However, with the ISM index of Employment now negative, as well as our local index now at its lowest level since 2009, we will need to watch the jobs reports more closely in coming weeks.
For auto sales, the industry posted one of the strongest months in history, bringing the seasonally adjusted rate to over 17 million vehicles. For the Detroit Three, GM gained 12.5 percent, Ford 23.3 percent and Chrysler 13.6 percent. For other major brands, Toyota gained 16.2 percent, Subaru 27.8 percent, Honda 13.1 percent and Volkswagen 7.3 percent. Most observers outside the industry do not believe that sales at this level can be sustained indefinitely.
In other economic news, the Department of Commerce revised the GDP growth estimate for the second quarter of 2015 upward to 3.9 percent from 3.7 percent. No revisions were made to the first quarter estimate, so it is safe to say the economic history books will permanently report it as a slow growth rate of 0.6 percent. Most observers expect the last two quarters to average about 2.5 percent, but even the best and brightest economists now have a wide range of opinions about how 2015 will end.
In summary, much of the latent economic pessimism comes from the slowing of the world economy and other geopolitical events. The national economy continues to slow but still remains positive by a very slim margin. Our survey participants associated with exports and firms tied to the extractive industries are beginning to retreat.
For West Michigan, we are fortunate not many manufacturing firms are directly tied to these industries. Some of our statistics remain positive, but much of the buoyancy for West Michigan is still based on near-record automobile sales and continued strength in the office furniture market. Both of these industries are notoriously cyclical, and we are currently at or near the peak.
However, West Michigan is still outpacing the nation as a whole as well as outperforming east Michigan by a considerable margin. This momentum should be sufficient to carry us well into 2016, although the pattern of slow growth is the most we can hope for.
Brian Long, Ph.D., is director of supply chain management research at Seidman College of Business, Grand Valley State University.