Flat, but meekly positive. That’s the latest word on the West Michigan economy according to the data and comments collected in the last two weeks of January.
Our index of business improvement, which we call New Orders, edged back to +4, up from -1. The Production index recovered more ground, rising to +12 from -4. Activity in the purchasing offices remained negative at -1, but improved from December’s -4.
In last month’s report, we noted December is often a month of slower sales and reduced production and predicted January would probably see the same slow growth we have reported for dozens of months. We hoped for a stronger bounce, but the West Michigan economy continues to outpace the national economy as well as the Michigan economy.
Given the slower pace, it is not surprising to see the momentum for most of our industrial groups has turned widely mixed. This is clearly the case with our industrial distributors, office furniture manufacturers, capital equipment firms and aerospace contractors. The exception may be our automotive parts producers, who are still basking in the glow of record auto sales that are optimistically projected to go even higher in 2016. The January auto sales report came in flat, however, and the retail auto market remains oversaturated and bolstered by lower credit requirements, massive incentives and low gasoline prices.
Our national parent organization, the Institute for Supply Management, reports the U.S. industrial economy continues to flatten. ISM’s index of New Orders came back considerably from December’s low of -9 to +1. The ISM Production index remained negative at -5, but improved modestly over December’s -8. Winter storms were blamed for part of the problem. The Employment index decline accelerated to -11 from -7. According to ISM’s index of Inventories, many firms are continuing to liquidate stocks of basic materials in anticipation of lower prices. New Export Orders edged back to negative at -6, down from December’s +2.
At 48.2, ISM’s overall index for January remains below the 50.0 breakeven point for the fourth consecutive month. Since the end of the Korean War, a recession has always followed.
A contrasting view comes from the survey conducted by Markit.com, an international economics consulting firm. For January, Markit’s PMI rose modestly to 52.4, up from December’s 51.2. Upturns in both Production and New Orders were cited as factors.
However, the survey author is not as positive: “Despite picking up slightly, the January PMI reading is one of the worst seen over the past two years, highlighting the ongoing plight of the manufacturing sector.”
According to the JP Morgan Global Manufacturing report released Feb. 1, the growth in world manufacturing remains “subdued.” Brazil, Russia, Canada, South Korea, Indonesia, Malaysia and China are mired in contraction. Improvements were seen in Poland, Czech Republic, Taiwan, Turkey and Vietnam. Because of quantitative easing by Europe’s central bank, most of the major Eurozone countries have returned to modest growth. Even the PMIs for France and Greece are now at the breakeven point of 50.0. Surprisingly, it is now Spain, Italy and Ireland that are posting the strongest growth.
Industrial deflation continues to be an unrecognized threat to the U.S. economy. Basic commodities like oil, copper, steel and aluminum are down 30 to 40 percent from 2011, resulting in mine and mill closures and significant layoffs in these industries.
Many farm commodities have fallen far enough in price to cause a recession in the seed, fertilizer and farm equipment industries. ISM’s January index of Prices came in at -33, a level that has only been seen during periods of severe recessions. As a result, at least $1 trillion of worldwide wealth has been obliterated.
The news media is still primarily giving attention to the oil industry, but the rest of the commodities in the supply chain are equally important. In the West Michigan economy, we don’t see the consequences because our industrial base has not been impacted, but that doesn’t mean we are immune from the fallout.
The employment picture remains very positive for West Michigan. The December unemployment rate for Kent County eased to a 15-year low of 2.7 percent, down from 3.6 percent one year ago and a fraction of the 12.6 percent rate reported in July 2009 at the peak of the Great Recession. Although our local index of Employment came in only modestly positive at +8, the projection indicates many of our local unemployment rates should continue to fall for a couple of months. With the ISM national Employment index now falling at a double-digit rate, however, it will be difficult for West Michigan to avoid being dragged down.
The impact of expanding or contracting employment in the industrial sector cannot be overemphasized. One new job for a manufacturing firm can generate as many as 10 additional jobs in the supply chain. The respondents to our survey represent about $15 billion in spending every year, so any form of expansion or contraction will be reflected in the employment picture. Hence, as long as our Employment index remains positive, unemployment in West Michigan will probably continue to fall.
Finally, it is essential to remember a lesson from Economics 101. As an economic indicator, employment is a laggard. Hence, the early stages of any economic downturn usually show no sign of trouble in the labor market. Firms continue to hire, sometimes because of the disbelief that a slump is imminent, but often because managers believe their firm or industry is exempt from the downturn.
Coming out of a recession, the reverse is true. Employers rehire staff very slowly and only begin expansion when the recovery is well underway.
Another recession? According to many indicators, the possibility remains a serious threat. Many pundits correctly point out that a few negative indicators do not predict the future, and many other current indicators are still very positive. The preliminary estimate of GDP for the fourth quarter of 2015 came in at an anemic 0.7 percent.
Although deflation in the supply chain is important, our greatest threat still comes from the possibility of the Chinese economy imploding, drawing the rest of the world into a global recession. The Chinese have now experienced 40 years of unparalleled growth. In fact, China reported a 9.2 percent GDP growth rate back in 2009 when the economies of the rest of the industrialized world were collapsing. By combining entrepreneurship and capitalism with a dictatorial government, they believe they have identified a model for long-term growth. They further believe they can pinpoint the “right” way to allocate resources and regulations better than Western governments that must rely on legislative bodies to argue rather than act. It is possible they might be right, but a more likely scenario involves some kind of a free market solution. In other words, so far they have gotten lucky.
Some current predictions are that the 2016 U.S. economy will expand at a rate as high as 2.5 percent, while others predict a slide of equal proportions. However, a third possibility exists: growth that simply flattens to somewhere near zero. We have now seen six years of slow growth, and the possibility remains the growth could get even slower without dipping into a formal recession. According to the textbooks, the term “growth recession” can be attributed to a period of GDP growth that hovers between breakeven and 1 percent.
Brian Long, Ph.D., is director of supply management research at GVSU’s Seidman College of Business.