Although 2019 got off to a slow start, West Michigan is continuing the pattern of slow growth we have been reporting for nearly 10 years.
According to data collected in the last two weeks of February, New Orders, our index of business improvement, bounced back to 16 from minus-4. In a similar move, the Production index rose to 16 from 4. Activity in the purchasing offices, the index of Purchases, also bounced to 16 from 3.
Several participants continue to voice concern over the still unresolved tariff war with China, and others are cautious about the potential decline in auto sales. Overall, the mood remains watchfully optimistic.
According to the March 1 report from the Institute for Supply Management, our parent organization, the national industrial economy posted another modest gain for February. New Orders, ISM’s index of business improvement, came in at 14, up marginally from 12. The Production index dipped to 12 from 13. The Employment index also lost a point to come in at 5. ISM’s overall index eased to 54.2, down from 56.6.
Contrary to other statistics reported in the news media, the U.S. trade imbalance might actually be improving. ISM’s index of New Export Orders edged up to 6 from 3, and the ISM index of Imports rose to 11 from 8. Hence, both indexes cancel each other out, yielding no deficit. However, these indexes reflect the physical actions that have been taken. The money transfers will not show up in the government statistics for weeks or even months from now.
The British international consulting firm IHS Markit offers a more pessimistic view of the U.S. economy for February. Market.com’s seasonally adjusted PMI for February remained above the 50.0 break-even point but dipped to an 18-month low of 53.0, down from January’s 54.9. The survey respondents were buoyed by forecasts of further upturns in new orders. That said, the degree of confidence slipped to the second-lowest since November 2016.
Our best summaries of the health of the world economy come from the JPMorgan Monthly Global Manufacturing index encompassing 43 nations. Unfortunately, the steady erosion, which began 14 months ago, has taken JPM’s overall index down to 50.6 from last month’s 50.8, the lowest level since June 2016. For diffusion indexes of this nature, 50.0 is the break-even point between expansion and contraction. Hence, this report still is considered marginally positive. The index is weighted by the size of each country’s respective economy, so the moderately confident report from the U.S. helped keep the overall survey statistics positive. At 50.1, the Chinese PMI has now flipped back to positive. However, weaker reports from other countries continue to drag down the index. The JPM index of New Orders remained unchanged at a paltry 50.1, and the Production index eased to 50.7 from 50.8. The index of New Exports eroded further to 49.1 from 49.4. Analysts continue to blame the Brexit for at least some of the weakness.
The IHS Markit February PMI manufacturing index for the eurozone turned negative for the first time since June 2013. The index came in at 49.3, down from last month’s 50.5. The PMI for Germany, the eurozone’s largest economy, dropped to 47.6, a 74-month low. Italy posted a 69-month low of 47.7. It may seem hard to believe, but the eurozone’s strongest PMI for February turned out to be Greece at 54.2. However, much of the Greek growth can be attributed to the proverbial post-debacle fire sale of unused production facilities. So far, the Greek financial restructuring seems to be working, which is a relief to the sanctity of the European currency itself.
According to the latest report from Michigan’s Department of Technology, Management and Budget, Michigan’s “headline” unemployment rate for January (the latest month available) remained unchanged at 4.0 percent, well below the 4.5 percent reported for January a year earlier. Total statewide employment in January grew by over 39,000 workers compared to a year earlier, and the number of people unemployed decreased by 7,000.
Despite the weakness in last month’s survey, our Employment index continues to remain double-digit positive. For February, we posted a modest uptick to 17 from 14. Regrettably, employers still are complaining they cannot find enough qualified workers to hire, much as they have been for nearly two years. Given the slight hesitancy in the current economic outlook and the absence of qualified workers, it is worth repeating the current low unemployment numbers are as good as we can expect for the near future.
Although several of our local auto parts producers remain modestly pessimistic about the prospects for 2019, we have yet to see any significant weakening in our local firms. According to the monthly report from Automotive News, sales for the industry dropped 2.9 percent in February, and the industry’s Seasonally Adjusted Annualized Rate (SAAR) slipped to 16.61 million units.
Looking as we always do at the Detroit Three, sales for GM declined 5.3 percent, Fiat-Chrysler eased by 2.3 percent and Ford lost 5.1 percent. Among the other major nameplates, sales at Honda declined 1.6 percent, Toyota shed 6.3 percent and beleaguered VW lost an additional 3.6 percent. Nissan plunged again, this time by 11.4 percent. Of the major brands, only Subaru was able to post a modest gain of 3.9 percent.
Our local index of Prices rose to 22 from 21, although all of the recent numbers for this index have eased from the 51 we reported last July. If it were not for the Chinese trade war, our inflation numbers would be even better. The world economy continues to slow, which has resulted in the JPMorgan international pricing index easing to 53.6 from 54.2 for February. ISM’s national index of Prices continues to be slightly negative at minus-1.
After posting some near-record lows in January, business confidence has rebounded in February. Many of our local firms remain cautiously optimistic, but others continue to voice concern over the ongoing trade war with China. Many of our auto parts manufacturers continue to watch the situation in the auto market, even though many are well positioned for a modest downturn. The West Michigan index for the Short-Term Business Outlook for February, which asks local firms about the perception for the next three to six months, rebounded nicely to 22 from 5. The Long-Term Business Outlook, which queries the perception for the next three to five years, rose more modestly to 27 from 22. Although both indexes are less robust than they were five years ago, they still remain optimistic about the future as long as our economic indicators continue to point toward more growth, even if we return to a pattern of slower growth.
The GDP growth estimate by the U.S. Bureau of Economic Analysis (BEA) for the last quarter came in at 2.6 percent, well in line with numerous predictions. Many economists now are turning their attention to the first quarter of 2019, and most predictions are not very optimistic for several reasons.
First, the trade war with China has destabilized at least some industries. Second, the government shutdown resulted in some regions of the country curtailing activity. Third, because of the way BEA now calculates GDP, the first quarter of the last few years has been weaker than the other quarters.
The harsher-than-usual weather for much of the first quarter across most of the country will play a role, as well. The Atlanta Fed, which has had a fairly good record of GDP forecasting, now expects the first quarter 2019 GDP to come in at a paltry 0.5 percent growth rate. However, the well-recognized blue-chip consensus estimates are now ranging between 1.3 and 2.5 percent. The current methodology for computing GDP concentrates heavily on the consumer sector, even though most of the economy is actually controlled by the business and manufacturing sectors. So, the recent moderate growth numbers we have been reporting for the industrial sector will not be enough to bring the BEA’s GDP very high.
Based on the national PMI indexes from both ISM and IHS Markit, the 2019 economy still has some significant positive momentum going forward. While the Chinese trade war, Brexit and the softening world economy still are constraining factors to the national economy, the 2017 tax cuts may still be having a positive impact on growth.
Someday we will be facing a new recession, although the rest of 2019 continues to look safe given the current economic momentum. A resolution of the Chinese tariff situation would virtually ensure growth would remain positive for the rest of the year, and possibly beyond. Although over 58 percent of the Wall Street Journal’s panel of 60 economists expects the next recession to start in 2020, none of these economic experts have been able to identify a major event that could spark another major downturn.
Brian G. Long, Ph.D., is director of supply management research at Seidman College of Business, Grand Valley State University.