Slow growth is still the best description of the West Michigan economy, according to the data and comments collected in the last two weeks of November.
New Orders, our index of business improvement, edged slightly lower to +7 from +9. The Production index remained unchanged at a modest +3. Our index of Purchases eased to +5 from +6. Some of the best news comes from the Employment index, which rose to +15 from +5.
Although growth in the West Michigan industrial economy has slowed to a crawl, we are still doing better than the overall Michigan economy. The cyclical components of our West Michigan report, namely auto parts, office furniture and aerospace, remain stable. Last month one respondent noted we are at the top of our game and should have momentum to carry us well into 2016. But trying to predict the economy in the later part of 2016 becomes iffy.
Fortunately, the index we post for the Short Term Business Outlook edged up to +10 from +4. In contrast, our Long Term Business Outlook index moved to +39 from +44. Although geopolitical events and the mass shooting in California are still having a psychological impact on the outlook for some respondents, there is a feeling that most of the turmoil is miles away from West Michigan.
Turning to individual industries, many of our auto parts suppliers remain at or near full capacity, although a couple have been disappointed with the pace of new orders. The office furniture business has turned mixed, with some firms showing obvious signs of topping out. Others posted modest declines for November. With many aerospace firms reporting record sales, it is not surprising to see the local companies supplying these firms doing well.
Because of deer-hunting season, some of our local industrial distributors felt a late November lull, while others reported stronger business conditions. Most firms associated with capital equipment are positive, which is normal for this stage in the business cycle.
At the national level, the Dec. 1 report from the Institute for Supply Management, our parent organization, indicated the first economic contraction in 36 months. ISM’s index of New Orders turned modestly negative to -1, down from +1. The ISM Production index dropped to -3 from +2. The Employment index improved to -1 from -8, but remained negative for the third successive month. Inventory liquidation picked up pace with ISM’s Inventories index falling to -14 from -7.
Just as with last month, a slightly different view of the U.S. economy came from Markit.com, the London-based international economics consulting firm. Although still above the 50.0 neutral level, Markit’s Purchasing Managers Index dropped from 54.1 to 52.8, its lowest level in 25 months, signaling a “relatively subdued manufacturing performance for the month.”
The paths of international economies continue to be confusing. The Dec. 1 report for the J.P. Morgan Global Composite Manufacturing Index came in at 51.2 for November, generally unchanged from the five-month high of 51.3 reached in October. The Production index posted a slight uptick to 52.3 from 51.9, but New Orders eased to 51.5 from 52.0.
Brazil is facing one of the worst economic downturns in its history. Countries like Greece, Russia, China, Turkey, Indonesia and South Africa continue to pull the numbers down for the international average, but upticks from many of the European countries offset much of the weakness. In fact, all countries in the Eurozone except Greece report growth in Production and New Orders for November.
A major policy shift was recently announced by the International Monetary Fund to recognize the Chinese currency, the yuan, as a reserve currency. In general, “reserve currencies” or “hard currencies” are among the only places in the financial world where individuals, governments, and businesses feel comfortable parking large amounts of money for a long period of time. For instance, a Mexican firm may be paid in pesos, but these pesos are usually converted to dollars as soon as possible to preserve the value of the capital. Also, most international transactions are only made in these few currencies. The U.S. dollar, British pound, Japanese yen and the Eurodollar have held this monopoly for many years.
The auto sales numbers for November moderated considerably but are still on track to set a record for 2015 if the December numbers come in strong. For the Detroit Three, GM gained 1.5 percent, Ford 0.3 percent, and Chrysler 2.9 percent. Toyota added 3.4 percent, Nissan 3.8 percent, and Hyundai-Kia 7.1 percent. Volkswagen lost 15.4 percent largely because of negative publicity, and Honda sales fell 5.2 percent, primarily because of management’s refusal to participate in the rebate price war. Some incentives are as high as $13,500 per vehicle, which could result in a drag on long-term profitability for some firms. Lower gasoline prices and record-low finance rates are also cited as reasons for the continued sales growth.
Industrial deflation continues to be a two-edged sword. For our survey, the index of Prices eased to -13 in November, down slightly from -12 in October. At the national level, ISM’s Prices index dropped to -29, down from -22. The lower prices are warmly welcomed by the commodity buyers, but for the producers, there are now mines closing, steel mills shutting down and oil rigs going into storage. In addition, the strong dollar has resulted in worldwide farm commodity prices falling rapidly. Business conditions for a couple of our local firms that supply the mining industries have turned negative. However, West Michigan is not feeling the pinch like Houston, Calgary, Pittsburgh or Gary, where business conditions have been diminished. Will lower commodity prices help keep retail prices low as well? Yes, but the impact is almost always long term because of the length and layers of the supply chain.
Interest rates. After threatening to raise rates for many months, is the Fed finally going to do it? In all probability, yes. But the increase will be modest, and the economic impact will be more psychological than actual. Even an increase by a half percent would have little impact on the decision making by businesses. With the Eurozone now driving interest rates to negative returns, the U.S. banking system is continuing to attract overseas capital, even though our rates are still quite low. A small return is still better than no return.
In summary, the U.S. economy continues to be hampered by a strong dollar, falling exports and weak business conditions in the extractive industries, including agriculture. Short-term business confidence is not as positive as it was a few months ago. Strong auto sales and robust commercial and residential construction sectors are among the elements keeping the industrial economy modestly positive.
December is often a month that sees slow growth for the industrial sector, so it would not be a surprise to see a little backtracking in our next report. January is normally a back-to-work month, so as January goes, so 2016 may go as well.
Brian Long, Ph.D., is director of supply chain management research at Seidman College of Business, Grand Valley State University.