Industrial economic growth hits the pause button


Growth pauses for the late summer season. That’s the latest word on the West Michigan economy, according to the data and comments collected in the last two weeks of August.

Our index of New Orders backtracked to +5, down significantly from July’s +22. In a similar move, the August Production index eased to +3 from +26. Last year’s New Orders and Production indexes also eased in August, denoting a possible seasonal trend.

However, our Employment index did not backtrack significantly in August 2014, so it was disappointing to see the index slacken to +7, down from +25. The index of Purchases eased modestly to +12 from +14.

Overall, the six-year pattern of slow growth continues on track with a few minor adjustments. While we have enough momentum to carry forward for the next few months, everyone is still concerned about China.

Looking at individual industries, the reports from our automotive parts producers depict a stable environment, although the number of firms reporting new contracts has flattened considerably. Mike Dunlap’s Furniture Industry Index for the second quarter of 2015 came in at 58.78, only slightly lower than the record high of 59.72 in July 2005. However, for August, our furniture industry respondents were not as positive, hinting the office furniture business may have peaked. For capital equipment firms, the August bias was to the down side. Industrial distributors reported mixed business conditions, typical for the summer vacation season.

Business confidence is still subdued. It appears geopolitical events have continued to dampen the outlook for some respondents, especially for those firms associated with the international markets. Our Long Term Business Outlook index eased to +38 from +40. The Short Term Business Outlook index remained positive but backtracked to +16 from +22. The general perception is the future looks a little less certain than it did a few months ago.

At the national level, the Sept. 1 report from the Institute for Supply Management, our parent organization, has turned virtually flat for the first time in more than two years. ISM’s index of New Orders remained scarcely positive at +1, down from +5. The Production index eased to +5 from +7. Although any reading over 50.0 is still considered positive, ISM’s overall index eased to 51.1 from 52.7.

The pattern of slower growth for the U.S. is also the view from, the international economics consulting firm. Markit’s overall index eased to 53.0, down from 53.8 in July. The survey author noted: “In response to softer growth momentum, manufacturers took a more cautious approach to staff hiring and inventories in August. Stocks of finished goods were depleted for the first time in 2015 so far, and job creation was the weakest for over a year.”

The JP Morgan Global Manufacturing Report released Sept. 1 reflects worldwide caution about the international economy. JPM’s primary index, the Global PMI, retreated to a 28-month low of 50.7, down from 51.0. The strongest reports came from Italy, Spain, Ireland, the Netherlands and Germany, but were offset by weaker reports from France, Taiwan, South Korea, Brazil, Indonesia, Malaysia, Russia and China. In addition, Greece still holds the record for the weakest PMI in 75 years among all 32 nations in the JPM report. The only saving grace is that Greece constitutes only about 1.8 percent of the European economy.

The July 25 unemployment report from the Michigan Department of Technology, Management and Budget confirms our survey statistics. For the past 18 months, our index of Employment has posted double-digit gains, despite the fact the recovery from the Great Recession is now well over six years old. In terms of job growth over the past six months, Kent County has added about 13,000 new jobs, Ottawa County 6,000, and Kalamazoo County about 3,000. During the January-to-June period, Michigan added 114,000 jobs. However, the total “official” number of unemployed workers for June rests at 261,000, well above the 30-year record low of 167,000 recorded in March 2000. The survey respondents continue to imply the unemployment rates would be even lower if they could find enough trained people to hire.

Other economic news for the month came from the Department of Commerce. After twice reporting that GDP for the U.S. fell in the first quarter, the latest revision pegs the growth rate at a positive 0.6 percent. For the second quarter, the first estimate was that GDP grew at a rate of 2.3 percent. On Aug. 27, the second quarter estimate was upgraded to 3.7 percent, offsetting all of the weakness for the first quarter. There will obviously be more revisions to come, but the pattern of slow growth averaging about 2.2 percent is projected to continue for the rest of the year.

For the economists of the world, all eyes are on China. Do we know for sure what is actually happening in China? Of course not. The government regulates the outflow of information, and officials are now cooking the books to the point that some numbers are obviously false. The meteoric growth in exports has only occurred over the past 30 years or so, and the government has struggled to put in place adequate measuring statistics. China’s GDP is now 20 times the size of 1985, but most of the benefits have accrued to only about 15 percent to 20 percent of the population. They now build about 24 million vehicles per year, which is twice the number of cars and light trucks built in the United States. By contrast, they produced a total of 5,200 vehicles for the whole year in 1985. In all of this time, they have not had a serious recession.

The China Purchasing Managers’ report for August was the catalyst for the recent stock market sell-off panic. Just like most PMI surveys, any number in the diffusion index below the break-even point of 50 is considered negative, and the current slide to 47.1 is the lowest since 2009. This report is especially telling because even the Chinese agree the success of their economy is almost exclusively attributed to manufacturing and export.

Outside of the GDP reports, many of the Chinese numbers have been pointing to an economic slowdown for the past two years. Specifically, we have seen a 24-month decline in industrial production, exports and retail sales. This is incongruent with the modest easing of GDP the Chinese government has reported for the same time period. In fact, it is possible the GDP is already negative.

If the Chinese economy simply tapers to a slower rate of growth, the U.S. will probably slacken to a very slow growth rate. The Eurozone economy is already slow, so most of the European countries fare worse. As mentioned in previous reports, almost all of the major commodities are falling in price, resulting in layoffs in the entire lower end of the supply chain.

The bottom line is that if the Chinese economy actually goes into a full-fledged recession, it will draw the U.S. and the rest of the world into a recession, as well.

Brian Long, Ph.D., is director of supply chain management research at Seidman College of Business, Grand Valley State University.

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