The West Michigan economy still is going strong.
According to the West Michigan survey conducted during the last two weeks of September, New Orders, our closely watched index of business improvement, rose to 21 from 19. The Production index remained positive but retreated modestly to 17 from 20. The index of Purchases slowed to 14 from 24. The index of Finished Goods remained unchanged.
Due to the recent hurricanes and otherwise strong business conditions, however, some classes of inventories are being drained across the country. The Raw Materials Inventories fell to 3 from 16. The index of Lead Times remained stretched at 30, and no one expects relief any time soon.
All of our individual industries remain on track, although slightly less robust. Most auto parts suppliers have been concerned about the slower auto sales, so the September bounce in sales seems to have forestalled any immediate fear of an automotive recession. The major office furniture firms still appear to be topping out at the present level, but the smaller firms are having a little more success. The capital equipment fabricators still have business coming in but at a slower pace. For the industrial distributors, the mood is stable.
Business optimism remains strong in West Michigan. September’s Short Term Business Outlook, which covers the next three to six months, was unchanged at 30. Looking out three to five years, the Long Term Business Outlook edged slightly higher to 45, up from 39. Firms remain cautiously optimistic, but most recognize there may be little room for growth unless something like the long-promised tax cuts finally materializes.
There is a divergence of opinion at the national level regarding the direction of the economy. The Oct. 2 report from the Institute for Supply Management came in even more bullish than last month. ISM’s index of New Orders jumped to 26 from 18. The Production index rose modestly to 21 from 20. The Employment index came off its five-year high of 19, easing marginally to 17. The expansion of Inventories, which had jumped to 11 last month, eased to a more normal level of 5. After posting a six-year high of 58.8 percent last month, ISM’s overall index for September jumped to a 13-year high of 60.8, nearing its highest level since the postwar recovery in 1948. This level of performance certainly was not expected or predicted.
Now for the confusion.
IHS Markit, the British economics consulting firm, also surveyed industrial purchasing agents throughout the U.S., as well as the rest of the world. Although the Markit report is positive, the pace of expansion for New Orders retreated for the second month in a row. The Production index remained unchanged at a positive but muted level. The IHS Markit PMI for the U.S. came in at 53.1, a little higher than last month’s 52.8 but still very subdued when compared to the near-record report filed by ISM for the same period. Although the headline for the report was still termed “improved,” Chris Williamson, the chief business economist for Markit, struck a less optimistic tone:
“While the headline PMI remained resiliently elevated in September, despite disruption from hurricanes Harvey and Irma, the details of the survey are more worrying. Output growth was unchanged from August’s 14-month low and translates into stagnation at best in terms of the official manufacturing output data. Firms’ expectations of future output growth also slipped to a four-month low. There was better news on the hiring front, with job creation perking up to a nine-month high. However, with employment rising faster than output, productivity may be slipping. Although the hurricanes appear to have made little overall impact on production, supply delays were widely reported and prices for many inputs rose, suggesting some near-term upward pressure on inflation.”
The economy for the rest of the world continues to improve. Canada and Mexico, our two largest trading partners, turned in strong reports for September. Whereas most of the major economies were improving over the summer, growth in September slowed in China, Japan and the U.K. JPMorgan’s Global Manufacturing survey of 31 nations came in unchanged at 53.2.
European economic news continues to get better. The PMIs for Germany, Netherlands and Austria led the way at 60.6, 60.0 and 59.4, respectively. Even beleaguered France came in with a PMI of 56.1, a 77-month high. Greece continues to climb out of the economic abyss, registering a 111-month PMI high of 52.8.
September auto sales reversed the negative pattern of the past six months. Although auto sales were due for a bounce, a large portion can be attributed to the estimated 1 million or more cars that were damaged or destroyed by the hurricanes. Among the major brands, Ford sales gained 8.9 percent, GM rose 11.9 percent, Honda added 6.8 percent and Toyota was a winner with 14.9 percent. Volkswagen posted the biggest gain at 21.4 percent. A sales decline of 9.7 percent left Fiat Chrysler well behind the rest of the major brands. For the entire industry, sales were up 6.8 percent, which breaks down industrywide to a 12 percent increase in light truck and SUV sales and a 3.3 percent dip in car sales.
Hurricanes Harvey and Irma will be talked about for decades. These back-to-back storms are definitely having an impact as far north as West Michigan. As expected, the demand for plywood, roofing materials and drywall has driven most material costs higher. Many of the plastic molding shops in West Michigan have been hit with higher costs for most types of plastic resins, even though the suppliers in the Texas-Louisiana area were only offline for a few days.
Tight inventories for many commodities means rising prices. After remaining relatively dormant for many months, inflation is becoming a cause for concern. The hurricanes disrupted many of the supply chains, resulting in our local index of Prices rising to 29 from 15. ISM’s index of Lead Times jumped to 28 from 14, and the tighter supply chains have been used as an excuse to raise prices. ISM’s index of Prices rocketed to 43, up from 24, and JPMorgan’s international index of Prices rose to a five-year high of 60.8. The strengthening of major economies around the globe also is coaxing many major commodities to edge up in price.
On Sept. 28, the Commerce Department released a “final” report of a 3.1 percent GDP growth rate for the April-June quarter, the best report since the first quarter of 2015. The upward revision is marginally higher than the previous estimate of 3.0 percent and considerably higher than the 1.2 percent growth rate for the first quarter of 2017. Estimates for the July-September period are running at about 2.2 percent, but spending resulting from the recent hurricanes is forecasted to raise GDP above 3.0 percent for the fourth quarter. It should be noted, however, these forecasts have not been especially accurate in the past.
The prices for petroleum and petroleum-related products are returning to pre-hurricane levels, but the reconstruction efforts for the hurricanes have driven prices higher for a wide range of products. The world economy — especially the economy in Western Europe — continues to strengthen, resulting in rising prices for many industrial commodities, such as steel, zinc and brass. The European Central Bank is talking about inflation returning to an unacceptable level, which probably means interest rates will start to edge higher. The threat of an altercation with North Korea or other Middle Eastern countries continues to be ignored by the markets and the business community in general. Some simply call these uncertainties the “new norm.” That said, the economic path ahead of us continues to be positive for the foreseeable future if the geopolitical situation remains stable.
Brian Long, Ph.D., is director of supply management research at Seidman College of Business, Grand Valley State University.