After last month’s substantial dip, the pace of the West Michigan industrial economy has returned to a very modest growth rate.
According to the data collected in mid-August, New Orders, our closely watched index of business improvement, recovered to 3, up substantially from July’s minus-13. In a similar move, August’s Production index bounced up to 9 from minus-15. Activity in the purchasing offices, our index of Purchases, flipped back to 2 from minus-6. Anecdotal comments from our survey participants continue to be mixed, although the mood continues to drift in a more cautious direction.
According to the Sept. 3 report from the Institute for Supply Management, our parent organization, New Orders, ISM’s index of business improvement, continued to fall in August. Last month’s report for July of minus-2, the first negative reading in seven years, was followed by a decline to minus-8 for August. August’s Production index held steady at minus-1. For a diffusion index, any reading below 50.0 is considered negative. It is therefore disappointing to see ISM’s overall index come in at 49.1, down from 51.2. As always, one month does not make a trend, and this same index was at 48.0 as recently as January 2016. However, another downtick next month will be cause for concern.
A slightly different and perhaps more accurate view of the U.S. economy comes from IHS Markit, the British international consulting firm. Markit.com’s seasonally adjusted August PMI came in at 50.3, down from July’s 50.4, the lowest the index has been since September 2009.
Just as last month, Chris Williamson, chief business economist at IHS Markit, continues to be very cautious: “The August PMI indicates that U.S. manufacturers are enduring a torrid summer with the main survey gauge down to its lowest since the depths of the financial crisis in 2009. Output and order book indices are both among the lowest seen for a decade, indicating that manufacturing is likely to have again acted as a significant drag on the economy in the third quarter, dampening GDP growth. At current levels, the survey indicates that manufacturing production is falling at an annualized rate of approximately 3%. Deteriorating exports are the key to the downturn with new orders from foreign markets dropping at the fastest rate since 2009. Many companies blame slower global economic growth for weakened order books but also point the finger at rising trade war tensions and tariffs. Hiring has stalled as companies worry about the outlook: optimism about the year ahead is at its lowest since comparable data were first available in 2012. Similarly, price pressures are close to a three-year low, as crumbling demand has removed firms’ pricing power.”
JPMorgan’s August Global Manufacturing Index, a compilation of purchasing managers’ reports from 43 nations, remained negative but ticked up to 49.5 from 49.3. Of the major industrial economies, modest expansions were reported in China, France, Brazil and India.
However, Japan, Germany, South Korea, the U.K., Taiwan, Italy and Russia were some of the countries reporting contractions. Given that JPM’s index is weighted by the size of the respective world economies, the modest expansion of the U.S. economy helps keep the index from falling further.
David Hensley, director of global economic coordination at JPMorgan, further noted: “While the global manufacturing output PMI increased in August, its level remained low, signaling very modest growth in manufacturing output. Away from the output index, details of the PMI report points to weakening in activity. New Order intakes fell at the joint-fastest pace in nearly seven years, business optimism dropped to a series-record low, international trade flows weakened, and the cyclically sensitive orders-to-inventory ratio hit its joint-lowest level since late 2012. Geopolitical uncertainty weighing on business capital investment remains the main drag on global industry. Developments on this front need to improve for industry to lift.”
It is good news that the PMI numbers from the eurozone appear to be stabilizing. The August IHS Markit PMI manufacturing index for the eurozone came in at 47.0, up modestly from 46.5 in July. Although still below the break-even point of 50.0, the PMIs for Spain, Italy, Austria and Germany improved slightly in August. The PMIs for Greece, France and the Netherlands remain marginally positive. Worries about the U.S./China trade war, Brexit and falling exports have driven the eurozone’s index of Business Confidence to a seven-year low.
Markit.com’s Williamson further commented: “Eurozone producers are suffering as the summer slump in factory production persisted into August. Although up on July, August’s manufacturing PMI was the second lowest since early 2013, and a marked deterioration in optimism about the year ahead suggests companies are expecting worse to come. Trade wars and tariffs remain the biggest concerns among producers, and the escalation of global trade war tensions in August encouraged further risk aversion. Germany is suffering the steepest decline, in part reflecting slumping global demand for autos and business machinery. While France bucked a wider downturn trend, even here growth was only very modest.”
Although the Detroit Three all have decided to quit posting monthly sales figures, the remaining nameplates reported very positive sales for August. According to Automotive News, sales for the industry (without the Detroit Three) bounced up 12.2% in August. The industry’s Seasonally Adjusted Annualized Rate (SAAR) came in at an estimated 16.5 million units, down from 17.1 million in August 2018. Among the firms still reporting monthly, VW improved by 7.7%, Subaru added 7.9%, Hyundai-Kia gained 13.3%, Honda added 17.6%, Toyota bounced up 11.3% and the Nissan Group bounced even higher — adding 13.2%.
Jeff Schuster, head of global vehicle forecasts at LMC Automotive, further noted: “Consumers continue to shake off the political and trade turbulence because the economy remains on solid, if somewhat slowing, footing. This foundation, combined with higher fleet volume in the first half of the year, will keep the industry above 17 million units for a fifth year in a row.”
The West Michigan index of Prices edged up to 4 from July’s minus-2, which is considerably higher than June’s index of minus-13. At the national level, ISM’s U.S. index of Prices rose modestly to minus-8, up from minus-10. The Markit.com index of U.S. prices remained above the break-even point of 50.0. As the world economy continues to slow, JPMorgan’s international Pricing index edged lower to 50.2 from 50.9.
Timothy Fiore, ISM’s survey committee chair, further noted: “Prices contracted in August but at lower rates compared to July. Respondents reported decreases in prices for aluminum, corrugate, energy, wood pulp and steel products, but the panel also reported price growth in hot-rolled steel, which is a positive sign for future price recovery,”
On Aug. 29, the Bureau of Economic Analysis announced the GDP “second estimate” for the second quarter of 2019 was revised modestly lower to 2% from 2.1%. Predictions for the third quarter continue to drift lower, with the Atlanta Fed’s “GDP Now” reporting a third quarter average estimate for the top 10 forecasters to be between 1.5% and 2.4%. Based on various business indicators and our own statistics, it appears to be fairly certain that the GDP numbers for the next few quarters will continue to soften but may remain modestly positive. The formal definition of a recession is “… a contraction in the GDP for six months (two consecutive quarters) or longer.” Hence, there currently is no evidence that a recession is imminent.
For August, West Michigan’s Short-Term Business Outlook, which asks local firms about the perception for the next three to six months, tiptoed up modestly to 10 from 6. The index for the Long-Term Business Outlook, which queries the perception for the next three to five years, remains more stable but edged slightly lower to 25 from 28. Just like most months, both indices are heavily influenced by the current news cycle. The West Michigan survey respondents apparently do not see any major shift in the current outlook.
Our local index of Employment has been one of our stronger statistics over the past 30 months or so. However, the index has now turned decidedly flat, coming in at minus-1 for July and 1 for August. According to the most recent data released by Michigan’s DTMB, the unemployment numbers for most of our West Michigan counties are edging up, even though the job market remained fairly strong.
Ottawa County reported an unemployment rate of 3.7%. Kent and Allegan both came in at 3.9%, according to DTMB’s latest report. These numbers are not as good as they were a few months ago for two main reasons. First, they are not seasonally adjusted. The raw unemployment rate always goes up in the summer when the annual graduations from college and high school add new people to the workforce. Second, the trend for marginally attached and discouraged workers to re-enter the workforce continues to push the unemployment numbers higher.
In short, the rising wages and the demand for workers at almost every level have enticed at least some people to return to the workforce, and not all of these people have immediately found work.
For West Michigan, the impact of the trade war with China is a two-edged sword, and both sides are bad. The news media has highlighted the impact on farmers, which has resulted in falling prices for corn, soybeans, pork and other agricultural exports. And then there is the import side of the sword. Many West Michigan industrial firms have come to rely on a wide range of industrial commodities subject to new tariffs that are driving up prices. Initially, many Chinese exporters were reluctantly willing to accept lower prices in order to retain the business relationship. Both buyers and sellers believed the governments for both countries would soon reach an agreement and some modified form of trade between the two countries would resume. But that was 18 months ago, and now the rhetoric has turned pessimistic. Even though trade talks have resumed, there is no concrete indication about how much longer the trade war will continue. On the selling side, our farmers are impacted by falling prices for corn and soybeans. On the buying side, the industrial firms are now being bitten by higher prices.
It is noteworthy that at least some of these firms are now actively looking for sourcing outside of China. However, for China, sales to the U.S. have become a gigantic cash cow. At some point, tariffs or no tariffs, the Chinese may come to realize that they may be permanently losing business.
In the past, a catastrophic event has triggered most recessions, such as the dot-com bust, the Arab oil boycott, or the housing-related financial crisis. There is no obvious event that could trigger a recession at this time, except if the trade war should get out of hand.
The world economy continues to slow, and the U.S. will eventually be drawn into the slowdown. We could see several quarters of GDP growing in the range of 1% or so. If, by some miracle, a trade agreement is soon reached with the Chinese, confidence in the entire world economy would benefit, and the U.S. and Chinese economies would rebound. But the operative word is “if.”
Brian G. Long, Ph.D., is director of supply management research at Grand Valley State University’s Seidman College of Business.