Much as it has been for the past five years, slow growth continues to be the trend in the West Michigan economy.
According to data collected during the last two weeks of July, New Orders, our index of business improvement, eased to +18, slightly slower than the +23 last month. In a similar move, the Production index tapered to +25 from +30. Purchasing office activity remained unchanged at +19. The Employment index continues to remain stable at +15, unchanged from June. Because of shifting demand patterns around the world, the index of Lead Times jumped to +32, up sharply from +13.
For our individual industry groups, the pattern established in 2009 as the recession recovery began remains virtually unchanged. Automotive parts producers continue to provide much of the drive behind the economic growth, although some firms have done better than others. The office furniture business remains positive, although some smaller firms are currently outpacing their larger counterparts. On the balance, the industrial distributors had a very good month. Only the capital equipment industry appears to be having difficulties, although there is no evidence that the weakness demonstrated by some firms is the beginning of a downward trend.
Fortunately, our statistics for business optimism are showing signs of stabilization after last month’s unexpected drop. The Short Term Business Outlook index rose to +27, up from last month’s +21. However, the index for the Long Term Business Outlook edged lower to +34, down from +36. Again, the level of pessimism for this index has grown considerably, given the +64 reported less than a year ago.
At the national level, the Aug. 1 report from the Institute for Supply Management, our parent organization, indicated the same pattern of slow growth seen for many months. For July, ISM’s index of New Orders remained unchanged at +15. The Production index eased to +16 from +19. However, ISM’s Employment index returned to double digit growth of +14, up from +9. With statistical manipulation, ISM’s seasonally adjusted Index of Manufacturing advanced to 57.1, up from 55.3. ISM’s Nonmanufacturing Index also benefitted from statistical seasonal adjustments, rising to 58.7 from 56.0. However, New Orders and Employment for the non-manufacturing survey actually declined in July, making the gains more statistical than actual.
The U.S. statistics from Markit.com, the British international economics consulting firm, reported slightly different results. Markit’s overall index registered 55.8 in July, down from a 49-month high of 57.3 in June. Overall, the smaller firms (1-99 employees) bucked the trend and posted their strongest rise in sales and production since April 2010.
At the international level, JP Morgan’s Global Manufacturing PMI eased to 52.5 from 52.6. Although countries like the U.S., U.K., Canada, Ireland and Taiwan are posting acceptable levels of growth, laggards like France, Brazil, Greece and Turkey continue to drag the averages down. Uncertainty over the supply of natural gas from Russia has caused many firms to hesitate regarding expansion. Most of Europe has very little natural gas in storage, and even a small reduction in supply could create an economic panic.
Any significant decline in China could easily spell trouble for the rest of the world. In the past months, we have kept a close watch on the softer numbers coming from several sectors of the Chinese economy. Although questions still remain about the status of housing loans percolating in the unregulated “shadow” banking system, the industrial sector has returned to slow growth, at least according to the latest HSBC purchasing managers’ report. Although the June PMI only came in at 51.7, June is the third successive month above the 50.0 breakeven point. Fortunately, the economic gurus in China, most of whom were trained at Harvard, Stanford and University of Chicago, have significant influence regarding government policy. Some of the stimulus programs appear to be working, and manipulation of the valuation of the currency has helped to keep exports competitive. In fact, new export orders for June grew at the second best rate in four years.
Gross Domestic Product is back in the news. According to the “advance” estimate released by the Bureau of Economic Analysis, the GDP increased at an annual rate of 4 percent in the second quarter of 2014. For the first quarter of 2014, the Federal Reserve posted one of its infamous revisions, and reported that the drop in GDP has been revised to negative 2.1 percent, up from negative 2.9 percent but down from the earlier estimate of negative 1 percent and considerably below the first estimate of a positive 0.1 percent. All of these recalculations, revisions and adjustments, when the variations are this great, undermine the credibility of GDP as a premier measure of economic activity.
On July 30, Mike Dunlap released his quarterly survey of the office furniture industry. The overall survey index came in at 55.62, up considerably from the 54.6 reported for the previous quarter. In the survey’s 10-year history, the highest recorded index was 59.72 in July 2005 during the economic boom, and the lowest 41.45 in April 2009, the pit of the Great Recession. Hence, the survey depicts slow, steady growth. Dunlap commented, “We are confident that the industry is still on course to achieve its best year in more than a decade.”
U.S. auto sales for July rose 9 percent. Relaxation of lending standards and the rise in consumer confidence were cited as reasons for the strong performance. For the first seven months of 2014, sales are up 5 percent, which also corresponds with projections posted at the end of 2013. The Standardized Adjusted Annual Rate eased to 16.5 million cars, down from the 17 million reported last month. As always, a rise in SUV sales is often driven by a drop in the price of gasoline. About 14 percent of this month’s gain came from the sale of light trucks, SUVs and crossovers, while car sales rose a more modest 5 percent. Among the major brands, Chrysler rose 20 percent, Ford 10 percent, GM 9 percent, Toyota 12 percent and Nissan 11 percent. Honda declined by 4 percent, and Volkswagen was off by 6 percent. For West Michigan, these numbers bode well for auto parts suppliers, and several report parts production for the 2015 model year is now in full swing.
As August and the third quarter of 2014 unfolds, most of our anxiety continues to be focused on the world’s geopolitical uncertainties. An expanded war in Israel or an escalation of the Russian invasion into the Ukraine could reverse most of the gains we have made. The rise of ISIS in Iraq may soon result in the overthrow of the Iraqi government, and the resulting disruption to the world’s oil supply could jack up the cost of energy. Meanwhile, slow growth continues in West Michigan. But then, growth is still growth.
Brian Long, Ph.D., is director of supply chain management research at Seidman College of Business, Grand Valley State University.