Summer doldrums keep economy on incremental pace

Summer’s end hopefully will bring better economic news.

According to our latest survey of the West Michigan economy conducted during the last two weeks of August, New Orders, our index of business improvement, remained positive but backtracked to plus 6 from plus 10. In a similar move, the Production index tapered to plus 6, down from plus 18. The index of Purchases, which tracks activity in the purchasing offices, fell sharply to minus 3, down from plus 14. The inventory indexes representing both Finished Goods and Raw Materials continue to show inventory accumulations well above normal.

Despite the dubious numbers from earlier in the year, the Southwestern Michigan economy remains slow but stable. For corporate America, August is a month when big decisions often are deferred due to vacations and other activities.

For automotive, the major manufacturers switch production to the next model year in July and August and also take a week or two of downtime to balance inventories. September is a back-to-work month, so we will hope to see some improvement.

Looking at local industrial groups, Mike Dunlap’s quarterly survey of the office furniture industry released mid-August came in at an optimistic 56.03, only a little below the July 2005 record of 59.72. Our office furniture survey respondents are less optimistic and tend to depict the current market as somewhat saturated.

The auto parts producers are beginning to feel the pinch from declining auto sales in certain segments, such as traditional economy cars. For most automotive suppliers, business conditions still are good, but there is a feeling the last half of the year will be a little less robust. Most industrial distributors are stable. The capital equipment industry remains checkered because of large variations from industry to industry.

The business sentiment numbers for August remain positive, and the overall pattern was little changed. The Short Term Business Outlook, which asks about the perception of the next three to six months, virtually was unchanged at plus 15, down from plus 16. The Long Term Business Outlook, which depicts the outlook for the next three to five years, rose modestly to plus 46 from plus 39. The Sept. 1 report from the Institute for Supply Management, our parent organization, came in more pessimistic than expected. New Orders, ISM’s index of business improvement, dropped to minus 4, down sharply from plus 12. In a similar move, the Production index backtracked to minus 3 from plus 8. ISM’s Employment index, which held steady at plus 2 for three consecutive months, fell to a negative reading of minus 3. ISM’s overall index dropped 3.2 percentage points to 49.4, slightly below the all-important 50.0 break-even point. Many years ago, a drop of this nature in the ISM index would have been a cause for concern. However, ISM’s database no longer is as solid as it should be, and this month’s report is most likely a statistical fluke.

A much more positive view of the U.S. economy comes from the Sept. 1 report from, the international economics consulting firm. The seasonally adjusted Markit PMI came in at 52.0, a little slower than the previous month’s 52.9 but still comfortably above the neutral 50.0 value. New Orders, Employment and Purchases were positive but at a slower pace. However, the Production index rose well above the July levels.

Markit’s chief economist noted, “Despite the PMI falling in August, the survey suggests the third quarter is shaping up to be the best quarter so far this year for manufacturing, with output growth picking up compared to the first half of the year on the back of improved export sales. The overall rate of expansion remains only modest, however, and the upturn fragile. Weak domestic demand remains a drag on order books. Concerns about the outlook have also resulted in a marked reduction in the rate of job creation.”

Turning to the world economy, the JP Morgan Global Manufacturing survey of 31 nations released Sept. 1 noted the world economy “… remained in low gear in August.” JPM’s index of New Orders remained positive but lowered to 51.0 from 51.4. The Production index increased to 52.1 from 52.0. The JP Morgan Global Composite Purchasing Managers Index tapered to 50.8 from 51.0.

Among the major economies of the world, Japan, South Korea and Malaysia posted modest increases. In Europe, the northern countries, including Germany, the Netherlands and Austria, are providing the main power to the expansion, but elsewhere, the picture is looking more subdued. France and Italy are in decline. After the dust settled from the Brexit vote, the August PMI for the U.K. came in at 53.3, up considerably from two months ago.

The Markit author further noted, “The August survey was a bit of a disappointment since it failed to deliver on improvements from July. The sluggish trends in new orders remains the main constraint, and this will need to improve if global growth is to progress in the latter part of this year.”

For the most part, industrial inflation remains subdued. Locally, our index of Prices came in at plus 2, well below last month’s plus 12. At the national level, ISM’s index of Prices eased to plus 6 from plus 10. Except for steel and a few types of plastic resins, prices for most other industrial commodities remain remarkably stable. Commodity prices also are influenced by changes in currency valuations, and the G-20 governments now have pledged to “avoid” devaluing their currencies to boost exports. The group further pledged opposition to “… protectionism on trade and investment in all its forms.”

The recent G-20 summit also addressed the issue of excess steel capacity, which has resulted in steel being “dumped” on the world market, especially by China. The prices for most grades of steel were down considerably. In retaliation for “dumping,” the U.S. and other nations have slapped stiff import tariffs on Chinese steel. Over the past two months, almost every grade, shape and type of steel is up in price. Fortunately, other major commodities, such as copper, are not impacted and still are stable.

Like it or not, automotive sales continue to be a benchmark for future economic health for West Michigan. The latest report from Automotive News posted a 3.5 percent decline in U.S. auto sales for August. However, U.S. auto sales are reported as “cars and light trucks.” Unfortunately, almost all of the sales expansions for the past two years come from the sales of trucks and crossovers, not from traditional two- and four-door sedans. In fact, sales for the typical family sedan are down 26 percent over a year ago.

For the individual Detroit manufacturers, Ford sales declined 8.8 percent and GM slipped 5.2 percent. Because of the overwhelming popularity of Jeeps, Fiat Chrysler eked out a 2.9 percent gain. For the other major brands, Toyota eased 5 percent, Nissan slid 6.5 percent and Honda tapered by 3.8 percent. Because dealer inventories climbed to two-year highs, even the aggressive Labor Day sales incentives are unlikely to spark stronger sales. Subprime auto loans are again being pushed, and cash-back incentives continue to grow.

The employment picture for the West Michigan industrial economy remains positive, although it was disappointing to see our Employment index slip back into single digits. For August, our West Michigan index eased to plus 6, down from plus 14. Of the 83 Michigan counties, Ottawa’s unemployment rate now stands at 3.6 percent — the second lowest in the state. Kent registered 3.4 percent unemployment, followed by Allegan at 3.9 percent and Kalamazoo at 4.4 percent.

It appears the shortage of workers is getting worse. Several firms have put expansion plans on hold because they do not believe they can find enough qualified workers to perform the necessary tasks.

So, where do we stand? First, it is worth repeating there is no indication we are sliding toward a recession. If anything, the latest round of statistics from our local survey and other PMI surveys around the world have depicted stable but slow business conditions. Some countries, like Nigeria, Brazil, Russia, France and South Africa, are having trouble, but others, such as the United States, Germany and Ireland, are keeping the world economy afloat. China remains a concern, but the August PMI from Caixin came in at the break-even point of 50.0.

With a pattern of slow growth around the world, it is not surprising to see West Michigan depicting the same boring pattern of slow growth we have been reporting for the past seven years. But slow growth still is better than no growth.

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

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