West Michigan economy remains on solid footing


Growth in West Michigan’s economy remains good, but the rate has moderated.

That is the latest word on the local economy, according to data and comments collected in the last two weeks of June. New Orders, our index of business improvement, backtracked to +19 from +31. In a similar pattern, the June Production index remained double-digit positive but eased to +16 from +29. The Employment index came in at +20, only a little below the previous reading of +24. Our index of Purchases bucked the trend and rose to +24 from +19.

Overall, the West Michigan economy remains on a solid footing, but the growth rate has tapered off. Part of this variation is seasonal, since the summer months are often slower for many of our local industries. Although certain segments outside of the industrial market, such as new home construction, have picked up, many local industrial firms are at capacity and can only contribute to the economic expansion by adding capacity. Fortunately, that is exactly what some of them are doing. Hence, the expansions now unfolding by some of our local firms are the reason our index of Employment has remained in double digits for the past 18 months.

Looking ahead, short-term business optimism has faded a little over the past month. Our Long-Term Business Outlook index remained virtually unchanged at +44, down from +45. The Short-Term Business Outlook index remained positive but backtracked significantly to +25 from +36. According to one survey respondent, the biggest reason for the drop in optimism may relate to the Greek and European credit crisis.

Like previous reports, most of our industrial groups are positive, although some firms have moderated their outlook. The industry leaders are still our local auto parts producers and the office furniture industry, which both report business conditions to be stable or expanding. In the case of automotive, several firms are increasingly optimistic about the future. Business for the industrial distributors remains mixed, which is typical for the summer months. Just as last month, business conditions for capital equipment firms were spread across the entire spectrum. A couple of local firms are tied into the extractive industries, so it is not surprising to find that their business is off considerably.

At the national level, the July 1 report from the Institute for Supply Management, our parent organization, continues to indicate the national growth rate slowing for a second month in a row. ISM’s index of New Orders remained positive but edged lower to +9, down from +15. The Production index moderated to +7 from +16. However, because of statistical readjustments, ISM’s overall index rose to 53.5, up from 52.8 in May.

The view from Markit.com, the international economics consulting firm, confirms the moderation of the U.S. economy. Markit’s overall index eased modestly to 53.4 from 54.0.

The survey author further noted: “Purchasing managers are reporting the slowest rate of manufacturing expansion for over a year and a half, suggesting that the economy is slowing again. The slowdown is largely linked to a third consecutive monthly fall in exports …”

At the international level, the Greek monetary situation has introduced a new element of uncertainty to the world economy. It is very difficult to predict the outcome of the crisis over the next few months, primarily because of the myriad political personalities involved and the uncharted nature of the problem.

One obvious fact is Greece constitutes only 1.3 percent of the GDP of the European Community, and its continued participation in the euro is not nearly as important as it was a few years ago. Alan Greenspan recently termed the Greek withdrawal from the Eurozone as “inevitable” and noted the other countries having economic difficulties just a few years ago may have turned around.

From the standpoint of the industrial market, the PMI for previously troubled countries, like Ireland, now stand at 54.6, followed by 54.5 in Spain and 54.1 in Italy. Otherwise, the international economy remains sluggish.

According to the survey author for the JP Morgan Global Manufacturing Report, the Global PMI for June eased to 51.0 from 51.3. Again, 50.0 is considered to be the breakeven threshold. Because of the recent drop in the Chinese stock market, new warnings have been raised about the health of the Chinese economy. A few countries like Brazil, Russia and Turkey are still struggling with political problems.

Looking at industrial inflation, or in today’s case, deflation, we have seen most of the major categories of industrial metals fall in price. Over the past two months, the prices for aluminum, copper, nickel, lead and zinc have declined about 15 percent. When prices get too low, some producers are permanently driven out of market, resulting in shortages when normal demand returns. Although most standard grades of steel are down about 35 percent over the past 12 months, there appears to be evidence of prices stabilizing and edging slightly higher.

Two main factors constitute the reasons for the recent fall in commodity prices. First, the escalating value of the dollar has resulted in prices for many key commodities rising simply because of valuation of the world’s main currencies. The second factor relates to the slowing of the industrial sector in the Chinese economy. China’s manufacturing economy, as measured by the HSBC Purchasing Managers’ Index, posted at 49.4 in June, the fourth successive month the PMI registered below the breakeven point. Participants in the world industrial market for commodities are well aware the slowdown in the Chinese economy has resulted in less demand for these commodities. Furthermore, Chinese industrial firms, as well as the Chinese people, are notorious hoarders of these commodities. The oversupply has resulted in a huge drop in demand. Therefore, it is of little surprise our local index of Prices has come in at -14 for the past three months. At the national level, ISM’s index of Prices had been as low as -22 in March, but now has rebounded to -1.

The growth rate in auto sales continues to moderate, although many local auto parts firms continue to hire. For the Detroit Three, Chrysler gained 8.1 percent and Ford edged up 1.5 percent, but General Motors lost 3 percent, primarily because of a decline in fleet sales. Of the other major nameplates, Honda gained 4.2 percent, Toyota added 3.7 percent and Nissan gained 13.3 percent. At least some of the variations in sales can be explained by variations in rebates among the major manufacturers.

At first glance, the June 25 report from the Michigan Department of Technology, Management and Budget looks like bad news. The overall unemployment rate for Michigan edged up to 5.5 percent from 5.4 percent, but almost all of our local numbers posted a jump in unemployment. The primary reason: The data are not seasonally adjusted, and seasonality is the biggest reason for the jump. The June workforce always increases because of graduations from schools and universities. By July, the summer jobs start to kick in and the unemployment rate should fall.

Statistically, Michigan added about 4,000 jobs in May, but because of the aforementioned reasons, the total workforce went up by 10,000. There is also a trend of people returning to the workforce after previously being discouraged. Overall, we should expect to have a normal summer economy in West Michigan.

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

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