On track. That’s the latest word on the West Michigan economy, according to the data and comments collected in the last two weeks of June.
New orders, our index of business improvement, rose modestly to +6 from +0. In a similar move, the production index advanced to +11, up from +4. However, the index of purchases edged lower, to -1 from +7. Our inventory indexes representing both finished goods and raw materials continue to show inventory accumulations well above normal.
Looking at local industrial groups, office furniture remains stable for large establishments, and business appears to be especially good for a couple of the smaller firms. Local auto parts suppliers are still doing well, but with U.S. auto sales up only 1.4 percent for the first seven months of the year, there is a sense that the market is now starting to top out. As in most summer months, June sales for the industrial distributors came in mixed. Because of excess equipment being dumped on the world markets, capital equipment firms continue to report widely mixed results. The standard types of equipment are available in abundance, while some of the specialty tooling is in short supply.
Despite some guarded optimism resonating from this month’s statistics, the business sentiment numbers from our local survey remain little changed. The short-term business outlook, which asks about the perception of the next three to six months, edged higher, to +26 from +24. The long-term business outlook for June, which takes in the next three to five years, eased modestly, to +35 from +42.
The June report from the Institute for Supply Management remains positive and little-changed from May. New orders, ISM’S national index of business improvement, backtracked to +13, down from +15. The production index rose very modestly, to +11 from +10. The employment index remained unchanged at +2. Because of statistical weighting, ISM’s overall index rose to 53.2 from 51.3, a notable gain.
The monthly survey by Markit.com, the international economics consulting firm, came in slightly more optimistic than in previous months. Positive factors included a renewed rise in production volumes, a moderate expansion of payroll numbers and the sharpest increase in new orders since March. The final U.S. manufacturing Purchasing Managers Index for June came in at 51.3, up from 50.7 in May.
The survey author opined: “Although the manufacturing PMI ticked higher in June, the latest reading rounds off the worst quarter for goods producers for six years. Producers are struggling in the face of the strong dollar, the energy sector decline, and presidential election jitters. With companies craving certainty, heightened tensions between the U.K. and the European Union are likely to unsettle the global business environment further in coming months, and therefore risk dampening growth in the U.S. and export markets. The data flow in the next two months will therefore be critical to policymakers in gauging the appropriate outlook for interest rates.”
At the international level, in the JPMorgan Global Manufacturing survey of 31 nations released July 1, the index of new orders edged higher, to 50.8 from 50.3. The Production index rose to 50.5 from 50.0. Although both of these indexes are barely above the 50.0 break-even point, they are headed in the right direction — at least according to the data collected before the Brexit vote. JPMorgan’s Global Composite Purchasing Managers Index rose to 50.4, up from 50.0.
The survey author and chief economist for Markit further noted: “Euro-area manufacturers enjoyed their strongest growth so far this year in June. An upturn in the rate of production growth signals factory output is expanding at a near 2 percent annual pace, which should help to drive further modest economic growth in the second quarter. New Orders and Exports also rose at faster rates, prompting a welcome upturn in hiring. However, the data were collected prior to the U.K.-E.U. referendum result, so any Brexit impact is yet to be seen in the PMI.”
Had it not been for the Brexit vote, the ominous June PMI report from China might have received more attention. Chinese manufacturers reported the sharpest deterioration in operating condition for the past four months. Production is falling at the greatest rate since February, and new orders dropped to a five-month low. Adjusted for seasonal factors, China’s PMI fell to 48.6 in June, down from 49.2 in May. The government has plenty of money to alter fiscal policy to help fill the gap, but past programs — like building cities where there are no people — cast doubt on the probability for success.
Turning attention to industrial inflation, our local index of prices backtracked to +15, a little less than the +18 we reported last month. The recent gyrations in oil prices are at least minimizing the price increases of plastic resins and fuels. Almost every grade and type of steel is still going up in price. Given the importance of steel to the industrial market, the cost implications are significant. However, the pundits are now starting to predict that most prices may soon begin to stabilize. Over half of the world’s steel is produced in China, and the producers are finally starting to take some of the capacity offline.
After a 6.1 percent dip in auto sales for May, it was good to see the June report come in with a modest 2.4 percent gain. Overall sales for all of 2016 are now up 1.4 percent, and there is still no sign of any sustained weakness in the market. However, much of the recent success for the industry has been propelled by lower oil prices, more subprime loans and record incentive levels. History tells us that all of this will change. Several of the manufacturers also have pushed low-cost leases as a means of boosting sales. Of the major brands, Nissan posted a 13.1 percent year-over-year increase because of the success of several new lines of crossovers, SUVs and trucks. Ford sales rose 6.4 percent, and Fiat Chrysler edged up 6.5 percent because of strong truck and SUV sales. A 17.1-percent increase for Jeep helped significantly. Sales at General Motors slipped 1.6 percent, primarily because of an 8.6-percent drop for the GMC brand and a 5.5-percent decline at Buick.
We continue to see employment growth for West Michigan outpacing most of the rest of the state and the nation. For the June survey, our index of employment again came in +12, well above the long-term average. Comparing year to year, the unemployment rates for most reporting units are still improved by about a full percentage point or so. The Ottawa County unemployment rate fell to 3.0 percent, lowest among the state’s 83 counties. Kent County took second place at 3.1 percent. Allegan County was fourth at 3.4 percent, and Kalamazoo County posted seventh at 3.6 percent. Although these unemployment numbers are well below the state and national averages, there is still room for improvement. For instance, Kent County unemployment was as low as 2.1 percent in late 1998. In addition, our workforce is now a little smaller than it was in 1998, so some of the improvement is statistical.
Needless to say, this month’s biggest story in economics is the Brexit. In reality, it will take armies of economists many months to sort out the impact. Fortunately for West Michigan, there will be no immediate impact regardless of where the chips fall. Even for Europe, the present agreement remains in place for the next two years, allowing plenty of time for readjustment. But some investors have already panicked.
From a pure economic standpoint, there is really no cause for a major upheaval. The U.K. still needs to buy products from Europe, and Europe has no replacements for products and services coming across the English Channel. However, it is the psychological implications that are the most difficult to figure out, complicated by the egos and personalities of the people involved. Britain’s prime minister has resigned. German Chancellor Angela Merkel stands almost no chance of re-election next year. Right wing factions in both the Netherlands and Germany want to hold their own Brexit-style vote. No one can predict the final outcome with any degree of accuracy at this time, but if all of the politicians start throwing stones at each other, Europe could generate its own recession.
As we roll into the lazy, hazy days of summer, one of our economic risks falls in the broad category of “unrest.” We expect numerous political demonstrations in cities like Cleveland, and the severity of these demonstrations could shake confidence in our stability as a country. So far, the major ISIS-directed attacks have fallen outside of the U.S. A significant attack at a U.S. airport or shopping mall could put business conditions at all airports and malls in jeopardy. This kind of event would probably carry over into the rest of the economy. So far, our intelligence community has thwarted many attempted attacks. Let’s hope that their proficiency endures.
It is true that our country has experienced some form of a recession every seven years or so for the past hundred years. Statistically, we are over seven years into the current recovery, and we are statistically or anecdotally “due.” But from an economic standpoint, there is still no evidence that we are about to enter an economic downturn. In fact, our local and national PMI numbers for June indicate a modest improvement in several critical areas. However, it is also noteworthy that many countries around the world have slid into recessions, and no countries are boasting an especially strong economy. A relatively flat worldwide economy looks increasingly possible.
Brian Long, Ph.D., is director of supply management research at Seidman College of Business, Grand Valley State University.