After last month’s 16-month high, the West Michigan industrial economy has again returned to a growth pattern that is almost flat. According to the latest survey conducted during the last two weeks of October, new orders, our index of business improvement, retreated to an anemic reading of plus 1, considerably below our September index of plus 23.
In a similar move, the production index eased to plus 4 from plus 24. Activity in the purchasing offices, the index of purchases returned to a negative reading of 3, down from plus 15. Unlike the inventor spikes we reported in August, the October indexes representing both finished goods inventories index and raw materials inventories remained almost unchanged. It should be noted the West Michigan economy still is very slightly positive, but the sharp uptick we were blessed with in September has not continued.
Looking at individual industrial groups, it is not surprising to see most groups flattened. Several of the auto parts suppliers raised concern over the recent softening in auto sales and noted new quotation requests were down considerably. Just like last month, the office furniture industry continued to show evidence of topping out, although business conditions still remain positive — at least for now. The bias on the capital equipment industry now is on the downside. For October, performance for the industrial distributors was mixed. The business sentiment numbers for October changed little and remain positive. The short-term business outlook, which asks local firms about the perception of the next three to six months, eased modestly to plus 22, down from plus 28. Conversely, the October index for long-term business outlook edged higher to plus 45 from plus 41.
From the anecdotal comments, it was obvious some respondents to this month’s survey were concerned about the outcome of the election. Business planners do not like uncertainty, so at least some expansion plans have been put on hold until the actual outcome of the elections can be determined and what direction the new administration will take. At the national level, the October report from the Institute for Supply Management, our parent organization, remained in single digits. New orders, ISM’s index of business improvement, came in at plus 4, down from plus 7. The production index rose modestly to plus 6 from plus 4. It was good to see ISM’s employment index return to positive at plus 2, up from negative 3. ISM’s overall index edged up to 51.9 from 51.5. As we noted in last month’s report, about half of all the PMIs worldwide are less than two points above the 50.0 break even.
The Nov. 1 press release from Markit.com, the British international economics consulting firm, depicts a more favorable view of the U.S. economy. New orders, employment and purchases were positive, and the overall Purchasing Manager’s Index (PMI) rose to a 12-month high of 53.4, up 1.9 from September. Chris Williamson, Markit’s chief economist, further noted: “October saw manufacturing enjoy its best performance for a year. Factories benefitted from rising domestic and export sales, driving output higher to mark an encouragingly strong start to the fourth quarter. However, a widespread reticence to take on extra staff highlights lingering caution with respect to investing in capacity, at least until after the presidential election.”
The Nov. 1 press release for the J.P. Morgan Global Manufacturing survey of 31 nations reported some promising improvement in the world economy. JPM’s index of new orders remained well above the all-important 50.0 break-even point and edged higher to 52.8 from 51.4. The production index advanced to 53.6 from 51.9. The J.P. Morgan Global Composite Purchasing Managers Index Rose to 52.0 from 51.0. Among the major economies of the world, the strongest PMI reports are coming from Germany (55.0), the U.K (54.3) and the Netherlands (55.7). At 51.8, the PMI for France now is positive. The October PMI for China came in at 51.2, up from September’s break-even point of 50.0. However, Greece, Brazil, Turkey and South Korea continue to be a drag on the world economy.
David Hensley, the survey author, further noted: “October saw growth of the global manufacturing sector accelerate to a two-year high, as new order inflows strengthened and international trade volumes picked up pace. Firmer demand combined with rising backlogs of work and higher employment all point to this growth rebound being maintained though some cooling can be expected as inventory growth stabilizes.” For some of our October reports, industrial inflation showed signs of recurring. JPM’s October index of prices jumped to 55.3, up considerably from 52.7. At the national level, ISM’s index rose to plus 9 from plus 6. In contrast, our local index of prices fell to negative 5 from 0. Most of the recent price increases are coming from the manufacturers of various plastic resins, as well as a few other chemicals linked to the recent (but temporary) spike in oil prices.
By most accounts, steel prices continue to stabilize in both the domestic and world markets. The West Michigan economy still is dependent on auto sales to fuel growth for our numerous automotive parts suppliers. For October, industry light vehicle sales fell by 0.7 percent, partially fueled by declines from the Detroit Three. Ford posted a decline of 8.1 percent, followed by a 3.6 percent drop at General Motors. Because of a 9.7 percent increase at Jeep and 11.2 percent jump for Ram, Fiat-Chrysler eked out an overall gain of 2.1 percent. For the other major brands, Honda sales fell 4.2 percent, Nissan slipped 2.2 percent, and Toyota skidded 8.7 percent. According to Automotive News:
“Analysts and automakers say sales to individual customers have peaked after six consecutive years of growth and that higher industry volume will only be supported by additional fleet deliveries. As retail demand slips, automakers are counting on low interest rates, widespread credit availability and modest economic growth to support volumes well into 2017.” The October employment index for West Michigan remained positive but eased to plus 7 from plus 9. Of the 83 Michigan counties detailed in the state of Michigan unemployment report, Ottawa County’s unemployment rate of 2.7 percent is the lowest in the state. Allegan and Kent Counties tied for second place at 2.9 percent. The unemployment picture for West Michigan continues to improve, but the changes are now very small. In general, most of the rest of the state is envious of our local unemployment numbers.
At long last, wages are starting to show significant improvement for the first time in more than seven years. Michigan still has about 80,000 jobs that cannot be filled because of a shortage of qualified workers. Unfortunately, the education system currently is doing little to close this gap. In other economic news, the Department of Commerce released a GDP estimate of 2.9 percent growth for the third quarter of 2016. If this number holds, it will be the strongest GDP reading in over two years. However, the Department of Commerce emphasizes 2.9 percent is just an estimate, and we will have to wait until Nov. 29 for a more permanent reading of third quarter GDP. The previous readings of 0.8 percent and 1.4 percent growth for the first two quarters remained unchanged. In terms of GDP, we are often reminded the industrial sector only contributes about 20 percent to the net GDP reading. Of course, this is because GDP represents final sales of goods and services. The purchase of raw materials and components, as well as outside services like chrome plating, do not count in the GDP tabulation. Hence the industrial spending on final goods and services may only contribute 20 percent to GDP but about 75 percent of the total momentum of dollars is encompassed in the industrial sector.
Historically, the accumulation of excess industrial inventories because of fears of rising prices or shortages have resulted in artificial bubbles. Exhaustion of these inventories has resulted in economic downturns. Locally, our survey respondents and their respective companies represent about $15 billion in spending. Even though all of that money is not spent locally, it still seems obvious a shift in spending by even a few percentage points will be felt. Where is the recession that was being so widely predicted earlier in the year? It is obvious from this report we currently have no evidence to suggest we are about to drop off a cliff. In fact, both the aforementioned JPM and Markit.com reports were actually up for October. Unless the Chinese economy was to suddenly collapse, there is not very much risk of being drawn into a world recession. Domestically, our biggest risk may be related to a perceived unfavorable outcome to the presidential elections.
Locally, our biggest risks relate to downturns in the auto and office furniture industries. The auto industry, in particular, is overbought and will someday have to balance supply with demand. With the aerospace and capital equipment industries already softening, it would not take much to push us over the edge. Hence, the odds of sliding into another recession over the next 12 months currently are about 50 percent.
Brian Long, Ph.D., C.P.M., is director of supply chain management research at Grand Valley State University.