Sustainable slow growth. That’s the latest word on the West Michigan economy, according to the data collected during the last two weeks of January.
Our index of business improvement, New Orders, gained strength by rising to +14 from +5. However, the Production index eased to +7 from +10. The Employment index returned to double digits at +12, up from +9.
Activity in the purchasing offices remained subdued at +6, virtually unchanged from +7. Some industries are plagued with price increases in January, so it was not surprising to see our index of Prices rise to +19 from +15. Because of optimistic forecasts for growth in 2014, firms added to their raw material inventories, and Raw Materials Inventories index turned positive at +6, up from -4.
Taking a look at local industrial groups, the furniture industry was quite positive in Mike Dunlap’s January report. “The industry remains on a very steady but improving trend line,” it read. However, our survey respondents reported a little softness in January orders, possibly because of orders strategically placed in November and December to expend funds before the end of the budget year. Another positive for the office furniture industry is the recent rise in construction of new office space.
The auto parts firms turned in a mixed performance for January, but the bias was still to the up side. January is usually a slow month for capital equipment firms, but several respondents reported very positive sales. For industrial distributors, it was “steady as she goes.” Overall, we have numerous local factories at full capacity, and firms looking for qualified people to fill positions.
Turning to the national economy, the Feb. 3 report from the Institute for Supply Management, our parent organization, indicated New Orders for ISM’s manufacturing index retreated to a six-month low of +8, down considerably from +20. The Production index retreated to +8 from +12. ISM’s anemic Employment index fell to +2 from +6, indicating job growth in the U.S. industrial sector has slowed to a trickle. The most unsettling news came for ISM’s overall manufacturing index, which retreated to 51.3, down from 56.5. Since Wall Street was expecting a consensus reading of 56.0, the report triggered a major selloff among the major stock exchanges around the world.
British economic forecasting firm Markit posted a less severe drop for U.S. manufacturing. Markit’s PMI edged lower to 53.7 from 55.0. Markit’s index of New Orders remained positive, but eased to 53.9 from 56.1. The index of New Export Orders flipped negative to 48.4 from 51.4.
At the international level, the Feb. 3 reports from some purchasing organizations continued to show modest improvement, while others posted modest declines. JP Morgan’s “32 nation” Global Manufacturing PMI was virtually unchanged at 52.9, down from 53.0. At 56.7, the U.K. PMI topped the list of the major world economies, followed closely by Japan at 56.6. Germany remains strong at 56.5, followed by the Netherlands at 54.8. It was gratifying to see the Greek PMI turn positive for the first time in 65 months. Losers for January included China, Indonesia, Russia and France. Taking a lead from the U.S., the Canadian PMI eased to 51.7 from 53.5.
In our survey’s two new categories relating to the short- and long-term business outlook, the greatest improvement in our five-month history has come from the “short-term” category. For January, the Short Term Outlook edged up to +32 from +27. This is almost three times as strong as the index of +12 recorded in November when the threat of an extended government shutdown put many business planners on edge. For the Long Term Outlook, the index rose to +60 from +53. Many firms ended 2013 with record sales and expect 2014 to be very positive as well.
Over the past few weeks, the financial markets have been rattled by several events in the news. First, the Federal Reserve announced it will continue to reduce purchases under the third wave of Quantitative Easing, or QE III. In the weeks since the “tapering” began, various short-term rates have edged higher. For instance, the 30-year fixed mortgage rate has risen to about 4.5 percent from 3.5 percent eight months ago. This has resulted in some money managers moving out of stock market equities into fixed rate notes and bonds. The predictable net result is that bond yields rise and stocks go down.
Unfortunately, rising interest rates have had a significant impact on a group of Third World countries known as the “Fragile Five.” This new moniker identifies Turkey, Brazil, India, South Africa and Indonesia as economies that have become too dependent on skittish foreign investment to finance their growth ambitions. The negative consequences are simple: When interest rates in the major countries were artificially pushed down to record low levels, several emerging economies found they could borrow money on the world market for as low as 4 percent, far below the 12 to 15 percent they would have paid just a few years ago. With interest rates in the U.S. and Europe now rising, these countries are seeing their cost of borrowing rise very rapidly. The Fragile Five are now threatened with serious recessions as monies flow out of these countries. Fortunately, this country does not have major exposure to the Fragile Five, so it is unlikely they could spawn another U.S. recession. However, the European countries are not so lucky. Furthermore, worldwide demand for commodities, goods and services will be noticeably curtailed if two or more of these five countries encounter major fiscal difficulties. This would inhibit, but not stop, the U.S. economy.
Another small shock came Jan. 23 when the Chinese PMI reported by HSBC fell barely below the break-even point to 49.6. In the final report Jan. 30, the index eased a little further to 49.5. Of course, the Chinese government’s official (but phony) statistics are still positive. Worries persist over China’s shaky bank loans, some of which are off the books in an opaque financial system called “shadow banking.” Although China is half a world away, a sharp downturn would severely reduce exports to our third-best customer. Furthermore, a Chinese recession would draw the fragile Third World economies into another worldwide recession, which the U.S. would find difficult to avoid.
In an election year, there is scarcely a politician who can give a speech and not use the word “jobs” at least six times. Of course, what he or she really means is employment, and more jobs generally mean lower unemployment.
The December unemployment level in Kent County fell to 5.4 percent. This is about half the unemployment level of about four years ago, but almost three times the 20-year low of 2.1 percent. Other entities like Kentwood can recall a 20-year unemployment low of 1.4 percent and the part of Holland in Allegan County, 0.9 percent. At the present rate of job growth, it is estimated it will be 2019 before we return to a normal level of unemployment. It is worth repeating that automotive and the industrial sector as a whole can go just so far in pulling us out of the Great Recession.
Brian Long, Ph.D., is director of supply chain management research at Seidman College of Business, Grand Valley State University.