Flat or slightly negative. That’s the latest word on the West Michigan economy, according to data and comments collected in the last two weeks of December.
New Orders, our index of business improvement, edged lower to -1 from +7. The Production index softened to -4 from +3. Activity in the purchasing offices eased to -4 from +5. One bright spot comes from the Employment index, which remains positive at +12.
December is often a month of slower sales and reduced production sales because of the holidays, so there is no cause for alarm — at least not yet. However, a continuation of this trend into January and February may warrant a re-evaluation of the outlook for the rest of 2016.
The West Michigan economy continues to outpace the national economy, and many local firms are fairly optimistic about 2016 — at least as they see it now.
Looking at West Michigan’s individual industries, we find auto parts manufacturing, office furniture and aerospace remain stable. However, all three are notoriously cyclical and are now at their peak.
Because of strong auto sales, some of our auto parts suppliers remain at full capacity, and at least one is still expanding. However, a couple of other Tier I auto firms have been disappointed with the prospects for the first quarter of 2016.
As noted last month, the office furniture business has turned mixed, and some firms are less optimistic about 2016.
Many of our firms associated with capital equipment are beginning to complain about the below-cost equipment being dumped on the market by the Japanese, Korean and Chinese manufacturers because of the weaker international markets. December is almost always a sluggish month for industrial distributors, so it was no surprise to see these respondents slower for the season.
According to the Jan. 4 report from the Institute for Supply Management, our parent organization, the national economy continues to lose strength. ISM’s index of New Orders eased to -9, down from -3, and its Production index dropped to -8 from -3. The Employment index declined to -7 from -1. According to ISM’s index of Inventories, many firms are continuing to liquidate larger-than-usual inventories they have accumulated. Inventory liquidation is typical during periods of falling prices because most commodities are expected to be cheaper for the upcoming months.
Although this report represents the fourth successive month of weak numbers from ISM, at least some of the explanation can be attributed to the month of December, which is often a slow month for the industrial economy.
A contrasting view of the national economy comes from Markit.com, the London-based international economics consulting firm. Although still positive, Markit’s Purchasing Managers Index for December dropped to a three-year low of 51.2, down from 52.8.
The chief economist continues to grow more pessimistic about the prospects for 2016: “The strong dollar is hurting exporters as well as hitting domestic sales as firms compete against inflows of cheap imports. Low oil prices are meanwhile hitting demand for goods and machinery from the energy sector. There are signs that consumers are becoming more cautious in relation to spending as interest rates lift off their historic lows, and overseas demand remains in the doldrums.”
A bright spot in this month’s report comes from our indexes of confidence. In December, the Short Term Business Outlook rose to +26 from +10; the Long Term Business Outlook index accelerated to +49 from +39. It appears the Christmas season has brightened the prospects for the future.
At the international level, the picture remains mixed, according to the Jan. 4 report from JP Morgan Global Manufacturing. The PMIs for countries like South Africa, Brazil, Indonesia and Canada remain negative. By contrast, prospects for the European economy have modestly improved, largely because of the European Central Bank’s quantitative easing.
Triggered by a stock market selloff in China, the New Year started off with a major decline in the equity markets around the world. The Purchasing Managers Index for China came in negative for the sixth successive month, raising fears that the Chinese economy may be much weaker than some of the statistics being reported. The Chinese government is trying frantically to regulate the economy back to a more positive stance, and billions of dollars are still being poured into questionable stimulus efforts. But China has not had a recession in 30 years, and many economists are questioning whether the government can continue to steer the economy away from trouble.
As expected, the auto industry succeeded in setting a record for the largest number of cars ever sold in one year. For all of 2015, Ford recorded an 8.3 percent increase, GM 5.7 percent, and Fiat Chrysler 12.3 percent. Sales for Honda rose 9.9 percent, Hyundai-Kia 7 percent, Nissan 17.9 percent and Toyota 10.8 percent. These numbers are for cars and light trucks, so it should be noted all of the gain was from the truck and SUV sector, not cars alone. We can give credit to cheaper gas for a good portion of this gain.
Industrial deflation continues to accelerate the recession in the extractive industries such as mining and petroleum production. At -33, ISM’s index for Prices is now at the lowest level since the pit of the recession in April 2009. Locally, our index of Prices remains negative at -6. Most “big ticket” items like steel, copper, aluminum and petroleum products are still falling in price.
For most of our firms in West Michigan, the lower prices mean a windfall of savings. But mines are now closing all over the world, and steel mills have reduced production to 2009 levels. Chinese firms are now dumping machinery and equipment on the world market at prices below cost.
It has been said that economic forecasting is like driving a car blindfolded with someone looking out the back window giving you directions. However, the past does tend to repeat itself, and some of the indicators are starting to look negative.
According to Citicorp, there is a 65 percent chance of a recession in 2016. JP Morgan’s economists have declared the probability of a recession within the next three years has risen to 76 percent. The international banking firm HSBC announced that the global GDP, expressed in dollars, is already down 3.4 percent for 2015. These economists also note the recent drop in factory orders, weakening export growth and the flattening of corporate earnings were precursors of several other recessions in recent years. If HSBC is correct, then the 2015 fourth quarter GDP report may be very weak.
Looking at the current situation, there are still a few positives. As noted earlier, the European economy has shown modest improvement in recent months, and the early part of 2016 appears to be on track for more slow growth. Even countries like Greece and France that had been posting red ink for many months have turned modestly positive. In the U.S., most of our industrial groups such as aerospace and automotive have remained strong.
Brian Long, Ph.D., is director of supply management research at Seidman College of Business, Grand Valley State University.