By Brian G. Long, Ph.D., C.P.M.
For the West Michigan industrial economy, 2018 is starting on a positive note. According to the data collected in the last two weeks of January, NEW ORDERS, our index of business improvement, rose modestly to +23 from +19. In a similar move, the West Michigan PRODUCTION index edged up to +24 from +22. Activity in the purchasing offices, the index of PURCHASES, rose modestly to +18 from +16. Overall, the West Michigan industrial economy can still be described as slow growth, but January saw a modest uptick in the pace. Here are some additional specifics:
Individual industries: The automotive parts producers remain cautious about 2018 as questions continue about auto sales as the year unfolds. The market continues to shift away from sedans and in the direction of light trucks, crossovers, and SUVs. Hence, the specific product line that a given parts manufacturer is supporting becomes important. The office furniture business continues to show signs of topping out, but the current level is both high and profitable. The back-to-work attitudes of the post-holiday season resulted in some modest improvement for our industrial distributors. However, this month’s big boom is centered on SOME of the manufacturers of capital equipment. Numerous firms were apparently waiting for the passage of the new tax law before making a firm commitment, so it is not a total surprise to find that a few local firms are swamped with orders.
The U.S. Economy: The February 1, 2018 press release from the Institute for Supply Management, our parent organization, remains bullish, although the pace of growth virtually plateaued. Although ISM’s manufacturing index for NEW ORDERS slowed to +25 from +27, the PRODUCTION index rose to +18 from +13. ISM’s EMPLOYMENT index, which has been in double-digits for the past eleven months, backtracked to +6 from +12. The PMI, ISM’s overall manufacturing index, edged slightly lower to 59.1 from 59.3 but still fairly near a twenty-year high. In contrast, The IHS Market.com registered 55.5 in January, up from 55.1 in December. Improved performance for Markit.com’s NEW ORDERS and PRODUCTION indexes were cited as the drivers behind the improvement. The survey author further noted: “U.S. manufacturing started 2018 in fine fettle, with the PMI up to its highest level for nearly three years. Output growth accelerated in response to fuller order books, the latter buoyed by the twin drivers of robust domestic demand and rising exports. Factory payroll growth remained among the highest seen over the past three years, underscoring the bullish mood evident across the manufacturing sector. Pricing power is also returning as a result of strengthening demand, which should help bolster profit margins, but likely to also feed through to higher consumer prices.”
The World Economy: J. P. Morgan’s monthly Global Manufacturing Report continues to depict a positive view of the world economy, although the pace eased modestly. According to JPM’s February 1 press release, JPM’s NEW ORDERS index came in at 55.4, slightly below December’s 55.9, but still well ahead of the 50.0 break-even threshold. EMPLOYMENT held steady at 53.0, but PRICES edged up to 61.4 reflecting the strong worldwide demand for most major commodities. New export orders also rose to 54.1 from 53.9. The survey author further commented: “The start of 2018 saw a continuation of the solid upturn in global manufacturing performance. With business confidence still robust and further job creation reported, the sector remains on course to sustain its current solid pace of expansion into the coming months.” In the IHS Markit Eurozone report, all of the major European economies are now on a roll. Even Greece posted a ten-year high PMI of 55.2, well ahead of December’s 53.1. The Netherlands hit a record high of 62.5. Chris Williamson, Chief Business Economist at IHS Markit, further noted: “The eurozone’s manufacturing boom continued in full swing in January. Output grew at one of the fastest rates recorded over the survey’s 20-year history, matched by a further near-record surge in NEW ORDERS. Employment likewise showed one of the largest gains yet recorded by the survey as firms expanded capacity in line with rising demand. The extent to which demand has surged in recent months nevertheless continued to run ahead of capacity, leading to near-record increases in both backlogs of uncompleted orders and supplier’s delivery times. The hike in prices associated with the further shift to a sellers’ market for many goods was accompanied by a steep rising in oil prices during the month, resulting in a further intensification of cost pressures, a warning signal for a potential rise in future consumer price inflation.”
Unemployment: January is often regarded as a back-to-work month, and this year was no exception. Our West Michigan index of EMPLOYMENT rose to +20 from +15, continuing the positive job growth we have now seen for almost a full year. However, the December seasonally adjusted unemployment rate reported by Michigan’s Department of Technology, Management and Budget rose to 5.1 percent, noticeably higher than the 4.5 percent rate we reported for December last year. In addition, the unemployment rate most of our local reporting units are now as much as a half percentage point higher than last year at the same time. Whereas we have declared West Michigan to finally be back at “full employment,” the apparent backtracking has been unsettling. However, drilling down into the state’s database reveals that much of the modest rebound is the result of workers reentering the workforce. Unfortunately, those people returning to the workforce are often not among the skilled, trained, or certified workers who are needed by employers. Hence, the participants in our survey continue to complain about the shortage of qualified workers.
Automotive: After a 5.0 percent loss in sales for December 2017, January 2018 started on a slightly stronger footing. Overall sales for the industry rose 1.2 percent in January, although much of the strength can be attributed to only few a nameplates. Toyota led the way with a 16.8 percent sales gain, followed by Nissan at 10.0 percent, VW at 6.7 percent, and a scant 1.3 percent advance at General Motors. Most of the other firms were losers. Fiat Chrysler lost 12.8 percent, followed by a 6.3 percent drop at Ford, and a 1.6 percent easing at Honda. At least some of the variations can be attributed to variations in incentives and policies toward fleet sales, although January is traditionally the slowest month of the year for showroom traffic. We can expect a small boost in sales from recently enacted tax incentives and bonuses, but the slower sales pattern we saw throughout most of 2017 will probably resume. However, for our West Michigan auto parts producers, any slight slowing in auto sales may well be virtually unnoticed.
Industrial Inflation: Needless to say, the booming economy in Western Europe and the general strength of the world economy have resulted in the inflation rate for most industrial commodities rising. Locally, our index of PRICES jumped to +41 from +33. At the national level, ISM’s index of PRICES pushed up to +45 from +37, a seven-year high. JPM’s “Input Prices” index rose to an 80-month high of 61.4, which the survey author attributed to strong business conditions in most of the major industrial nations. Among the big-ticket commodities, many grades and types of steel are now edging up in price after a fairly quiet 2017. Aluminum and copper are now approaching four-year highs. Rising oil prices have escalated the price of diesel and gasoline, and when combined with rising demand, has propelled price increases from most plastic resins manufacturers as well.
Interest Rates: At some point, the current level of industrial inflation will spill over into the consumer market and drive the Consumer Price Index significantly higher. The Federal Reserve has already forecast three interest rate increases for 2018, but higher inflation could result in as many as six or even eight increases. The January 2018 jobs report of 200,000 was much better than expected, and the 2.9 percent annualized wage growth for 2017 was the best since 2009. GDP growth, which has been slow for the past nine years, could have a couple of quarters in the five percent range in 2018.
Business Confidence: The mood of the industrial economy held steady in the first report for 2018. The January West Michigan index for the SHORT-TERM BUSINESS OUTLOOK, which asks local firms about the perception for the next three to six months, backed down to +38 from the record high of +39 set a few months ago. The LONG-TERM BUSINESS OUTLOOK also shed a single point to +44 from +45.
GDP: The first estimate for the fourth quarter GDP came in at a growth rate of 2.6 percent, slightly below most estimates as well as 0.4 points below the previous quarter of 3.2 percent. February paychecks will begin to reflect a slight increase in buying power for many sectors of the workforce, but the big boom will still come from the industrial sector. Of the industrialized nations of the western world, the tax rate in the United States is lower than any other country except Switzerland. However, financial impact of growth in the industrial market is usually delayed, so the first quarter of 2018 may experience growth in the 3.0 range, followed by a significant boom as high as 6.0 percent in the second quarter.
Overall Economy: Yes, the stock market, which is now largely controlled by computers talking to computers, was due for a setback. However, most experts note that the trigger has been the threat of higher interest rates as opposed to some new fundamental development. Corporate earnings remain positive, which should help to create a plateau after the selloff. However, a more ominous fundamental disruption, like a trade war or military action from North Korea could put a significant damper on the stock market as well as the overall economy. The post-war record expansion partially resulted from the 1981 tax cuts and lasted for 10 years. The current expansion is now approaching nine years old, and will need to make it to June 2019 to be a record. Barring a catastrophic geopolitical event, there is a chance that the old record may be broken.