Meekly Positive

Flat, but meekly positive. That’s the latest word on the West Michigan economy according to the data and comments collected in the last two weeks of January 2016. Our index of business improvement, which we call NEW ORDERS, edged back to +4, up from -1. The PRODUCTION index recovered more ground, rising to +12 from-4. Activity in the purchasing offices, our index of PURCHASES, remained negative at -1, but improved from December’s -4. In last month’s report, we noted that December is often a month of slower sales and reduced production and predicted that January would probably see a return of the same slow growth have reported for dozens of months. We had hoped for a stronger bounce, and some firms are not as optimistic about 2016. But theWestMichigan economy continues to outpace the national economy as well as the overall Michigan economy, so many local firms are still very optimistic.

Given the slower pace of the West Michigan economy, it is not surprising to see that the momentum for most of our industrial groups has turned widely mixed. This is clearly the case with our industrial distributors, the office furniture manufacturers, capital equipment firms, and aerospace contractors. The exceptionmay be our automotive parts producers, who are still basking in the light of record auto sales that are optimistically projected to go even higher in 2016. However, the January auto sales report came in flat, and the retail auto market remains oversaturated and bolstered by lower credit requirements, massive incentives, and low gasoline prices. These incentives cannot go on indefinitely.

Our national parent organization, the Institute for Supply Management, reports that the U.S. industrial economy continues to flatten. Typical of most post holiday reports, ISM’s index of NEWORDERS came back considerably from December’s low of -9 to +1 for January. The ISM PRODUCTION index remained negative at -5, but improved modestly over December’s -8. Winter storms were blamed for part of the problem. The EMPLOYMENT index decline accelerated to -11 from -7. According to ISM’s index of INVENTORIES, many firms are continuing to liquidate stocks of basicmaterials in anticipation of lower prices.

New EXPORT ORDERS edged back to negative at -6, down from December’s +2. At 48.2, ISM’s overall index for January remains below the 50.0 break-even point for the fourth consecutive month. Since the end of the Korean War, a recession has always followed. A contrasting view comes from the survey conducted byMarkit.com, the international economics consulting firm. For January 2016, Markit’s PMI rose modestly to 52.4, up from December’s 51.2. Upturns in both PRODUCTION and NEW ORDERS were cited as factors accounting for the rise. However, the survey author is not as positive: “The manufacturing sector continues to struggle against the headwinds of weak global demand, the strong dollar, slumping investment in the energy sector and rising financial market uncertainty, all of which mean the goods-producing sector looks set to act as a drag on the wider economy again in the first quarter of 2016. Despite picking up slightly, the January PMI reading is one of the worst seen over the past two years, highlighting the ongoing plight of the manufacturing sector.”

According to the J.P. Morgan Global Manufacturing report released on February 1, the growth in world manufacturing remains “subdued” at the start of 2016. Brazil, Russia, Canada, South Korea, Indonesia, Malaysia, and China are mired in contraction. Improvements were seen in Poland, the Czech Republic, Taiwan, Turkey, and Vietnam. Because of quantitative easing by Europe’s central bank, most of the major Eurozone countries have returned to modest growth. Even the PMIs for France and Greece are now at the break-even point of 50.0. Surprisingly, it is now Spain, Italy, and Ireland that are posting the strongest growth numbers. According to the J.P. Morgan Chief economist: “The January PMI data signals that the upturn in global manufacturing remained lackluster at the start of 2016. A mild improvement in new order growth and higher employment are steps in the right direction, but with export trade flows still close to stagnation the trend in output has yet to break free of its ongoing inertia.”

Industrial deflation continues to be an unrecognized threat to the U.S. economy. Basic commodities like oil, copper, steel, and aluminum are down 30-40% from 2011, resulting in mine closures, mill closures, and significant layoffs in these industries all over the world. Many farmcommodities have fallen far enough in price to cause a recession in the seed, fertilizer, and farm equipment industries. ISM’s January index of PRICES came in at -33, a level that has only been seen during periods of severe recessions. As a result, at least a trillion dollars of worldwide wealth has been obliterated. The news media is still primarily giving attention to the oil industry, but the rest of the commodities in the supply chain are equally important.

In the West Michigan economy, we don’t see the consequences, because our industrial base has not been impacted. However, that doesn’t mean we are immune from the fallout. Good news. The employment picture remains very positive for West Michigan. The December unemployment rate for Kent County eased to a fifteen-year low of 2.7%, down from 3.6% one year ago and a fraction of the 12.6% rate reported in July of 2009 at the peak of the Great Recession. In Kalamazoo County, the December unemployment rate fell to 3.2%, down a full percentage point over the past calendar year and the same rate theMichigan Department of Technology, Management and Budget reported in June of 1999.

Although our local index of EMPLOYMENT came in only modestly positive at +8, the projection indicates that many of our local unemployment rates should continue to fall for the next couple ofmonths. However,with the ISM national EMPLOYMENT index now falling at a double digit rate, it will be difficult for West Michigan to avoid being dragged down.

The impact of expanding or contracting employment in the industrial sector cannot be overemphasized. One new job for amanufacturing firmcan generate as many as ten additional job in the supply chain. The respondents to our survey represent about $15 billion in spending every year, so any form of expansion or contraction will ultimately be reflected in the employment picture. Hence, as long as our EMPLOYENT index remains positive, unemployment in West Michigan will probably continue to fall. To their discredit, it should be noted that Keynesian economists generally ignore the industrial market and concentrate their analysis only on end consumers.

Finally, it is essential to remember a lesson from Economics 101. As an economic indicator, employment is a LAGGARD. Hence, the early stages of any economic downturn usually show no sign of trouble in the labor market. Firms continue to hire, sometimes because of the disbelief that a slump is imminent, but often because managers believe that their firm or their industry may be exempt from the downturn. Coming out of a recession, the reverse is true. Employers rehire staff very slowly, and only begin expansion when the recovery is well underway and confidence has improved.

Another recession? That’s the big question everyone is asking. According to many indicators, that possibility remains a serious threat. Many pundits correctly point out that a fewnegative indicators do not always predict the future, and that many other current indicators are still very positive. The preliminary estimate of GDP for the fourth quarter of 2015 came in at an anemic 0.7%.

Although deflation in the supply chain is important, our greatest threat still comes from the possibility of the Chinese economy imploding, drawing the rest of the world into a global recession. The Chinese have now experienced 40 years of unparalleled growth without experiencing a significant recession. In fact, China’s reported a 9.2%GDP a growth rate back in 2009 when the economies of the rest of the industrialized world were collapsing. By combining entrepreneurship and capitalism with a dictatorial government, they believe that they have identified a better model for long-term growth. They further believe that they can pinpoint the “right” way to allocate resources and regulations better than Western governments which must rely on legislative bodies to argue rather than act.

It is possible that they might be right, but a more likely scenario involves some kind of a free market solution. In other words, so far they have gotten lucky. Some current predictions are that the 2016 U.S. economy expand at a rate as high as 2.5%, while others are predicting a slide of approximately equal proportions. However, a third possibility exists in the form of growth that simply flattens to somewhere near zero. We have now seen six years of slow growth, and the possibility remains that the growth could get even slower without dipping into a formal recession. According to the textbooks, the term “growth recession” can be attributed to a period of GDP growth which hovers above 0% but stays below 1%. Again, it is just a possibility.