By Brian G. Long, Ph.D., C.P.M.
After a modestly negative report last month, the West Michigan economy has returned to a normal pattern of slow growth. According to the data collected in the last two weeks of August, NEW ORDERS, our index of business improvement, came in at +21, up significantly from last month’s report of -3. The West Michigan PRODUCTION index tapered to +16 from +23, probably because of last month’s unexpected flat sales report. Activity in the purchasing offices, the index of PURCHASES, edged higher to +15 from +13. The comments from our survey participants continue to voice concern over the uncertainty brought on by the tariffs, but recent anecdotal progress in talks with both Mexico and Canada appear to have lessened the fear of a trade war.
Individual industries. After last month’s lackluster report, slow growth has returned to most sectors in the West Michigan economy. At least some of the fears of the trade war have been moderated, and the automotive sector appears to be exempt from some of the tariffs. Auto sales continue to soften in the traditional sedan sector, but the light truck/SUV segments are doing well. So far, the market shift has been fairly orderly, and our local forms are adapting. The office furniture business continues to benefit from the new tax structure, so the outlook for most firms remains positive. The local firms producing capital equipment are also back on track after last month’s hesitation. Business conditions for our industrial distributors remain seasonally flat.
The U.S. Economy. According to the September 3 press release from the Institute for Supply Management, our parent organization, the national economy resumed a pattern of stronger growth in August. NEW ORDERS, ISM’s index of business expansion, advanced to +25 from +18. In a similar move, the PRODUCTION index edged rose to +25 from +16. The EMPLOYMENT index rose two percentage points to +17 from +15. ISM’s overall index rose 3.2 percentage points to 61.3, a four-year high.
A less optimistic report on the U.S. economy comes from the British consulting firm of IHS Markit.com. The firm’s seasonally adjusted PMI for August registered 54.7, down from 55.3. Although still strong, Markit’s index of NEW ORDERS came in slightly lower. New EXPORT ORDERS also rose, perhaps because of the possibility of new tariffs being imposed in the near future. Chris Williamson, Chief Business Economist at HIS Markit, further noted: “Exports remain the key source of weakness for producers, with foreign orders barely rising in August after two months of modest declines. The strongest growth is being seen in consumer-facing companies, reflecting robust domestic demand, in turn linked to the strong labour market and buoyant consumer confidence, though even here growth has slowed. However, at least some of the slowdown compared to earlier in the year reflects production being curbed by widespread shortages of inputs, haulers and labor, leading to a further build-up of backlogs of work. For producers of investment goods such as plant and machinery, order books are backing-up at a rate not exceeded in over ten years.”
The World Economy. The J.P. Morgan Monthly Global Manufacturing Report encompassing 43 nations remained relatively subdued in August. JPM’s index of NEW ORDERS tapered to 52.4 from 52.6, but the PRODUCTION statistic edged higher to 53.1 from 53.0. Although well ahead of the break-even point of 50.0, the overall index eased to 52.5 from 52.8, a 21-month low. The PMI readings for Turkey, Russia, South Korea, and Thailand are currently negative. China, the world’s second largest economy, remains marginally positive at 50.6. Most European countries as well as the U.S. are still above the global average. The survey author further commented: “August PMI data signaled a slight firming in global manufacturing output growth to a solid pace at near 3% annualized. The survey suggests that the recent inventory drag has reached an end. However, we were disappointed to see the further decline in the New Orders PMI.”
The eurozone’s overall manufacturing index reported a modest downtick to 54.6 from July’s 55.1, according to the eurozone PMI released on September 3 by IHS Markit. The Netherlands, Ireland, and Austria are currently the strongest eurozone performers, offset by weaker performances by Spain and Italy. However, the PMI reports for all of the major countries in the eurozone are still above the 50.0 break-even point. Even beleaguered Greece came in with a PMI of 53.9, a recent high. However, current estimates note that it may take Greece as long as twenty years to return to the pre-crisis economic output. Overall, the tone for the eurozone August report is cautiously optimistic. Chris Williamson of HIS Markit, the survey author, further noted: “Eurozone factories reported a further solid production gain in August, but prospects dimmed further as growth of NEW ORDERS hit a two-year low and worries about the outlook deepened. Some of the slowdown in exports can be attributed to the appreciation of the euro since earlier in the year, but companies are also reporting signs of demand cooling and risk aversion intensifying. Worries about trade wars and the damaging impact of tariffs, as well as Brexit and other political worries, all contributed to a dampening of business optimism about the year ahead. Business expectations were the second lowest since November 2015. One positive was a cooling of price pressures, which fed through to the smallest rise in factory selling prices for a year and could help bring consumer inflation down in coming months.”
Michigan Unemployment. According to the latest report from Michigan’s Department of Technology, Management, and Budget, Michigan’s “headline” unemployment rate for July edged down to 4.3 percent, slightly higher than the national unemployment rate of 3.9 percent. According to DTMB, the July workforce grew by 29,000 workers compared to July 2017. Although many of the new members of the workforce are recent graduates from schools and colleges, a significant percentage of these previously discouraged workers have been motivated by improving wages and job prospects to reenter the workforce. There are also some anecdotal stories of workers who left Michigan when the economy was bleak now returning to the state because of improved job prospects.
West Michigan Unemployment. Our August index of EMPLOYMENT came in at +21, unchanged from the previous month. According to the state statistics, Kent County, the largest county in our survey, reported a July labor force of 362,676. Of that number, about 13,093 workers are currently unemployed, bringing the official unemployment rate to 3.6 percent. Ten years earlier, 24,991 workers were unemployed, and the official unemployment rate was 7.8 percent. During that 10-year period, the Kent County workforce grew from 321,852 to 362,676, an increase of 11.2 percent. Although Ottawa County is less than half the size of Kent, the ten-year growth rate in employment has been 18.3 percent. Needless to say, the employment growth has triggered a housing shortage. Although the improved West Michigan growth is favorable for the State of Michigan, it is also good to see some of the counties on the east side of the state returning to prosperity. For instance, the unemployment rate in Oakland County has now fallen to 3.9 percent, and the rate in near-by Livingston County is currently at 3.6 percent, tied for fourth lowest in the state.
Automotive. Auto sales for August edged slightly lower by a scant 0.2 percent, largely because the expanded sales for light truck and SUVs were offset by falling sales for sedans. The seasonally adjusted sales rate (SAAR) fell to 16.58 in August, down modestly from July’s 6.73 reading. GM posted a decline of 12.8 percent, largely because of a decision to reduce some sales incentives. Fiat Chrysler gained 9.9 percent because of spectacular sales for both Jeep and Ram. Among the other major brands, Ford gained 4.1 percent, Hyundai-Kia added 3.5 percent, and Honda eked out a 1.3 percent gain. Toyota sales fell 2.0 percent, largely because of fewer truck models available to meet the current consumer demand. According to David Phillips at Automotive New: “Truck-fueled advances by many automakers couldn’t make up for plunging demand for passenger cars and an estimated double-digit drop at General Motors. High incentives and a healthy U.S. economy continue to support light-vehicle demand, which has risen 1.1 percent through the first eight months of the year. Most analysts expect sales to taper off in coming months and drag the industry to its second-straight annual decline by year end.”
Industrial Inflation. Because of the tariff threats, steel and aluminum pricing continue to be volatile. However, the continued moderation in worldwide demand for many key industrial commodities has resulted in at least some price relief. Our local index of PRICES eased to +42 from last month’s torrid +51. ISM’s national index of PRICES eased to +44 from +47. The J.P. Morgan international pricing index also registered slightly lower. However, one of the most unexpected higher costs to West Michigan industrial firms is coming from the trucking industry, where shortages of both trucks and drives are driving up prices and triggering delivery delays.
GDP. Statistics from the government are frequently revised, and the estimated GDP growth for the second quarter has been adjusted upward to 4.2 percent from 4.1 percent. The focus now shifts to the third quarter, which is expected to be as good or better than the second quarter. The Atlanta Fed, which has usually been optimistic, is now estimating that the third quarter will be close to 4.4 percent. Other forecasts had been as high as 5.0 percent, but the dampening effects of the trade wars have tempered the latest assessments. An even bigger limiting factor may be the logistical challenges faced by the nationwide shortage of trucks and drivers. Hence, the fourth quarter GDP will probably be closer to the 3.5 percent range. Still good, but not great.
Business Confidence. Although the fear of a recession is always present, the mood of our local industrial firms remains cautiously positive. The West Michigan index for the SHORTTERM BUSINESS OUTLOOK for August, which asks local firms about the perception for the next three to six months, ticked lower to +32 from +33. In a similar move, the LONG-TERM BUSINESS OUTLOOK, which queries the perception for the next three to five years, also registered +33. Although these readings are lackluster, they still do not indicate any significant level of pessimism about the current economy.
Summary. The current economic momentum will keep the economy growing well into the fourth quarter and possibly into early 2019. Hopefully, we will begin to see some progress in trade talks between Mexico and Canada. It is worth remembering that these countries are still our largest trading partners. The trade relationship with China is more complex, and forming a new agreement will be more difficult. The tax cuts will continue to move the U.S. economy in a positive direction, but uncertainty about the trade talks will limit future economic growth.