By Brian G. Long, Ph.D., C.P.M.

The stronger-than-usual performance for the West Michigan economy has continued into the opening of the second quarter of 2018, although the pace slowed to some extent. According to the data collected in the last two weeks of April, NEW ORDERS, our closely-watched index of business improvement, retreated to +28 from +34. In a similar move, the West Michigan PRODUCTION index edged lower to +28 from +31. Activity in the purchasing offices, the index of PURCHASES, came off a recent high and eased to +34 from +37. The EMPLOYMENT index rose to +23 from +19. Based on the comments for the survey participants, most firms remain reasonably confident about future economic conditions. However, pricing pressures for key commodities, such as most grades of plastic resins and all types of steel, are beginning to cut into the profitability for many firms. Personnel shortages continue to plague may firms, and there is no end in sight.

Individual industries. Just like in previous months, most capital equipment manufacturers continue to be positive, but there are some exceptions. Our local automotive parts producers are still modestly expanding despite the slight downtick for the industry as a whole. The office furniture is industry holding steady, but signs indicate that the peak for the current business cycle has been reached. Although there are a couple of exceptions, most industrial distributors reported a good month, much as they have since the beginning of the year.

The U.S. Economy. The May 2, 2018 survey report from the Institute for Supply Management, our parent organization, remained positive but slightly less robust in April. ISM’s manufacturing index for NEW ORDERS came in virtually unchanged at +34.3, down only 0.4 from +34.7 in March. In a similar move, the PRODUCTION index edged lower to +25.6 from +27.9. In contrast, ISM’s EMPLOYMENT index upticked modestly to +12.9 from +12.2. Because of statistical manipulation, ISM’s overall index eased to 57.3 from 59.3, making the limited backtracking appear more severe than the fundamentals portray. A more accurate view of the U.S. economy may come from the IHS PMI, which rose to 56.5 in April from 55.6 in March. The survey author continues to voice a positive tone: “April saw U.S. manufacturers reporting the strongest monthly improvement in business conditions since September 2014. The survey suggests the economy has started the second quarter on a solid footing and sends an encouraging signal for GDP growth to accelerate after the modest 2.3% rate of expansion seen in the first quarter. With inflows of new orders rising at an accelerated pace, greater input buying and business expectations regarding future production levels running at one of the highest levels seen over the past three years, there’s plenty of evidence to suggest strong growth will persist through May.”

The World Economy. For April, the J.P. Morgan Monthly Global Manufacturing Report yielded a “mild improvement” in the rate of expansion for the global economy. This month’s survey of 32 nations posted a global PMI of 53.5, up slightly from 53.3 in March. According to the May 2 press release, JPM’s NEW ORDERS index came in at 53.9, up slightly from last month’s 53.7, but still well ahead of the 50.0 break-even threshold. Worldwide EMPLOYMENT held steady at 52.3. Price pressures resumed escalation in April, and the index of PRICES rose to 60.1 from 59.9. The survey author further commented: “April PMI data signaled a marginal pick-up in the rate of expansion of the global manufacturing sector, the first growth acceleration seen since the turn of the year. Forward-looking orders data point to solid output gains in coming months, constrained by a cooling in the inventory cycle.”

The first month of the second quarter saw further slowing of the rate of growth in the eurozone manufacturing sector. Since hitting a record high in December, the April Markit Eurozone PMI eased to a 13-month low of 56.2. The Netherlands, Germany, and Austria continue to be the strongest performers, but even France, Italy and Greece are still modestly positive. Chris Williamson, Chief Business Economist at London-based IHS Markit, further noted: “Although the April growth rate has slowed markedly compared to the start of the year, December had seen the best performance in over 20 years of survey data collection, with factory activity clearly surging at an unsustainable rate. Since then, supply constraints including raw material scarcities, supplier delivery delays, and skill shortages have constrained production. Some of these adverse factors are therefore likely to be reversed in coming months.”

Unemployment. The latest numbers reported by Michigan’s Department of Technology, Management and Budget pegged Michigan’s seasonally adjusted unemployment rate for March at 4.7 percent, up slightly from the 4.6 percent reported in March 2017. A major factor in the 0.1 percent increase was workers deciding to return to the workforce, offset by job gains for the entire state. From March 2017 to March 2018, payroll jobs in Michigan increased by 61,000 or 1.4 percent. For the major counties in West Michigan, the estimated unemployment rates range between 3.2 percent for Ottawa County to 4.2 percent in Barry County, all well below the state average. The current national unemployment rate for April rests at 3.9 percent, and analysts are still projecting the rate to fall slightly more by the end of the summer. The national U-6 unemployment rate, which includes various discouraged and marginally attached workers, has now fallen to a 17-year low of 7.8 percent.

Automotive. Just like the past fifteen months, the pattern of slightly slower sales resumed in April. So far, the decline has still been very orderly. Industry-wide sales for cars and light trucks posted a year-over-year loss of 4.8 percent, down from last month’s gain of 6.4 percent. Of course, for many years these reports from Crain Communication’s “Automotive News” have included cars AND light truck. With the advent of crossovers, the light truck category was expanded to include all non-sedan light vehicles. But it is the decline in sedan sales that are blamed for the overall industry retreat. Hence, the Detroit manufacturers are continuing to drop various sedan nameplates in favor of expanding crossover and SUV offerings. Looking at April tallies, Ford sales were down 4.5 percent, but Fiat-Chrysler gained 4.5 percent because of the continued good sales for Jeep. GM is no longer posting monthly numbers, but industry analysts estimate an April decline of 2.7 percent. Of the other major brands, Toyota lost 4.7 percent, Honda eased 9.2 percent, Nissan slid 28.1 percent, but VW eked out a gain of 3.2 percent. “Despite sales beginning to cool off, the industry is still on pace for a record year,” said Eric Lyman, TrueCar’s chief industry sales analyst. “2015 delivered a 10- year high in August sales, so automakers faced a high hurdle to show year-over-year gains in August 2016.” Other analysts, citing low gasoline prices, widely available credit, low financing costs, and employment gains believe sales still have room to grow.

Industrial Inflation. The upward pressure on prices continues. Locally, our index of PRICES jumped to +59 from +54. At the national level, ISM’s index of PRICES pushed higher to +58.6 from +56.2. JPM’s worldwide index of “Input Prices” index edged above last month’s 80-month high to settle at 60.1, up slightly from 60.0. Fortunately, the West Michigan index of LEAD TIMES eased to +39 from +44, implying some relief in pricing pressure may be coming. Partially resulting from the recent tariff announcement, aluminum and steel are among the commodities rising in price. However, many of the aluminum and steel imports have already been exempt, and the actual tariffs still have not been imposed, although the deadline is near. As one survey respondent put it, prices still have not moved “all that drastically.” The rise in pricing for most grades of plastic resins of has been driven by the rising cost of oil, which of course has nothing to do with tariffs. The cost of truck transportation is starting to escalate at a much more rapid rate than expected. The biggest complaint is the shortage of qualified drives, despite the rather attractive compensation packages being offered.

GDP. The first estimate of economic growth for the first quarter of 2018 came in at 2.3 percent, a little disappointing for those who expected a bigger bounce from the tax recent cuts. The second quarter is now estimated to come in about 3.0 percent or so. As we have previously noted in this report, the expansion in the industrial market can take months to spill over into the GDP. Hence, the real impact of the tax cuts may not be seen until the third or even fourth quarter of this year. To offset the revenue lost by the tax cuts, economic growth will need to expand to about 4.0 percent for a considerable period of time. Many economists still estimate GDP growth for 2018 to be only about 3 percent, but 3.5 percent still seems possible. GDP for 2019 will therefore need to be at least 4.0 percent to offset the revenue lost by the tax cuts.

Business Confidence. The tariff announcement definitely put a damper on the elation from earlier in the year. Although all of the numbers are still positive, the March West Michigan index for the SHORT-TERM BUSINESS OUTLOOK, which asks local firms about the perception for the next three to six months, eased to +35 from +42. In a similar move, the LONGTERM BUSINESS OUTLOOK also retreated to +40 from last month’s +44. Many businesses are still waiting to see the impact, if any, of the new tariffs. A trade war would be devastating to the relative tranquility of the current world economy, but the odds of such a war seem to be declining as the tariff negotiations continue to unfold.

Overall Economy. The stock market, which is now controlled by computers talking to computers, will probably continue to fluctuate with current news events until the threat of a possible trade war has passed. Our automotive parts suppliers should remain on sound footing, but the office furniture industry continues to show signs of topping out. Very little stands in the way of our local economy as we head into the summer season. Even the geopolitical situation shows signs of improving, although no one knows for sure what major event may be just around the corner.