Summer Doldrums for West MI Economy

Thanks to vacations and a multitude of summer activities, Professor Brian Long of Grand Valley State University considers August to be a “non-big-decision” month. Sure, routine work gets done, but in a corporate setting, it is hard to get everyone together to make major decision. Pretty much the same category December ends up in due to the holiday season. So…Long’s monthly report on Current Business Trends in the West Michigan Economy doesn’t hold much to get either excited or alarmed about on either side of the coin.

As Director of Supply Chain Management Research for GVSU, Long assembles a monthly report on the state of the West Michigan industrial economy as a measure of the state of affairs in multiple industrial sectors. Now that summer is over, Long’s latest report covers the last two weeks of August.

His all important New Orders Index of business improvement remained positive, but backtracked to +6 from +10 in July. In a similar move, the Production Index tapered to +6 down from +18, and his Purchasing Index, which tracks activity in the purchasing offices across the region, fell sharply to -3 from a reading of +14 the previous month. The inventory indexes, representing Finished Goods and Raw Materials, continue to show inventory accumulations well above normal.

Long says that nevertheless, “Despite dubious numbers from earlier in the year, the Southwestern Michigan economy remains slow but stable.” He notes that additionally, most of the anecdotal comments from the current month’s survey participants are positive, even though there is “at least some uncertainty about the last few months of the year.”

Long reiterates that “For corporate America, August is a month when big decisions are often deferred. In the waning months of summer, we are drawn to summer activities and summer vacations. For automotive, the major manufacturers switch production to the new model year in July and August and also take a week or two of downtime to balance inventories.” He points out that “September is a back-to-work month, so we will hope to see some improvement in our next report.”

Looking at various industrial groups, a quarterly survey of the office furniture industry released at mid-month came in at an optimistic reading of 56.03, only a little below the July 2005 record of 59.72. He notes that office furniture survey respondents were “less optimistic, and tend to depict the current market as somewhat saturated.”

In a similar vein, the auto parts producers are beginning to feel the pinch from declining auto sales in certain segments, such as traditional economy cars. For most automotive suppliers, however, Long says, “Business conditions are still good, but there is a feeling that the last half of the year will be a little less robust.

Most industrial distributors are stable, but three of the current respondents turned in strong results. The capital equipment industry “remains checkerboard because of the large variations from industry to industry.”

Turning to Business Sentiment numbers for August, things remains positive and the overall pattern was little changed. The Short Term Business Outlook, asking about perceptions for the next 3-to-6 months, was virtually unchanged at +15 down from +16 in July. The Long Term Business Outlook, depicting perceptions for the next 3-to-5 years, rose modestly to +46 from +39.

Long says that from comments by the survey participants, “We know that the shortage of workers has inhibited our economic growth in West Michigan for the past three years. It now appears that the situation is getting worse.” He reports that several firms have put expansion plans on hold because they do not believe that they can find enough qualified workers to perform the necessary tasks.

Nevertheless, Long says, “It is worth repeating that there is no indication that we are sliding toward a recession. If anything, the latest round of statistics from our local survey and other PMI surveys around the world have depicted stable but slow growth conditions.” He concludes, “Slow growth is still better than no growth.”

Here is a sampling of the verbatim anecdotal comments from survey participants in August:

“We are busy this month. At this time, September and October look slower.”
“Our backlog is good throughout the fourth quarter, but new PO’s are showing signs of softening.”
“We are seeing a little softening in our forecast for September and the fourth quarter.”
“We are starting to receive price reductions on some components by moving some purchases to India and China from the U.S.”
“Orders are good, but it is hard to find operators to run the machines.”
“August was a very good month for us. Sales are twice as high as last year.”
“Our business has come back to our budgeted plans after a few months of softer schedules.”
“It’s been a very busy summer! We’re hoping to get all of the construction projects completed before the snow flies.”
“Business is pretty flat compared to last month, and last month was slow. It’s kind of in the blahs right now.”
“Our short term sales outlook is down due to some regional aircraft orders slipping out to the back half of the year. Employment down as management is holding back on hiring until it becomes more certain that the sales will be back.”
“The third quarter ended strong, and the fourth quarter forecast is solid.”
“The end of the year is coming quick, and releases appear to be strong.”
“Bullish is our attitude.”
“We are very busy. Our production is running 24/6 to keep up. Production workers are in short supply.”