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Dr. Long’s Monthly Analysis Shows Recovery Slowing in West Michigan

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MoodyOnTheMarket.com is privileged to receive an in-depth economic analysis each month from Dr. Brian G. Long, the Director of Supply Chain Management Research at Grand Valley State University.  Dr. Long looks at the economic and employment numbers from a West Michigan perspective and gives us his conclusions.  Those conclusions have been getting a bit less positive as 2021 progresses.  And this month is no exception.   Long’s headline:  The Recovery Slows.

Here are his summary points, followed by excerpts from his detailed report.

—   NEW ORDERS, our index of business improvement, came in at +14. Not super-strong, but typical of the recovery from most recessions once the initial pent-up demand has been satisfied.

—   The on-going chip shortage has washed backward into the automotive supply chain, causing slowdowns or temporary stoppages in production.  The PRODUCTION index has tapered to +11.

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—  Staffing continue to be a major problem for many firms, even though some have raised their starting wage and offered “signing bonuses.” Many economists are concerned that we could be developing a wage-price spiral.

—  Despite the Covid “Delta Variant,” , the JPM international survey posted at 54.1, only a little below the all-time high of 56.0 set in May. The supply chains of the world continue to show no sign of returning to normal.

—  The index of PRICES, at +69, is still near the record high of +85 set in March.   .

— The Index of EMPLOYMENT remained positive at +19, but would be stronger if there were people to hire. With some of the generous unemployment benefits coming off line, there is speculation that the employment situation will improve in coming months.

— At the national level, the ISM index of NEW ORDERS came in at +29, below the 17-year high of +41 set in April, but still strong. In addition, the IHS Market U.S. Composite Index (PMI) came in at 61.1, a little below last months’ record high of 63.4.

— Auto dealers have had their lots stripped clean, and the chip shortage has severely restricted production.  Automotive News is now projecting that the shortage may run well into mid-2022. Ouch.

—  Are we somehow building another bubble? If we are, another black swan event could be devastating. It seems that the prospect for inflation returning to normal in both the consumer and industrial markets continues to be progressively elusive.

—  Worst case: It is the job of the Federal Reserve to guard the integrity of the dollar, and runaway inflation would demand decisive action, i.e, raising interest rates. However, our economy has now become addicted to ultra-low interest rates, and even minor adjustments could quickly change the economic landscape.

Doctor Long expands on his analysis with this overview of his latest research:

Although still positive, the recovery for the West Michigan industrial economy has slowed considerably in recent weeks. NEW ORDERS, our closely-watched index of business improvement, posted at +14 for August, well below the peak of +57 reported earlier in the year. The August PRODUCTION Index, which is now termed “output” by many economists, followed a similar pattern, and eased to +11. Aside from wrestling with numerous ongoing logistics problems, rising prices, and shortages of critical materials, activity in the purchasing offices, reflected in the index of PURCHASES, eased to +17. Unfortunately, most of our survey participants see no end in sight for many of these problems. For some firms, the complications have actually worsened in recent weeks, although this month’s index of LEAD TIMES eased modestly to +75 from the survey record of +93 set four months ago. To provide some context, our 25-year average for this index is +11. Needless to say, some firms are beginning to lose confidence in where the economy is headed.

Much of Michigan’s economic fortunes are still tied to the Automotive sector.  Here’s Dr. Long’s current perspective on Automotive:

By now everyone in the business world is fully aware that the world-wide chip shortage is hampering auto production for almost every nameplate in the world. Dealer lots are predominately empty, and potential new car buyers are annoyed by the lack of selection and the dealer’s unwillingness to negotiate on price. Attempting to track industry performance, the Automotive News editors remain frustrated by many of the major firms continuing to post sales only at the end of each quarter. However, one analyst estimated that market share for the Detroit Three in August dropped to 38.1 percent for the month, a decline of 6.7 percentage points from the same period last year. Ford does still report monthly, and August sales fell 33.2 percent. Honda America skidded 15.6 percent, Subaru of America’s sales dropped 14.7 percent, but sales at Toyota, who claims to have better supplier relations with their chip suppliers, eased by only 2.0 percent. One the positive side, Mazda sales climbed 4.6 percent in August, and Volvo sales rose 3 percent. Share-wise, the Asian nameplates now account for about 52 percent of the U.S. market, while European automakers have a 10 percent share.

Here in West Michigan, Long says it’s all about who’s working, who’s not… who wants to work and who doesn’t:

West Michigan Unemployment. The Bureau of Labor Statistics reported on September 3 that the national rate of “headline” unemployment fell to 5.2 percent in August. This is better, but still a long way from the 3.5 percent rate posted two years ago. Given that the $300 weekly federal unemployment bonus program has ended as well as other state unemployment benefits drawing to a close, some analysts are predicting that the September unemployment rate will fall to about 4.6 percent when reported in early October. For Michigan, the July (latest month available) unemployment rate edged down to 4.8 from 5.0 percent. Many frustrated industrial firms have numerous vacancies, but there simply isn’t anyone left to hire. Hence, for our West Michigan survey, the index of EMPLOYMENT came in at +19, down significantly from the tenyear high of +40 reported in March. Temporary layoffs are popping up among the auto parts suppliers because of parodic shutdowns at the auto assembly plants that run short of computer chips. Significant personnel shortages still remain in the hospitality and service industries as well, but the situation is beginning to improve. However, a recent survey by the National Federation of Independent Businesses found that 49 percent of all business owners are still reporting job openings that they cannot fill.

Several major economic forces are at odds and the Inflation Rate is essentially scorecard of that battle, according to Professor Long:

Industrial Inflation. Although our local index of PRICES set a record of +85 last April, the August posting of +69 is still far above the survey’s 25-year average of +15. We are still caught in a cycle of both traditional demand-pull and cost-push inflation. Almost without exception, all major commodities are still either rising in price or remining at lofty levels. At the national level, there is now at least some hope that the situation MAY be heading in the right direction. Although the ISM national index of PRICES eased to +59 from the recent 41- year high of +84, the industrial inflation rate remains very high. The J.P. Morgan world index of PRICES eased modestly to 70.4 from last month’s record-setting 71.2. According to Timothy Fiore, chair of ISM’s survey committee: “Aluminum, electrical and electronic components, energy, plastics and plastic products, freight, and steels continue to remain at elevated prices due to product scarcity, but supply and demand dynamics appear to be moving closer to equilibrium, as stated in recent months.”

From his vantage point at Grand Valley State University, Dr. Long points to the cautionary signals that may be precursors of an inflationary cycle.  The ‘medicine’ that would be administered by the Federal Reserve Board—higher interest rates—is NOT going to sit well with the ‘patient’—US consumers and businesses:

Are we somehow building another bubble? If we are, another black swan event could be devastating. It seems that the prospect for inflation returning to normal in both the consumer and industrial markets continues to be progressively elusive. It is the job of the Federal Reserve to guard the integrity of the dollar, and runaway inflation would demand decisive action, i.e, raising interest rates. However, our economy has now become addicted to ultra-low interest rates, and even minor adjustments could quickly change the economic landscape.