Recovery of West MI Industrial Economy Picks up Steam

Cautiously optimistic that the West Michigan Industrial Economy is “headed in the right direction,” there is also the fear that recent rebounds stem largely from simple pent-up demand rather than real, sustainable growth. The assessment comes from the latest survey from Dr. Brian Long, Director of Supply Management Research at Grand Valley State University.

Professor Long’s latest monthly survey detailing the conditions of the West Michigan Industrial Economy show the marketplace recovery is “picking up steam — for now.”

Long says that with many West Michigan production facilities resuming marginal operations, the pent-up demand has brought the latest statistics “back closer to break-even.” According to the data collected in the third and fourth weeks of June, Long’s closely-watched New Orders Index of business improvement came in at -7, considerably better than the -32 index reported for May.

In a similar move, the June Production Index rallied to -11 from -35. The June activity in the purchasing offices, Long’s Purchasing Index also recovered to -13 from -32. The Professor writes, “Although all of these readings remain modestly negative, the improvement over just two months ago is obvious. Some survey participants are still working from home, and others are working on reduced office sharing schedules to help accomplish more social distancing.”

Additionally, Long contends, “Some of the factory re-openings have been thwarted by kinks in the convoluted supply chains we have built over the last two decades. In some instances, new suppliers need to be located to fill supply chain gaps. Although most factories have successfully enforced face masks, regular facility decontamination, and social distancing, increased social activities outside of the workplace may be causing the number of Covid-19 cases to re-escalate. Hence, we can expect next month’s survey statistics to remain near the current levels, unless the current situation grows worse.”

Turning his attention to the all important automotive sector of Michigan manufacturing, Dr. Long reports that according to Automotive News, sales for the first half of 2020 were off by 27.7-percent. “With customers depleting dealer inventories and only about 60-percent of the assembly lines reopened, the sales numbers for the remainder of the year will probably remain soft.” So far, the drop in sales has not been nearly as steep as some had expected.

Looking at the sales figures for the 2020 second quarter for the Detroit Three, General Motors sales declined by 34.0-percent, FiatChrysler slid 38.7-percent, and Ford lost 33.0-percent. For other major nameplates, Toyota second quarter sales were down by 34.6-percent, Honda lost 28.0-percent, Hyundai-Kia dropped 24.8-percent, and Subaru fell 25.3-percent. Almost all brands reported that a significant drop in fleet sales resulted in about half of the decline.

Chief Economist Jonathan Smoke at Cox Automotive struck a cautious note, saying, “The market is losing the upward momentum that it enjoyed in May and early June. The challenge ahead begins with the increasing number of COVID-19 cases that’s causing consumer sentiment to decline again. It also appears the pent-up demand that gave us a much stronger recovery in May and June is waning. Dealer inventory remains challenged as well. When you add it up, it looks like the industry will be heading into an even more challenging sales environment in July.”

Looking at employment numbers, Professor Long writes, “Fortunately, many of our local manufacturing firms have resumed at least partial production schedules. Although still negative, the June West Michigan Employment Index recovered to -13, up from -38. At the state level, the June 25th unemployment report for the month of May released from Lansing’s Department of Technology Management and Budget reported that state-wide unemployment improved modesty to 21.2-percent from 24.0-percent, the third highest in the nation. Of the 83 counties in Michigan, the estimated unemployment rate ranged from 12.3-percent to 30.3-percent.

From an industrial inflation point of view, the West Michigan Price Index for June returned to the break-even point of +0, up from May’s -7.

Long says in addition to capital equipment manufacturers, there are three cyclical industries in West Michigan that must be watched, Automotive, Office Furniture and Aerospace. He suggests, “At present, it appears that automotive stands the best chance for recovery over the short term. The office furniture industry is shipping orders that were placed before the crisis, so we don’t know what the October order books will look like. Home offices will become a bigger market in the future, but our local firms do not seem to have many entries for this market.” On that front he concludes, “We will need to see Mike Dunlop’s quarterly report on the office furniture industry to see where we really stand.”

As Dr. Long turns his attention to the business outlook going forward, he first paraphrases King Solomon, saying, “This too shall pass.” He adds, “Fortunately, our Short Term Business Outlook Index continues to recover. The June survey, which asked local firms about the business perception for the next three to six months, came in at -8, modestly better than May’s -15 and vastly improved over the record low of -47 recorded in the March survey.” Long adds, “For June, the Long Term Business Outlook Index, which queries the perception for the next three to five years, remained positive but retreated to +26 from +33.” He concludes, “With many venues beginning to reopen in late June, some of the general public may have become overly optimistic. Although economists polled by Dow Jones had expected June Consumer Confidence to rise to 91.0 from a May reading of 85.9, the Conference Board’s confidence index surprisingly rose to 98.1 for the month. Given the recent surge in Covid-19 cases, it is doubtful that these numbers will continue to rise.”

In wrapping up his general commentary before moving on to anecdotal responses from survey participants, Long gets philosophical to a degree, saying, “It is worth repeating the same warning for the Nth time. This crisis WILL NOT be over until we have a viable vaccine that can be widely disseminated to the entire world. Until then, the economy will be restrained. In the short term, we cannot be fooled by a bounce triggered by pent-up demand. The good news, of course, is that there are hundreds, if not thousands, of scientists with modern equipment scrambling to come up with a solution. Furthermore, numerous production labs around the globe stand ready to duplicate the vaccine once it has been identified. Short term, we can mitigate the damage with face masks, social distancing, increased sanitization, and comprehensive screening tests. Again, ‘this too shall pass.’”

As has long been his practice, the Professor shares a series of verbatim, anonymous, anecdotal comments from those taking part in the survey, and we share some of those with you here:

“Business is down 30% from where we thought we would be prior to Covid-19. We have not reduced workforce, and there are no plans to do so. This remote working is becoming old.”
“We’re feeling the effects of Covid-19 on our business.”
“After several months of automotive sales being almost non-existent, we are seeing the month of June look to be almost back to pre-Covid-19 planned numbers.”
“Automotive is coming back pretty fast. June and July should be good months for our U.S. market, and the China market continues to do quite well.”
“We’ve seen a slow start-up for the auto industry. New vehicle programs are being delayed, and some maybe cancelled.”
“Business prospects for the next 6-12 months are still up in the air, given that we sell capital equipment.”
“Sales are slowing even more. Our workforce is reduced to 4-day weeks until sales pick back up.”
“Our business is the slowest it has been since 2009.”
“Some suppliers running on tighter labor and shifts are taking longer to turn around orders.”
“We have not recovered from shutdown/lockdown yet.”
“We continue to do well, Only time will tell how the economy goes.”
“We anticipate a sales decrease of 35-40% in the short term.”
“2020 is looking to be a break-even year at best.”
“More of the same. Bhhhhhh.”
“Hopefully, the small companies survive this.”
“In a nutshell, 2020 sucks.”