Setting Aside the Lackluster for More Normal Slow Growth in Industrial Economy

Following a lackluster July report the man with the pulse of the West Michigan Industrial Economy says a more normal pattern is re-emerging even in the face of U.S. tariffs that continue to cause consternation worldwide. Grand Valley State University Professor Brian Long’s newly released August report says the more normal pattern of “slow growth” has re-taken the market.

Dr. Long, who serves as Director of Supply Chain Management Research at Grand Valley, tells us that after a modestly negative report last month, the West Michigan industrial economy has assumed a more routine picture. Long says that according to the data collected in the last two weeks of August, his widely watched index of New Orders — a measure of business improvement in the region — came in at +21, up significantly from last month’s report of -3.

Meanwhile, his West Michigan Production Index tapered to +16 from +23, “Probably because of last month’s unexpected flat sales report.” Long reports that his Purchasing Index, however, edged higher to +15 from +13. Long reasons, “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.”

When the Professor turns his attention to individual industries, he finds that slow growth has returned to most sectors. He notes, “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,” adding, “Auto sales continue to soften in the traditional sedan sector, but the light truck/SUV segments are doing well.” Long contends that so far, the market shift has been fairly orderly, and local firms are adapting.

The office furniture business continues to benefit from the new tax structure, so the outlook for most firms remains positive, according to Long’s accumulated data. He also points out that the local firms producing capital equipment are also back on track after last month’s hesitation. On another front, business conditions for the industrial distribution market remained seasonally flat in the current report period.

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.

Long says, “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.”

Long’s August Employment Index came in at +21, unchanged from the previous month.

Long admits that although the fear of a recession is always present, the mood of local industrial firms remains “cautiously positive.” He says the West Michigan index for the Short Term 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. Long suggests, “Although these readings are lackluster, they still do not indicate any significant level of pessimism about the current economy.”

In summarizing his monthly data, Professor Long says, “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.”

As is standard procedure in Long’s West Michigan Industrial Economy report, he shares a number of verbatim anecdotal comments to deliver a bit of the flavor to the raw numbers. Here are some of the comments shared in his report:

“The labor market is beginning to be problematic.”
“Overall, we continue to remain very busy, and automotive is plugging ahead. Sales are good, but margins are shrinking a bit.”
“Not seeing many changes since July. We’re struggling a little to get rolls of paper. Our raw material inventory is down slightly due to that.”
“Costs for freight are hard to manage with the shortage of drivers.”
“The trend is typical for this time of year.”
“Price increases for raw materials are continuing. We have no choice but to pass it on to customers.”
“A slowdown has begun. July was down from June slightly, and August looks like it will be the worst month of the year. Hopefully, it doesn’t get worse.”
“Tariffs are affecting raw material prices.”
“We’re still doing quite well, and expect 2018 to close with another banner year for us.”
“Tariffs are causing headaches, and how to pass on the costs to our customers is a big question.”
“Production is on the rise for us, especially on the automation and fixtures side of our business. Both our tool and die and automation and fixtures companies are booked out for months at the moment.”
“Business is good with new projects coming on board for future business.”
“We have a very robust outlook.”
“We are starting to see orders fall off for August and September.”
“We’re still spending a lot of time and resources preparing for the tariffs, and preparing for a very large impact if the next 25% hits.”
“Tariffs have opened Pandora’s box on price increases.”
“If the next round of China tariffs are increased from 10% to 25%, it is going to hit us hard.”
“Tariffs are scaring prices upward.”
“Sales are starting to pick up. An unusually long downturn this year seems to be coming to an end.”