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Still Facing Employment Issues, the Recovery for the West MI Industrial Economy Continues to Soar

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While staffing issues continue to plague many manufacturers across the region, virtually all industrial firms are back to work as the West Michigan Industrial Economy’s recovery “roars.” That’s the thumbnail assessment of Dr. Brian Long, Director of Supply Chain Management Research at Grand Valley State University in his monthly recap on the state of the region’s industrial health.

Long tells us that according to the data he collected over the last two weeks of April, the West Michigan industrial economy “continues to expand at a significant pace.” His all-important New Orders Index, the index of business improvement, posted in at +46, just slightly below the previous month’s +51.

The Production index, which is termed “output” by many economists, remained strong but tapered modestly to +29 from +33. Meanwhile, activity in the purchasing offices, Long’s Purchasing Index, eased to +44 from +51. Professor Long says, “Just like last month, much of the industrial market continues to experience spot shortages and shipment delays for a wide range of industrial commodities with no immediate end in sight,” and adds, “This month’s index of Lead Times set another record of +93, which in turn kept the Price Index at near record levels. In general, the mood has turned cautiously optimistic, although many supply chain professionals find themselves at record levels of stress.”

Long notes, “Further expansion in the region is severely limited by the inability of many firms to hire additional workers.” Fortunately, he suggests, “Industrial inflation — so far — is not spilling over to the consumer sector. The rate of inflation for the national and international surveys are at near record highs, so something’s gotta give!”

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Dr. Long notes that although some analysts suggest that the industrial markets should begin to normalize by late summer, Chris Williamson, Chief Business Economist at IHS Markit, shared this analysis: “U.S. manufacturers reported the biggest boom in at least 14 years during April. Demand surged at a pace not seen for 11 years amid growing recovery hopes and fresh stimulus measures. Supply chain delays worsened, however, running at the highest yet recorded by the survey, choking production at many companies. Worst affected were consumer-facing firms, where a lack of inputs has caused production to fall below order book growth to a record extent in over the past two months as household spending leapt higher. Suppliers have been able to command higher prices due to the strength of demand for inputs, pushing material costs higher at a rate not seen since 2008. Attempts to expand capacity via hiring extra staff gained further momentum, though in some cases staff shortages were an additional constraint on production. However, with confidence in the outlook continuing to run at one of the highest levels seen over the past seven years, buoyed by vaccine rollouts and stimulus, further investment in production capacity should be seen in coming months, helping alleviate some of the price pressures.”

Turning attention specifically to the auto industry sector, Dr. Long says, “Most every major news outlet has made mention of automotive production at many different plants being inhibited by the worldwide shortage of computer chips. As a result, many auto dealers are down to minimal inventories in a market where consumer demand continues to rise.” He adds, “Last month, Automotive News posted sales for the first quarter which greatly exceeded expectations. Although the Seasonally Adjusted Annual Rate for March posted at a respectable 16.5 million units, the April rate vaulted to 18.5 million units, a near-record high. Pent-up demand, consumer liquidity fueled by the stimulus outlays, low interest rates, and rising consumer confidence were all cited as reasons for the strong April report.”

Although most auto manufacturers are now reporting quarterly, those who still report monthly included Hyundai Kia, up 127.1-percent year-over-year, Toyota rising 182.6-percent, Honda gaining 171.0-percent, and Ford adding 64.8-percent. Of course, in April of 2020, almost all showrooms were closed, so 2021 sales were widely expected to double. Brian Finkelmeyer of Cox Automotive further comments: “The market is being driven by inventory right now, not incentives, and it is only getting worse as the chip shortage continues. Most dealers are scrambling to secure inventory in any way they can. Those who aren’t paying close enough attention are losing out to those who are managing it more efficiently. The industry’s average supply of vehicles — 65 days in an ideal market — is on track to fall into the 30s soon.”

Shifting his focus to the realm of employment, Dr. Long notes that for March, which was the latest moth of data available for his report, Michigan unemployment edged down to 5.1 from 5.2-percent. He adds, “Although many firms have numerous vacancies, there simply isn’t anyone left to hire. Hence, for our West Michigan survey, the Employment Index came in at +23, down significantly from the ten year high of +40 reported last month. Except for numerous pockets of weakness in the office furniture business, the West Michigan industrial economy remains on a roll. The major segments of COVID-19 unemployment in West Michigan remain in the entertainment and hospitality industries, not with the industrial firms.”

When it comes to future forecasting, Professor Long relies on a measure of confidence from the local industrial sector and reports that such confidence “appears to be stabilizing.” He tells us that the Short-Term Business Outlook Index for April, which asks local firms about the business perception for the next three to six months, rose modestly to +44 from +41. For the Long-Term Business Outlook Index, which queries the perception for the next three to five years, the index was virtually unchanged at +39, down from +40. Both of those measurements are now at or near three-year highs.

Summarizing things, Professor Long suggests that, “By almost any standard, 2021 will be a historical year for the U.S. economy. The average estimates of annual growth are running between 7- and 9-percent, which will be the fastest growth rate in over sixty years. Needless to say, a growth rate of this magnitude is not sustainable. It is being fueled by unprecedented peace-time borrowing, massive stimulus packages, low interest rates, and the hope that inflation will somehow be held at bay.” He adds, “The current wave of industrial inflation has not spilled over to the consumer market, and the Federal Reserve leadership contends that a new round of inflation is unlikely. Hence, some economists are looking ahead to 2023 and 2024 when most of the stimulus money has been spent and the debt levels of all types will be at record highs,” and concludes, “Their concern is justified.”

As is his routine practice, Dr. Long shares verbatim comments from survey participants in an anonymous fashion to provide a bit of flavor to the data being mined each month. Here are some of those comments from his April report:

  • “COVID is limiting the availability of current staff and hampering the hiring process.”
  • “Most commodity prices are experiencing upward pricing pressure and longer lead times.”
  • “If we can just get through the next (6) months things should hopefully settle down and opportunities will rebound.”
  • “With lead times extending out even further than promised from the majority of manufacturers, we are seeing the demand start to far outpace the supply chains.”
  • “We’re working hard to keep up with automotive demand. Labor is an issue. Steel lead times and logistics delays continue to plague our supply chain.”
  • “Extremely strong demand, limitations on input materials, and labor are capping our ability to meet demand. Upward price pressure is coming from all areas.”
  • “The politicians are going to drive the inflation of this country. Outrageous.”
  • “Demand is outstripping supply for all major commodities leading to longer lead times and higher prices.”
  • “Steady recovery!”
  • “I’ve never seen this much dysfunction in the marketplace. I’m retiring.”
  • “Strong sales continue, and we will exceed forecast again this month. I’m unsure if it’s a short-term blip, or longer trend. Prices are rising everywhere, with huge delays in international freight, domestic vendors are lacking capacity.”
  • “Customers are busy, but complaining that they cannot find quality employees to expand their business.”
  • “We continue to struggle with labor shortages.”
  • “This month is better, and the quarter ended strong. Now, if we can just keep it going.”
  • “This market is crazy!”
  • “This month was strong, but we’re starting to get more short-term disruptions due to supply chain issues at the automotive OEMs.”
  • “Electronic shortages continue to plague the auto industry. Outside of the electronics shortages, there are other significant shortages as well as material price increases.”

To see the full report as filed by Professor Long, click this link: gr-2021-05