West Michigan Industrial Economy Softens to the Point of Ouch!

The growth rate of the West Michigan Industrial Economy has softened to the point that the man who tracks the numbers on a monthly basis now fears that, “At minimum, we are headed for a worldwide slowdown. At worst, we are drifting into a worldwide recession.”

Professor Brian Long, Director of Supply Management Research at Grand Valley State University, opens his July survey report with the sobering news, saying, “Regrettably, the pace of the West Michigan industrial economy has now turned negative.”

Long concludes that one month does not constitute a trend, but his immediate reaction was simply, “Ouch!”

Long routinely conducts his monthly survey through contact with West Michigan manufacturing firms to determine the overall health of the industrial economy. His most closely-watched index of business improvement, his New Orders Index, dropped substantially to -13, down from +10 in the month of July alone. He adds that in a similar move, July’s Production Index fell to -15 from June’s +11.

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One brighter spot was reflected in activity from the purchasing offices which he contends “fared a little better,” but adds, “Our Purchasing Index still declined to -6 from +12.” Long tells us, “Just as last month, the anecdotal comments from our survey participants continue to be mixed. However, many firms are starting to feel less certain about the future.”

Long turns his attention to next to the Office Furniture market, saying, “It is worth remembering that 14-percent of the world’s office furniture is made here in West Michigan. Hence, the brightest spot in this month’s West Michigan economy comes from Mike Dunlap’s quarterly report on the health of the office furniture industry.” Long says, “Except for Capital Expenditures and Tool Expenditures, most of his indicators are up substantially from April’s rather cautionary report. In particular, Gross Shipments jumped from 57.7 to 74.0, and Order Backlog rose to 71.5 from 55.0.”

Dunlap himself says, “We feel good about where the industry is currently. The effects of the next round of tariffs are still too early to predict, but it is reasonable to believe that it will dampen third and fourth quarter numbers. The overall economic growth will likely affect this industry. In spite of the first quarter declines, we believe that the industry remains very strong. The ‘Big Nine’ are generally doing very well. However, it is the smaller ‘under $50.0 Million sales and fewer than 250 employees’ companies that are driving this industry.”

Looking at the bigger picture of the overall U.S. Economy, Dr. Long says his parent organization, the Institute for Supply Management, reported a New Orders Index number that retreated to a negative reading of 2 for the first time in seven years. In a similar pattern, the nation’s Production Index for July slipped to -1 from +12. He says the national overall index eased to 51.2 from 51.7.

In the all important automotive sector, Long turns to the August 1st report from Automotive News, which indicated that sales for the industry dropped a scant 1.1-percent in July, but still left the industry’s Seasonally Adjusted Annualized Rate with an estimate of 16.6 million units, down from July’s 17.3 million. However, Long notes, “The Detroit Three have all decided to quit posting monthly sales figures and will now only report quarterly. Sales for Ford, GM, and Fiat-Chrysler have generally fallen at a rate faster than the rest of the industry, allowing these firms to average out their sales irregularities by only reporting quarterly. Among the firms still reporting monthly, the major nameplates on the down side were Mazda at 3.5-percent and the Nissan Group shedding 9.1-percent. On the up side, Subaru added 7.9-percent, Hyundai-Kia gained 7.1, Honda added 2.5-percent, and Toyota edged up a scant 0.40-percent.”

Jeff Schuster, head of global vehicle forecasts at LMC Automotive, further notes:  “There are signals that auto sales in the second half of 2019 are poised to outperform expectations. While trade risk remains a threat, transaction prices continue to rise and economic growth is moderating, sales in the second half of the year could outperform expectations consistent with strength in the previous five years.”

Another area of concern voiced by Professor Long at Grand Valley comes in the arena of Business Confidence. He reports that for July, West Michigan’s Short-Term Business Outlook, which asks local firms about the perception for the next three to six months, “retreated to a near all-time low of +6, down from June’s +20.” However, the index for the Long-Term Business Outlook, which queries the perception for the next three to five years, “remains more stable and edged slightly higher to +28 from June’s +24. Both of these indices are heavily influenced by the current news cycle, which has been fairly negative for the past few weeks.”

Summing it all up, Dr. Long says, “At minimum, we are headed for a worldwide slowdown. At worst, we are drifting into a worldwide recession. As evidenced by the July gain in Consumer Confidence, the weakening industrial market is still being offset by a strong consumer economy. Trade wars, Brexit fears, and unstable politics in the Middle East continue to weigh on business confidence around the world, and West Michigan is not immune. We can continue to hope that wiser minds will prevail in trade talks between China, the U.S., Britain, and Europe, but conditions may have to get worse before they can get better.”

He adds, “A tariff war, like any war, is a lose-lose battle. Like any war, the objective is to make the other party lose faster than you are. Right now, it is uncertain whether the U.S. or China is losing faster. What we do know is that this war is starting to have a significant bite on the U.S. economy. Key comments from two of this month’s survey participants note that some firms are actively looking for new sources outside of China. Hence, the Chinese may soon discover that they are permanently losing sales.”

Long’s policy in his monthly survey is to share anonymous, verbatim anecdotal comments from survey participants, and here are some of those comments from the July survey:

  • “We have been lucky, and have not had many items in short supply. I believe this is because all mold shops are slow at the moment, so suppliers have proper stock levels of items.”
  • “Transportation costs continue to increase, and drivers are becoming hard to find.”
  • “Tariffs continue to impact our bottom line and increase the cost of doing business with China. A majority of our efforts are focused on re-sourcing, or potentially re-shoring, a lot of our high dollar components. “
  • “We are still quite busy, but August looks like it may be tapering off.”
  • “We are still holding our own. The economy continues to feel like it’s getting softer.”
  • “Finding enough production workers is still a challenge.”
  • “June was down from a really strong May. May was biased by some windfall orders.  June was more ‘normal.’”
  • “July looks like a vacation month. Orders are coming in mighty slowly.”
  • “Things are heating up.”
  • “We are recording record sales and profits. Business is very strong with a positive outlook. Labor remains the biggest challenge for us and our suppliers.”
  • “We will incur $1 million in tariffs this year.”
  • “One large, unexpected project saved our month. Otherwise, it has been slower than expected.”
  • “Business appears to be strong yet unstable.”
  • “We’re very busy right now.”
  • “Tariffs have actually helped with new business. Customers want their product pulled out of China, allowing us to have new opportunities elsewhere.”

You can see Professor Long’s complete report by clicking the link below: