West MI Industrial Economy Picks Up Speed in Recovery

If you want proof that the West Michigan Industrial Economy has picked up the economic bounce that had been anticipated, look no further than the help wanted ads. As an increasing number of employers report difficulty in finding enough workers to get the job done, it’s clear that the expected bounce has arrived.

Dr. Brian Long, Director of Supply Chain Management Research at Grand Valley State University is out with his monthly survey results today, highlighting the numbers important to the West Michigan industrial economy. He tells us that according to the data collected in the third and fourth weeks of August, his closely-watched New Orders Index, the index of business improvement, came in at +19, up nicely from July’s +12. The August Production Index remained virtually unchanged at +13. Activity in the purchasing offices, his Purchasing Index, was also essentially unchanged at +10.

Professor Long says, “Just like last month, some of our survey participants are still working from home, and others are working on reduced office sharing schedules to help accomplish more social distancing. While some firms are still struggling, others are already back at full capacity.”

Pointing to one of the toughest things a healthy market faces, Long says, “Furthermore, some survey participants report that they are again having difficulty finding enough workers, especially workers with specific skills. If this trend continues, our unemployment rates will continue to fall. That said, the recovery from every recession in recent memory has begun with a surge in pent-up demand.” The professor continues, “After the initial surge, we begin to see the permanent damage that the recession has wrought. The proverbial ‘rising tide lifts all boats,’ so the steady improvement in the world economy will clearly be a plus for the U.S. economy going forward.

Although the West Michigan unemployment rates continue to be very high, Dr. Long’s August Employment Index returned to a positive reading of +13, up from July’s -4. At the state level, the August 27th unemployment report for July released from Lansing’s Department of Technology Management and Budget reported that state-wide unemployment improved to 8.7-percent, down significantly from June’s 14.9-percent. Of the 83 counties in Michigan, the estimated unemployment rate ranged from 6.6-percent to 13.2-percent.

The professor notes that the industrial market is still full of shortages, saying, “Suppliers that are slow to reopen, reduced shipping schedules, and convoluted supply chains have stretched lead times to 10-year highs.”

He also notes, “Unlike previous recessions, the economy was already in fairly good shape before the crisis hit. West Michigan had recorded a near-record increase in job growth, and many firms were scrambling to find people. Furthermore, as everyone is well aware, a significant number of West Michigan firms that were deemed ‘essential’ were never shut down, and are still booming. This is not typical of any post-war recession.”

Turning to industry sectors, Long says that in the automotive world, “So far, the drop in sales has not been nearly as steep as some analysts had expected. However, a combination of factory shutdowns, depleted dealer inventories, relative high unemployment, weak consumer confidence, and lower incentives are all weighing on the outlook for automotive sales for the rest of the year.” For those firms still posting monthly sales figures, Toyota August sales were down by 24.6-percent, Honda lost 23.0-percent, Hyundai-Kia dropped 7.5-percent, and Subaru fell 17.4-percent. Almost all brands blamed a major portion of the decline on a significant drop in fleet sales.

Jeff Schuster, president of Americas operations and global vehicle forecasts at LMC Automotive, further commented: “The global auto sales recovery is accelerating. Wild cards for the remainder of the year include the U.S. presidential election, financial stimulus programs, and any specific vehicle purchase incentives, so uncertainty is still at an elevated level. Supply and inventory are still expected to be a challenge in high demand segments going into the fall, due to factory shutdowns this past spring. Additionally, a potential second wave of shutdowns during the fall and winter seasons remains a concern.”

On the office furniture front, Dr. Long suggests that things are more “problematic.” He argues, “It is somewhat obvious that corporate America is in the process of redefining the traditional office concept. Many people who were virtually forced to work from home have now indicated that they would prefer to permanently work from their own at-home workstation.” He contends that West Michigan office furniture makers have developed few products geared toward the home office concept, and “it seems uncertain how long it will take for our local firms to turn the corner and service the new office reality.”

When looking at industrial inflation, Dr. Long says, “Our West Michigan Price Index for August flipped back to positive for the first time in four months to +9, up from -4. For the ISM national survey, the index of PRICES rose sharply to +19, up from +7.”

Turning his attention to business confidence, the professor says, “Most measures of confidence tend to be driven by the current news cycle. Hence, the August news cycle, which included the political conventions, yielded a slightly different view of the future. Our Short-Term Business Outlook Index, which asks local firms about the business perception for the next three to six months, came in flat at +0, down from July’s +6. By contrast, the Long-Term Business Outlook Index, which queries the perception for the next three to five years, jumped to a two year high of +41, up from July’s +32. However, presumably because of the negative vibrations from the political conventions, the Conference Board’s August index of Consumer Confidence deteriorated to 84.8, which is the lowest reading since May of 2014.”

In is brief summary statement, Dr. Long says, “One of our survey participants quipped that he will be glad when the November election is over. As we enter an election season wherein many people are already in a negative mood, we can expect that we do not really know where the economy is headed until the election is over. As schools continue to reopen, additional Covid-19 cases are inevitable. If the increase in the number of cases begins to get out of control, we face the possibility of another shut-down. Otherwise, the current positive numbers should probably improve a little more when we add up the results for September.”

As is Dr. Long’s practice in each monthly report, he shares a series of verbatim, yet anonymous, comments from survey participants. Here are some from his August report:

“Forecasting for automotive right now feels near impossible. Tier I demand seems to fluctuate quite a bit right now, so there is a lot of daily firefighting that did not exist pre-Covid. Overall sales are getting close to pre-virus sales volumes.”
“Very slow August.”
“We’re starting to return to normal.”
“We are steady right now. The forecast for Q4 2020 looks positive.”
“We are seeing increased lead times from our suppliers. I believe that since most are working from home, there’s a lag in communication and many companies aren’t up to full capacity. Therefore, lead times have increased. I think companies are running inventory thinner than normal since business has decreased. We have a mixed employment situation right now. Most everyone in the plant is back full time. However, the office has most people working from home, some not hired back at all and some are back part time. We just received an email that people working from home will do so for the foreseeable future.”
“Our sales are still off from COVID, although we are busy as ever with everything else!”
“I can’t wait to get the election is over.”
“Sales are down 35-percent. Production on the shop floor still working 32hrs/wk. We need more project work.”
“We continue to see a very weak forecast for the next few months.”
“We are about 90-percent back to our plan for production. We think any growth from here will be slow or same for the coming months.”
“We chewed through our backlog over the past five months, which kept us very busy. New sales orders have continued to come in, which translates to a somewhat stable working environment for us, considering the current state of world affairs. From what I can tell, we are faring better than most.”
“Business for July was up over a horrid June, but it is still slow. August has started well, and could be about the same as July if it doesn’t wither by month’s end.”
“Although business is down from last year, we are settling in nicely to new reality. There has been a rebound in business to a level that allows us to weather the storm.”