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Published in Economic Development

West Michigan industrial economy returns to ‘positive territory,’ economist reports

BY Thursday, August 06, 2020 03:20pm

West Michigan’s industrial economy further improved in July as three of four key activity indexes moved back to positive territory after sharp declines this spring from the economic fallout of the COVID-19 pandemic.

Indexes for sales, production and purchases each recorded strong double-digit gains to register positive for July, according to a monthly report from economist Brian Long, director of supply chain management research at Grand Valley State University’s Seidman College of Business. The index for employment remains in negative territory at minus-4, but registered a 9-point improvement from June to July.

Economist Brian Long COURTESY PHOTO

“After four months of gut-wrenching decline, the West Michigan industrial economy has returned to positive territory — at least for now,” Long wrote in his August report on monthly surveys with industrial purchasing managers in Grand Rapids and Kalamazoo.

Long cautioned that the month-to-month improvements in the activity indexes from the spring resulted from pent-up demand, adding: “We have to go a few months down the road to see where we really stand.”

The short-term outlook of three to six months among survey respondents also returned to positive territory, swinging to a plus-6 for July from a minus-8 in June. The short-term outlook had fallen to a record low of minus-42 in March as the COVID-19 pandemic took hold in Michigan and the state issued shutdown and stay-at-home orders.

The long-term outlook for the next three to five years held relatively steady at a plus-32, down a single point from the prior month.

Long noted in his August report that West Michigan’s main manufacturing sectors — office furniture and automotive and aerospace components — are cyclical. All are feeling the effects and experiencing market shifts in the pandemic, he said.

“I am most worried about the office furniture industry,” he wrote. “The industry is still shipping orders that were placed before the crisis, so we don’t know what the October order books will look like. Just like most recessions, most firms are not going to be opening new office space, which usually means new office furniture. Also, many firms have received multiple requests to continue working from home. The apparent new frontier for the office furniture industry is the ‘socially distanced’ work environment. Some firms are starting to work on this concept, but I don’t know how long it will take to turn the corner.”

A “few more good reports” are needed “before absorbing the negative impact” of such market shifts on key industries in the region, Long wrote. “In addition, the trillion-dollar incentives (from the federal stimulus) will eventually run out, and we will then need to reassess where we stand in the West Michigan industrial market.”

According to the National Bureau of Economic Research, the U.S. economy fell into recession as the pandemic hit. Meanwhile, GDP declined nearly 33 percent for the second quarter.

In an updated U.S. economic outlook issued last week, PNC Bank projects Real GDP to rebound by 12.2 percent in the third quarter and 7.4 percent in the fourth. The economy should continue to recover into 2021 with 5.5 percent Real GDP growth in the first quarter and 4.7 percent in the fourth, according to PNC’s latest outlook.

PNC based the outlook on “two crucial assumptions” —  that “the spread of the coronavirus is contained in the near term, and then a vaccine is developed over the next year,” and that “policymakers provide sufficient fiscal stimulus to support a strong economic recovery.”

“A recovery from the Viral Recession is underway in the United States, but the strength of that recovery remains highly uncertain,” PNC economists wrote in the outlook. “PNC is forecasting a solid rebound in the economy over the next few years, with real (inflation-adjusted) GDP returning to its pre-recession level in the first half of 2022 and the unemployment rate falling rapidly. But the strength of the recovery will depend on efforts to contain the spread of the coronavirus and the extent of fiscal stimulus.”

The outlook projects that U.S. auto sales will decline this year to 14.3 million units, from 16.9 million in 2019, and then recover to 16.4 million in 2021.

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