Whether the West Michigan manufacturing industry continues on an ongoing growth trend in 2019 or veers into a contraction remains uncertain.
Economist Paul Isely, associate dean for undergraduate programs in the Seidman College of Business at Grand Valley State University, uses automotive, furniture, agriculture, and “amazingly nowadays” aerospace manufacturing to find the pulse of where the region’s economy is headed in the coming months and years.
“Those are some of the big, big chunks that move us around and can point the direction that we’re going to move as an economy,” Isely told MiBiz.
While aerospace and medical manufacturing will continue to grow in 2019, Isely predicts headwinds that will bring automotive manufacturing flat to trending down. He also expects furniture manufacturing to come down from a midyear-peak in 2018 fueled by tax law changes.
“This year, we had a little bit of a sugar high from the tax cuts. And a lot of that was front-loaded into this first year. A lot of that is burnt off now,” he said. “Overall though, we’re really looking at that first part of ’19 to still be pretty strong.”
According to Grand Rapids-based economic development firm The Right Place Inc., manufacturing currently accounts for 15 percent of all jobs in the West Michigan region. Since 2009, manufacturing job creation and investment have surpassed both state and national averages, and now many companies struggle to fill their open positions.
Isely expects the lack of qualified job applicants for many skilled positions across all industries to slow overall growth in 2019.
“We’re seeing a lot of constraints on the ability to grow. We can’t find workers, we need to pay workers a lot more, particularly bottom-end workers, where that floor is moving toward $15 an hour pretty fast,” he said.
With slowed growth comes an increased chance of a recession, according to Isely. This year, he suggests businesses start thinking about — and saving cash for — the workers they could acquire in the case of an economic slowdown.
“Right now, we can’t get the labor that we want, so we have to understand that if there’s a slowdown or even a downturn in the economy, that’s going to break some labor free that we could take advantage of,” he said.
Michael Davenport, president and CEO of Grandville-based Jireh Metal Products Inc., told MiBiz his company is part of a movement among manufacturers who are turning to a “growing your own” plan to fill their employment gaps.
“We’re trying to address it at the very core level,” Davenport said.
Jireh also aims to cultivate a workplace culture that drives performance, affects employee satisfaction, and ultimately, retains the company’s existing workforce, according to Davenport.
“We think that we can have a great place to work where people come in and feel very comfortable,” he said.
After nine consecutive years of job growth, economists at the University of Michigan Research Seminar for Quantitative Economics project manufacturing employment to still grow by 3,300 jobs next year. However, that’s nearly half of the 6,000 new manufacturing jobs added in the state in 2018.
Still, Michigan continues to outperform expectations for talent acquisition and growth, according to economist Jim Robey, director of regional economic planning services at the W.E. Upjohn Institute for Employment Research. He attributed that stronger than expected performance to a diverse and productive economy, quality training programs, vertically integrated producers, well-managed locally-owned companies, and the enticing “amenity base” in and around Grand Rapids.
The strong growth also has contributed to Grand Rapids leading the state and nation in continued economic recovery, he said.
The Grand Rapids-metro area has the lowest unemployment rate of economically comparable regions in Robey’s forecast. Yet, despite the tight labor market, employment growth in the region is still comparably strong, Robey told more than 300 business and community leaders at this month’s 2019 Economic Outlook for West Michigan organized by The Right Place.
“Where you all found these people, I don’t know,” Robey said.
However, uncertainty stemming from several policy “risk factors,” including tax cuts and increases, federal deficits and debt, interest rate hikes, tariffs and elections, could derail U.S. manufacturers and lead to a recession, according to Robey.
“All of those things individually or (together) conspire to make bad decisions on a macro basis that can lead us into a recession,” he said.
In the past year, the automotive supply chain has grappled with heightened uncertainty related to trade agreements and tariffs. Yet, the industry’s fundamentals remain in good shape heading into 2019, according to Mike Wall, director of automotive analysis in Grand Rapids at IHS Markit.
The company currently forecasts North American vehicle production to increase from an expected 17 million units this year to 17.2 million units in 2019, particularly as a new BMW plant comes online in Mexico and as foreign automakers localize production for some vehicles rather than import them.
“It’s 200,000 units. I don’t want to minimize it, but at the same time, we’re starting to see that plateau,” Wall told MiBiz.
In part, the plateauing automotive environment stems from a dramatic shift away from passenger cars in recent years, as consumers instead flock to light trucks, crossovers, and SUVs, he said.
As a result, OEMs have started to discontinue their car production. In late November, for example, General Motors announced that in 2019 it would close three assembly plants in Hamtramck, Mich., Lordstown, Ohio and Oshawa, Ontario — all of which produced sedans like the Chevrolet Volt, Cruze, and Impala.
IHS Markit forecasts trucks, currently about 70 percent of the market, to become an even larger portion of overall vehicles sales in the coming years, perhaps approaching the 80 percent mark “in the intermediate to longer term.”
As automakers adjust to the “new reality,” Wall expects more OEMs to take the cue from GM, “see the writing on the wall” and close car assembly plants.
“GM, to their credit, is taking the Band-aid off very quickly all at once,” Wall said. “I think it’s a manifestation of where things are at on the passenger car side, and where the money’s made or not made.”
While the automotive production forecast calls for a slight increase, IHS Markit expects sales to continue a slow erosion next year. The firm expects light vehicle sales to reach 17.1 million units in 2018 and fall 300,000 units next year, “obviously barring a recession,” according to Wall.
Most models he’s watching have put off the probability of a recession until sometime in 2020. Still, suppliers and OEMs need to take action now so they can have flexibility when the next downturn does occur, Wall said, adding that he thinks West Michigan-based manufacturers should be in good shape due to diversification.
“It doesn’t mean there’s not going to be some pain points,” Wall said.
As office furniture manufacturers adjust to demand for nontraditional furniture alternatives from an increasingly transient workforce, a number of them went on a buying spree in 2018. That includes Grand Rapids-based Steelcase Inc. and Zeeland-based Herman Miller Inc., which focused their acquisitions on education furniture and smaller niche-product manufacturers to broaden their portfolios.
“What drove the industry for 35 years was cubicles and high-price, high-function (equipment). That’s where the growth was and the margin was,” Mark Kinsler, president of Holland-based Trendway Corp., told MiBiz. “That’s decreased significantly as the walls literally come down.”
Kinsler expects the trends will continue to drive acquisitions in the industry, particularly in some of the growing adjacent markets.
“In the office furniture business, the types of products are changing, so we can clearly see that ancillary furniture is something we need to spend more time and energy on. An acquisition there would be something that we’d look at,” he said.
Kinsler remains “cautiously optimistic” for 2019, even if the contract furniture industry still has not yet returned to its pre-recession peak.
Steelcase, which last week reported strong sales and earnings growth in its most recent quarter, is forecasting that momentum to continue into the beginning of the year. The company is projecting its sales will grow at a faster rate than the overall industry.
Sales for the first nine months of its current 2019 fiscal year were up 10.9 percent.
“Our fiscal 2019 earnings are on track to represent one of our strongest years in more than a decade, and we are targeting to grow revenue and earnings again in fiscal 2020,” President and CEO Jim Keane said in a statement.
Other office furniture supplier executives said they expect more muted growth that tracks expansion in the national economy.
Amy Sparks, president and CEO at Holland-based Nuvar Inc., said the level of activity among customers has been “reassuring” her outlook for 2019. The contract manufacturer and developer of finished goods plans to find ways to grow despite the talent crunch, which has caused Sparks’ crystal ball to become “a little fuzzy sometimes.”
“But overall, I would say I’m cautiously optimistic,” she said.
MiBiz Editor Joe Boomgaard contributed to this report.