Published in Manufacturing

Manufacturing Outlook: West Michigan manufacturing could contract in 2020, economists say

BY Sunday, December 22, 2019 11:43am

 

If the long-promised economic downturn is on the horizon, manufacturers will be the first to feel it in 2020. 

That’s according to economists and industry experts who say the U.S. economy has become virtually split as it’s powered by confident consumers but weakened by a cautious business sector that is reducing investments and bracing for a contraction.

“We’re seeing wages go up, and people are seeing the people around them employed, so consumers are pretty optimistic right now,” Paul Isely, associate dean of the Seidman College of Business at Grand Valley State University, told MiBiz. “But one thing that we know historically is the consumers are the last to find out about a recession.”

Manufacturers, on the other hand, are often the first. The U.S. manufacturing Purchasing Managers’ Index (PMI) from the Institute for Supply Management has been dropping since April 2019, down to 48.1 in November, well below market expectations. This marked the fourth consecutive month of contraction, which is represented by any reading below 50. 

Global trade remains the most significant cross-industry issue, according to the data. However, falling oil prices, which were consistently down about 20 percent this year compared to 2018, helped to forestall an overall economic turn, according to Isely. 

“The drop in oil prices really helped alleviate some of the other pressures that businesses were feeling and kept us from slowing down even more as we came into the end of the year,” he said. 

Year over year, U.S. manufacturing employment is up 0.6 percent, according to Isely’s read of the data. However, that slight growth — in an era of record-low unemployment — may not paint the whole picture. 

“The average hours worked have dropped from last year by more than half an hour a week,” Isely said. “When you factor that in, the total hours worked in manufacturing have dropped by 0.4 percent.” 

The corresponding modest decrease in income per person may seem insignificant, but it might mean the difference between certain workers being able to go out to eat or go to a movie, he said, noting it also has the potential to affect their purchasing power. 

“It really looks like the end of this year is going to stay consumer-driven,” Isely said. “Certainly, we’re going to start next year consumer-driven, but we’re going to be watching that consumer very carefully to see whether the corporate pessimism leaks into the consumer side of the equation.” 

Auto holds steady

The collective outlook among automotive suppliers moved deep into negative territory late this year as trade tensions, declining volumes and weakness in the U.S. economy weighed on manufacturers, according to a report from the Original Equipment Suppliers Association  (OESA). 

Even so, auto sales slightly exceeded expectations, ending 2019 with sales estimates of more than 17 million light vehicles, according to Mike Wall, director of automotive analysis at IHS Markit in Grand Rapids.

Wall predicts consumers will become a bit more stretched for funds in 2020 and sales will drop to about 16.7 million units, which is “still quite healthy.” 

“We’ve seen the trade issues weigh heavily on exports at times and other elements of the economy like industrial production, but at the same time, the consumer has been pretty resilient,” Wall said. “We’ve got a little bit of a decline (in auto sales) for next year but not anything that would be a harbinger of doom for the industry as it relates to the North American market.” 

The effects of the UAW-GM strike that lasted six weeks before ending in late October will extend into the new year. GM estimates that it lost approximately 300,000 units of vehicle production to the strike. Overall, the industry will end 2019 at 16.3 million units produced, according to Wall’s forecasts.

“We’re going to get some of that back next year,” Wall said. “GM is working furiously to try to recover.” 

The industry also produced about 300,000 fewer units than forecasted because of tariff difficulties and tighter controls on inventory and vehicle stocks by the OEMs and retailers, according to Wall. 

Because of these constraints, Wall predicts automotive production will increase slightly to 16.6 million units in 2020, including 200,000 units that will come back to the market as part of GM’s strike recovery. 

New vehicle launches are also expected to increase 33 percent in 2020, when automakers will bring online 64 new products, according to Wall. 

This trend will continue to present challenges for suppliers from both operational and cash flow perspectives, according to Sig Huber, senior managing director at Conway MacKenzie. The challenges are even greater when suppliers need to manage multiple launches within a short period of time, or even concurrently, he said.

“When you go through launch activity, it’s always a time of risk for the automaker as well as its suppliers further down in the supply chain,” Huber said. “When there is a large jump in the volume of launches, industry-wide, that creates an environment that will be very challenging for the supply base to deal with.”

Flawed launches can create significant cash flow burdens for suppliers if they have to absorb high part scrap rates, plant overtime and expedited freight charges, according to Huber. These launch pressures exist at all tiers throughout the supply chain and in many cases are felt more strongly at the Tier 2 and Tier 3 levels, he said. 

‘Returning to trend’

Two other influential cyclical segments of West Michigan’s manufacturing sector — office furniture and aerospace — have also topped out and are showing signs of weakening, according to Brian Long, director of supply chain management research at Grand Valley State University. However, Long said there are “no signs” to indicate a local recession ahead for 2020. 

Many local measures, including manufacturing output and light vehicle sales, are simply “returning to trend,” according to economist Jim Robey, director of regional economic planning services at the Kalamazoo-based W.E. Upjohn Institute for Employment Research

In a presentation as part of The Right Place Inc.’s annual economic forecast, Robey said he expects manufacturers in the Grand Rapids metropolitan statistical area — which includes Barry, Kent, Montcalm and Ottawa counties — will lose more than 700 jobs in 2020 thanks to “productivity enhancements.” Even so, the industry’s gross regional product (GRP) will still increase by a percentage point, or about $130 million, he said. 

Uncertainty stemming from several policy “risk factors,” including the ongoing trade wars, volatility of the stock market, federal debt and deficits, and general political concerns, could derail U.S. manufacturers and “keep economists up at night,” Robey added. 

Indeed, economic forecasts become substantially less accurate the closer the economy comes to a significant shift, said GVSU’s Isely. 

“To look into the future, we have to look at the past,” he said. “It’s like driving down the road at 90 miles per hour and looking in your rearview mirror. It works pretty well when the road is going straight, but when there’s a 90-degree turn, you might not see it.”

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