Economy Moderate Improvement
The index of new orders, NAPM’s index of business improvement, moved up from 10 to 28. The production index remained stable at 28; fractionally lower than the 30 that was reported last month.
Following the usual zigzag pattern, the employment index edged up to 10 from 4 and activity in the purchasing offices, as measured by the index of purchases, moved up to 24 from 16.
“All in all, our local report confirms many reports we are already reading about the continued upward pace in the economic recovery,” said Brian Long, CPM with NAPM.
Looking at individual industries, the auto parts producers turned in a good performance for the month, although a couple of firms are not benefiting from the improved production schedules posted by many auto producers. As a group, the capital equipment firms are back on track, Long noted.
The steel furniture business continues to bump along at about the same pace as last month. For industrial distributors, this month’s trend was definitely positive.
At the national level, the Jan. 2 press release from the Institute for Supply Management, NAPM’s parent organization, continues to depict a strong national economy. New orders edged up to 33 from 32. The production index, which usually sags a little in December, moved up to 34 from 29.
For the first time in many months, the employment index turned positive at 6, up from -2. ISM’s overall index jumped to 66.2 from 62.8. Since any index ahead of 50 is considered positive, this month’s report is certainly good news, Long said. For the non-manufacturing survey, the index edged down to 58.6 from 60.1.
“There seems to be little doubt on the part of just about everyone that the economy is once again on a roll,” said Long. “Is this recovery sustainable? Given the current situation, there seems to be little doubt. However, just as we have cautioned many times in the past, another major terrorist attack would obviously call for reassessment.”
Another problem that NAPM is watching closely, Long said, is the valuation of the dollar. Since the dollar fluctuations only have a direct effect on international purchases and sales, most people do not notice the impact of the recent dollar decline in their daily purchases.
Long laid out a few basic details to illustrate this point.
A decline in the value of the dollar tends to make domestically produced goods and services cheaper to the rest of the world. Prior to Sept. 11, the euro, which represents the combined currencies of 12 European nations, was worth only about 90 cents. As of last week, the value had risen to $1.26. This has the same impact as if the U.S. put all of its goods and services on sale at 40 percent off the pre-Sept. 11 prices, he said. This should mean that exports will increase. Hence, the falling dollar is an economic advantage, as along as it doesn’t go into a freefall.
A freefall of the dollar would require an immediate increase in interest rates by the FED. Since many international business deals take a long time to negotiate and sign, it may take months before an impact on exports is seen. One of the few places where a more immediate impact has been seen is in the rise of farm commodity prices.
The downside of the falling dollar is that it makes all imports from countries with rising currency values more expensive. Unfortunately, the commodities that the country must import are now edging up in price. Some of the commodities that are rising in price include copper, aluminum and most importantly, oil.
Despite the removal of the steel tariffs, there is no rush to import foreign steel because currency fluctuations have made foreign steel more expensive. Furthermore, the bankruptcy and closing of some U.S. steel mills has reduced the supply of steel, adding to the recent price pressures.
When assessing the impact of currency fluctuations, it is once again worth noting another sore point concerning the United States’ trade relations with China. The Chinese, as well as the Koreans, have pegged their currencies to the U.S. dollar; hence, nothing coming from China or Korea is any more expensive as a result of the fall of the dollar around the rest of the world. In a sense, the Chinese exporters are benefiting from the fall of the dollar at the same rate of the United States’ own domestic exporters.
Regarding interest rates, recent comments by Federal Reserve economists have noted that the United States is in an economic “sweet spot.” Most consumer prices are remaining stable, even though the economy continues to improve. So far the rising cost of steel, plastic resin, copper and other industrial commodities has not spilled over to the consumer sector.
“The Fed sees little need to think about increasing interest rates, even though the current rates are far below historical averages,” said Long. “By recent comments, it appears that the Fed will not increase rates until absolutely necessary, since a shift in Fed policy will probably result in immediate negative reaction by the financial markets. For this reason, rates will probably remain stable until late in the summer or early fall, barring catastrophic events.”