Purchasing indicators moderating slightly

March 6, 2009
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Still moderately lower. That's the latest word on the greater Grand Rapids economy, according to data collected in the last two weeks of February. New orders, our index of business improvement, came in at -20. Since last month's reading was -28 and the previous month was an anemic -57, it is tempting to become overly optimistic. But negative is still negative, and at this time, we can only say that the rate of decline is lessening. The production index moderated to -31, up from -38, as did our index of purchases, which edged up to -44 from -53. However, the index of employment posted a record low of -48, surpassing our previous record set in October 2001. The firms that last month reported adding staff are still in a modest hiring mode, but they were more than offset by the larger number of firms reporting staff reductions.

As we look at individual industries, there is little news to report. Automotive continues to be a drag on the local region as well as the entire state. For the second successive month, the business conditions for distributors were slightly improved. Capital equipment is still weak. The office furniture business remains down, but some firms are at least starting to stabilize.  For most of our firms, stabilization will be key as we head toward spring.

At the national level, the March 2 press release from the Institute for Supply Management, our parent organization, continues to parallel our local report. ISM's index of new orders came in at -31, up from -37 in January and December's record low of -59. The same was true of the production index, which moderated to -28 from -41. The employment index hit a record low of -48. ISM's composite manufacturing index edged up very slightly to 35.8 from 35.6.

At the international level, the pattern remains the same as the national survey and our local survey. The composite index for J.P. Morgan's Global Manufacturing Report dated March 2 rose modestly to 35.8, up from 35.0 last month and 33.7 for the months of December. After sliding for 12 consecutive months, this is the second consecutive month that the index has posted a modest rise. JPM's index of new orders also notched a modest gain. The author further noted that "the rate of contraction has begun to ease in global industry." Furthermore, "production cuts are likely to remain deep near-term while companies reduce inventory." The U.S., Japan, China and India were sited as countries where the decline appears to be moderating, but the Eurozone and the U.K. are still declining sharply. Since the worldwide liquidation of raw materials inventories is still reported as ongoing, it can easily be implied that the recovery for most of the world's basic industries is not at hand. 

In last month's report, we raised the issue of the need to pare down the inventories of basic raw materials that were accumulated as a result of last summer's speculative run on most of the major commodities. For southwestern Michigan, our index of purchased materials inventories liquidation rate improved to -26, up from -32. In the greater Grand Rapids survey, we improved to -36 from -42. These improvements are modest, and we still have a long way to go toward emptying the warehouses of materials so that normal markets can resume.  However, these days, even modest good news is welcome.  

Regrettably, the collapse in the automotive industry has continued to worsen, fueled by several negative factors. First, the credit crunch, despite some modest loosening in credit standards, remains a significant problem. Second, even those customers who do have good credit are reluctant to commit to a $400 per month payment for a modestly priced new car, given economic uncertainties and announcements of job cuts. Third, as a group, consumers are now saving more of their paychecks than they have for any time in the past five years, and parting with these savings for a down payment for a new car does not seem to have much appeal. Fourth, the threat of bankruptcy by all of the Detroit Three makes at least some buyers reluctant to purchase a car from a company that may not honor the warranty or even worse, may cease to exist. Fifth, using incentives to induce buyers to buy has always been regarded as a short-term strategy. Eventually, the incentives become part of the "current market price" and have little effec
t. In short, after seven years of bombardment, zero-percent financing and deep discounts are not working.

Sixth, the total miles driven by the motoring public continues to decline, which incrementally means fewer cars are needed to replace the cars in the entire consumer fleet. Seventh, sticker shock may finally be catching up to people. The auto industry may finally be pricing itself out of the range of many Americans.  Finally, the car companies have become a victim of their own good work. Cars of today are of higher quality, and as a result, last longer and go farther. Hence, there are a lot of people who have decided that they really don't need a new car at this time.

As noted last month, the recently passed stimulus package will add some jobs to the local market for firms that build bridges and overpasses, pave highways and maintain highway infrastructures. Firms that produce equipment for "green" energy equipment, such as wind turbines and solar panels, may receive some additional funding. Unfortunately, even though the entire state will benefit, the additional new jobs will not begin to offset the job losses resulting from the declining automobile industry. The stimulus package also includes numerous tax reductions, but since many Michigan firms are not paying taxes because of not making money, we cannot expect very much help from this part of the package. 

In the coming weeks, what should we look for in the way of good news? One thing would be a solid plan to reorganize General Motors. This may well take additional government money, and every citizen of this great state must support the effort to get these funds from Washington. Second, we can hope that the moderation trend of our last two reports will continue. Finally, let's hope that the most of the bad news is behind us. 

Brian Long is director, Supply Chain Management Research, Seidman College of Business, Grand Valley State University.

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