Modest increase in new orders spurs positive hopes

May 11, 2009
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Bottoming out: That's the latest word on the greater Grand Rapids economy, according to the data collected in the last two weeks of April. For the first time since January 2008, new orders, our index of business improvement, came back to positive at a very modest +2, up from -5 in our last report. Rebounding from an all-time record low of -57 just four months ago, this is a positive sign. The production index remained modestly negative at -2, up from -7. Activity in the purchasing offices moderated to -21 from -42. The index of employment came in at -14, up from -27. Although the index of new orders has flipped to positive, all of our other statistics remain negative.  Hence, we are not yet to the point of declaring the beginning of a recovery. However, it is a reasonable bet that we may have reached the bottom of the current slide, at least for now.

With the bankruptcy of Chrysler and the threat of bankruptcy looming for GM, we could be dealt another downward spike if too many of our local firms are negatively impacted.

Turning to individual industries, it is no surprise that many auto parts suppliers are struggling just to keep the lights on. For the fourth successive month, the business conditions for distributors were slightly improved. One of our local capital equipment firms reported better business conditions for the first time in months. Although one of the office furniture firms reported an improvement in new orders, the rest of the respondents remained flat.

At the national level, the May 1 press release from the Institute for Supply Management, our parent organization, is still paralleling our local survey. Just like our survey, ISM's index of new orders came back to positive. At +2, this index was nicely improved over the -13 reported last month. The production index remained negative, but recovered to -13, up form -27. The employment index moderated to -28 from -43, indicating that the rate of layoffs is lessening. All of this should have resulted in considerable improvement in ISM's index of manufacturing. However, because of statistical variations, the April index only edged up to 40.1 from 36.3.

At the international level, the news is good. The composite index for J.P. Morgan's Global Manufacturing Report dated May 4 rose to 41.8 from 37.2, its highest level in seven months. Although well below the breakeven point of 50, this constitutes the largest increase in the 12-year history of the survey. Considerable improvement was noted in the index of new orders, new export orders and employment.  

For an automotive state like ours, this month's big news is the bankruptcy at Chrysler. With the help of $6 billion in additional money from Washington, the company hopes to form a partnership with Fiat to produce fuel-efficient cars. Immediately after the announcement, the company closed all its plants and sent its work force home for the duration of the bankruptcy. Some suppliers had already stopped shipping parts to the firm for fear they would not get paid. Since Chrysler sales are down about 46 percent over last year, the dealer lots are full enough to last more than the length of the bankruptcy, which is supposed to last no more than 60 days. Fiat will emerge with 20-35 percent ownership of the company, and the UAW will net a 55 percent stake. The remaining stock will be held by the U.S. and Canadian governments. With the June 1 deadline for General Motors looming, what path the Chrysler bankruptcy takes will probably form a pattern for the reorganization of GM, whether through a pre-planned bankruptcy
or a government-refereed reorganization.

There are several big problems with the government's plan. First, Fiat is far from being a stable company itself, and has already been propped up by the Italian government. Hence, they bring almost no useful management expertise to the table. Second, the plan for restructuring calls for Chrysler to gain access to Fiat's expertise in manufacturing small, fuel-efficient vehicles. However, with gas now just over $2 per gallon, fuel-efficient vehicles are no longer selling as fast as a year ago. The Toyota Prius is selling at a discount, and the firm is introducing a third generation Prius in October. The new Honda Insight is already in the showrooms. This is tough competition. Finally, no one seems to be addressing the issue of whether anything that Chrysler produces will actually sell when it finally gets to the showroom. The auto industry has ignored Marketing 101 principles for years.

Last month, we discussed the problem of inventory liquidation. The end of inventory liquidation is and has been a key to the end of any recession in the past 80 years. Fortunately, the news in recent weeks has been filled with reports that inventories around the world are declining significantly, both for raw materials and finished goods. As a result, aluminum ingot is up 15 percent just since March, and copper is up 62 percent since December. Unfortunately, steel is still being overproduced around the world, so prices have not yet stabilized. Furthermore, raw material inventories are still too high. ISM's April index of inventories came in at -31, which indicates that many firms are still overstocked. Similarly, the greater Grand Rapids index of purchased material inventory came in at -25.

Finally, national media reports are starting to talk about evidence of modest improvements in our economy, even though home prices are still falling. It is worth repeating that the U.S. may pull out of the recession and leave Michigan still mired in it. However, the economy on the west side of the state will continue to outperform the economy of the Detroit-Flint-Saginaw area.

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

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