Purchasing report finally shows some positive indicators

July 6, 2009
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Slightly better!  That's the latest word on the greater Grand Rapids economy, according to the data collected in the last two weeks of June. New orders, our closely watched index of business improvement, bounced to +26, up from +5. The production index reversed itself to +14, up from -21. Activity in the purchasing offices, our index of purchases remained slightly negative at -3, but was vastly improved over the -32 we reported last month. Although still in negative territory, it was encouraging to see the index of employment come back to -4, a vast improvement over lasts month's -37. This of course means that layoffs are subsiding. Is this finally the beginning of the recovery?  Perhaps.  However, one month does NOT constitute a trend. The General Motors bankruptcy is just starting to unfold, and the recovery for the Detroit Three is still nowhere in sight.

Turning to individual industries, our auto parts suppliers continue to be our weakest groups.  Business conditions for the industrial distributors came in mixed, with some doing better in June, but others feeling the pinch of reduced maintenance budgets. Our local capital equipment firms continue to report better business conditions. The major office furniture companies appear to have stabilized at the present level, but the small firms are reporting better business conditions.  All in all, the positives outweigh the negatives, at least for this month.

At the national level, the July 1, 2009 press release from the Institute for Supply Management, our parent organization, shows that the national economy is still moderating. ISM's index of NEW ORDERS retreated to +4 from +8.  However, the PRODUCTION index bounced to +10, up from -2. The EMPLOYMENT index remained negative, but moderated to -16, up from -28. All of this modest improvement in the statistics resulted in ISM's Index of Manufacturing rising to 44.8 from 42.8. Compared to December's low of 32.9, this is great. However, it is worth remembering that any index below 50.0 generally depicts a contracting economy.

At the international level, the news is similar. The composite index for J.P. Morgan's Global Manufacturing Report dated July 1, 2009 rose to 46.9, up from 45.3.  Only China, India, and Turkey posted reading above 50.0.  Production increased in China, India, Turkey, and Denmark. The international index of NEW ORDERS rose to 49.0, up from 48.6.  The Eurozone continues to be "…weaker than the global average." The author remains optimistic that the global PMI "… should begin its ascent during Q3 of 2009.”

The news about automobile sales is still not good, despite the positive twist that the news media seems to be trying. One report noted that Ford sales for the month of June were "only" down 10.7 percent. Compared to the rest of the industry, being down 10.7 percent is certainly better than the average, but down is still down. Chrysler may be pulling out of bankruptcy and resuming production, but with sales for June down 41.9 percent, the prospect for the survival of the company seems increasingly dim. Considering that Honda dropped 29.5 percent and Toyota fell 31.9 percent, the General Motors drop of 33.4 percent drop was in line with the industry.

For automotive parts suppliers, this was the week for Lear to file bankruptcy.  As the industry continues to unravel, there will be many more to follow.  Hence, it is worth repeating that the fallout from the declining auto industry still has a long way to go. The unemployment rate for both Kent and Kalamazoo counties has slid into double digits, even though the development agencies have had some success in attracting new jobs to West Michigan. However, the jobs that are being added are obviously not enough to offset the jobs being lost. Statewide, the current unemployment rate of 14.1 will probably rise for the rest of the year.

The problem of inventories continues to slow the recovery.  For this month, ISM's index of inventories worsened slightly to -38 from -34. Similarly, the greater Grand Rapids index of purchased material inventory edged up to -28 from -17. For Southwestern Michigan, the index eased to -6 from -4. Commoditized like steel, copper, and aluminum will not stabilize in price until inventory liquidation is minimized, and commodity price stabilization is essential to economic recovery.

Another problem which could inhibit recovery is the recent increase in mortgage interest rates.  In fact, rates for a 30 year mortgage are up about .75 percent since our last report.  Even though these rates are still low by historical standards, if they continue to rise, they could choke off a recovery in the housing market. Unfortunately, the FED has already cut short term rates to at or near 0 percent, so there is no more "dry powder" to do much about it if the rates continue to rise.

In this same context, the treasury department is going to be throwing nearly two trillion dollars in bond on the market over the next few months. We cannot possibly absorb all of this debt in the domestic market, so we must depend on foreign investors and foreign governments to buy our debt.   The last couple of treasury auctions have gone fine, but it is difficult to predict how they will go as the summer unfolds. Most observers say that the debt will probably get sold, but even knowledgeable bond traders are not sure what the price will be. Some traders flatly declare that it will take considerably higher rates of interest to attract foreign investors.  If this is the case, then the higher rates will inhibit the recovery.

In summary, several things are key to the national economic recovery. First, as the major countries of international economy have become increasingly interdependent, the entire world must recover before we can expect to recover. Second, commodity prices must stabilize, given that the production of all of these commodities from wheat, to copper to steel, are key components of the world economy. Third, interest rates must stabilize. Fourth, the credit markets must define some new form of normality.  Everyone is now aware that credit standards in the 2002-2006 era were too loose, but some kind of reasonable standards must emerge so that businesses and consumers alike can know what to expect regarding the availability of credit before they even walk through the door at the bank. Fifth, housing prices must stabilize. Although prices have started showing signs of stabilization in some parts of the country, the worst is still not over for the Michigan housing markets.

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

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