Area’s slow but steady growth pattern is continuing
Modest growth. That's the latest word on the greater Grand Rapids economy, according to the data collected in the last two weeks of January. New orders, our index of business improvement, eased to +14 from +20. However, the production index rose to +22 from +14. The back-to-work mood of the post-Christmas season resulted in the index of purchases bouncing to +17, up from +0. The employment index slid back to +0, down from +8. Like last month, all of this bodes well for a pattern of slow but steady growth, even though the pace of the recovery has slowed since the summer and early fall of 2009.
A look at individual industries provides a little different view. First, the undisputed stars of this month's report are the automotive parts suppliers. Thanks to improved auto sales, these auto suppliers are starting to dig out of one of the worst slumps in recent history. Capital equipment manufacturers and distributors also are showing significant signs of improvement, although margins remain very slim. All of this is offset by the office furniture business, which appears to have taken a slight dip. For industrial distributors, the results were very mixed, with some firms very busy, while others are still stuck at recession-level sales. Most firms are still cautiously optimistic about 2010, and growth is expected to be slow.
At the national level, the Feb. 1 press release from the Institute for Supply Management, our parent organization, shows that the national economy is expanding nicely. ISM's index of new orders rose to +25, up from +16. The production index jumped to +27, up significantly from +10. It was good to see the index of employment turn back to positive at +3. ISM's composite index jumped to 58.4, up from 54.9. The survey's author noted that this is the sixth consecutive month that the index has come in ahead of the break-even point of 50.0, and that it provides "significant assurance that the manufacturing sector is in recovery."
The news at the international level is also very good. J.P. Morgan's Global Manufacturing report released Feb. 1 saw the January index of new orders rise to 59.5 from 58.3. JPM's index of production jumped to a 69-month high of 60.2, up significantly from 57.5. Solid gains were reported in France, Germany, Italy and the Netherlands. Spain, Ireland and Greece remained negative. The Eurozone and Japan showed improvement in January; the pace was well below the world average.
This month's big economic news comes from the Commerce Department, which announced that the preliminary estimate for economic growth in the fourth quarter of 2009 came in at 5.7 percent, the highest expansion rate in six years. However, the same report notes that a whopping 3.4 percent of that figure was the result of halting inventory liquidation, or, conversely, rebuilding of depleted inventories at other points in the supply chain. This analysis is collaborated by the recent history of the index of inventories in our local survey, which saw firms accumulate inventories in a panic as prices and shortages skyrocketed in 2008. Commodity prices fell dramatically at the end of 2008, as speculators exited the market and industrial firms all over the world began using up the inventories that they had accumulated. In the middle of 2009, these excess inventories were depleted, the speculators were gone, and GDP as well as the statistics for this survey, the ISM national survey and JPM international survey began to
show positive growth.
Another issue that has received attention in financial circles is the alarming rate of the increase in the federal debt. Because of the sheer strength of the dollar, we thus far have been able to float trillions of dollars of new debt on the national and international money markets with little apparent short-term consequence. This has helped us fund wars in Afghanistan and Iraq, as well as huge amounts of money to bail out financial institutions and the auto industry. Under the terms of the Maastricht treaty, the European nations collaborating in the Eurodollar are restricted to relatively low budget deficits and have no such budgetary freedom. China, which holds about $700 billion of our debt, has been especially vocal about opposition to our fiscal mismanagement.
The dollar has continued to fall in value, which ironically helps our economy by making it easier to sell our products and farm commodities around the world. However, if there were to be a run on the dollar, the Fed would be forced to raise interest rates immediately to stop the collapse. This could generate a second leg to the recession. The same would be true if foreign governments like China were to put a retaliatory freeze on additional purchases of our debt, or even worse, begin dumping the debt on the open market. This would clearly not be in their economic best interest, but the threat is still there.
A third issue up for discussion is the concern over the impending return of inflation. Whereas our current indexes of prices in all of the surveys mentioned in this report are relatively benign at this time, they could spike up on relatively short notice. In recent months, we have noted that the list of commodity prices on the "up" side has grown considerably, particularly for high-ticket items such as copper, aluminum and steel. Since we import large quantities of these commodities from overseas, the falling dollar has clearly contributed to this problem. Although there may be no reason for the Fed to take action at this time, this situation could change if these price increases get out of control.
Finally, it is worthwhile to make mention of the term "recovery." In technical terms, a recession is defined as "three continuous quarters of economic decline." Hence, the "recovery" officially began in the third quarter of last year, and some pundits said that the recession was "over" as of approximately June 2009. In actuality, this economic terminology may be correct, but it makes far more sense to declare June 2009 as the time that we began to dig ourselves out of a very deep hole. In fact, it may take many years before unemployment drops to the level of 2006.
In summary, improving auto sales will help, but not nearly cure, Michigan's economy. Second, the U.S. Commerce Department's announcement of 5.7 percent growth, even if it is only 2.3 percent after subtracting inventories, is still very good news. Third, the recovery at the international level continues to outpace the U.S. economy. Fourth, barring catastrophic surprises, economic growth should easily continue.
Brian G. Long, CPM, is director of Supply Chain Management Research, Seidman College of Business, Grand Valley State University.