Modest growth continues to be the area's signal
Continued modest growth. That's the latest word on the greater Grand Rapids economy, according to the data collected in the last two weeks of February. New orders, our closely watched index of business improvement, eased to +6, down from +14. In a similar move, the production index backtracked to +8 from +22. Activity in the purchasing offices, which we record as our index of purchases, remained positive but came in at +14, down slightly from last month's +17. The best news for the month came from the employment index, which jumped to +9 from +0. All in all, the pace of the recovery continues to slow. Although there is no evidence at this time to suggest any fundamental new problems, the recovery will probably continue to be restrained.
Looking at individual industries, it almost goes without saying that any auto firms that supply Toyota had a rough month. For Grand Rapids, that was only a couple of firms, and the remainder of the auto parts suppliers filed positive reports. Conditions were seasonally weaker for several of our capital equipment firms. The performance of our distributors came in mixed. The slight dip for the office furniture business has extended into a second month. Unfortunately, this industry lacks a catalyst for turning it around. Overall, a review of the respondent comments at the end of this report tells us that many firms are not quite as optimistic as a couple of months ago.
At the national level, the March 1 press release from the Institute for Supply Management, our parent organization, shows that the national economy is also experiencing a little moderation. ISM's index of new orders retreated modestly to +21 from +25. In a less modest move, the production index eased to +18 from +27. It was good to see the index of employment move up to +12 from +3, the best level since January 2005. However, averaging everything together, ISM's composite index eased to 56.5, down from 58.4. The survey's author noted, "This is the third consecutive month of growth in the employment index," and “New orders and production still show significant month-over-month growth.”
The news at the international level shows a similar pattern. J.P. Morgan's Global Manufacturing report released March 1 saw the February index of new orders ease to 56.9 from 59.5. From last month's 69 month high of 60.2, the international production index backtracked to 57.4. Growth in the Eurozone countries hit a three-year high. Output in the U.K. rose at the fastest pace since September 1996. However, the troubles in Greece continue to be a wet blanket for economic growth in Western Europe.
This month's big economic news came from Europe, where the Greek economy flirted with collapse over the government's huge budget deficit. Although Greece's Eurodollar deficit amount is small by U.S. standards, it constituted a huge breach of the Maastricht currency agreement, which limited all countries that converted their currencies to the Euro to an annual budget deficit of no more than 3 percent. Germany and France could easily bail out Greece, if it were not for the broader problem that Greece is one of the so-called "PIGS" countries (Portugal, Ireland, Greece, Spain), all of which are running deficits over the 3 percent level. Help one, and you may have to help them all. By the time all of the deficits are covered, the Euro could be devastated. A total collapse in the Maastricht agreement would result in all of the European countries reforming their original currencies. But the chaos would spread worldwide and push most of the world back into a recession. Europe cannot afford to let this happen, so it will be stopped, even if the French and Germans have to ante up.
Auto sales for February were acceptable, although some kind of a drop seemed almost certain. Part of the softness is clearly attributed to the Toyota fiasco; the other manufacturers picked up a little of the slack. Part of the lack of sales was the bad weather in many parts of the country. Another part of the problem can be blamed on the softer-than-expected consumer confidence numbers. The good news from all of this is that most automotive analysts think this trend is temporary, and that March and April auto sales numbers should look considerably better.
The recurring problem of inflation continues to weave its way through the financial news media. However, ISM's index of prices moderated this past month to +34, down from +40. Locally, we did not fare as well, given that the greater Grand Rapids index of prices jumped to +40 from the subdued +17 we previously reported. For the Southwestern Michigan Survey, the index edged up to +41 from +36. Aside from the statistics, the list of "big ticket" items reported as rising in price constitutes a greater cause for concern. Specifically, almost every type of steel is now going up in price at a rate more resembling a boom period than a period of recovery from a recession. The Chilean earthquake escalated the price of copper, which was already going up. Aluminum and zinc, which did appear to stabilize, are also rising faster than expected. Despite relatively stable oil prices, most manufacturers of plastic resins are posting price increases.
When asked about the cause of these price increases, many economists point to the world economic recovery for the reason that demand is rising. Others note that some countries like China are accumulating reserves of basic commodities in anticipation of higher prices in the not-too-distant future. Finally, at least some evidence exists that American firms are reverting to behavior of the 1960s and are building inventories in anticipation of higher prices. With the current interest rates so low, accumulation of inventory is far less costly. However, if all of this gets out of hand, we could be in for a serious round of inflation across the entire economic spectrum.
In summary, the auto sales dip is probably temporary, and better auto sales later in the year will help, but not cure, some of the problems in Michigan's economy. Second, the weak commercial and residential real estate markets will continue to restrain our recovery for many months to come. Third, the international economic recovery will continue to augment our own recovery. Fourth, a meltdown of the Euro, although unlikely, would cause chaos for the financial system of the entire world. Fifth, a double dip to the current recession is possible, but still unlikely.
Brian G. Long, CPM, is director of Supply Chain Management Research, Seidman College of Business, Grand Valley State University.