New orders showing strong growth in area market

May 10, 2010
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Strong growth. That's the latest word on the greater Grand Rapids economy, according to the data collected in the last two weeks of April. New orders, our closely watched index of business improvement, shot up to a 16-year high of +51. For the first time in the 21-year history of the survey, not a single firm reported business conditions to be weaker than the previous month. In a less spectacular move, the production index advanced to +44, up from +30.

Activity in the purchasing offices rose to +39 from +17. The news from the employment index was also good, and index rose to +22 from +17. It was especially good to see that 32 percent of the respondents reported adding staff over the past month.

All in all, our greater Grand Rapids statistics are on a roll. Although we have no indication regarding the sustainability of our current good fortune, we will seize the moment for now. It should be clearly noted that we have not returned to the output and employment levels of 2005. However, we can say that strong growth has resumed, and we are on our way back to the pre-recession production levels of a few years ago.

Major exceptions to all of this good news are the commercial and residential construction markets, which will take many more years for a full recovery. 

Turning to individual industries, it almost goes without saying that no sectors are weak, but that some sectors are stronger than others. Automotive is leading the way, with almost every respondent reporting business as very positive. Next up are the industrial distributors, who are helping to provide materials, repair and replenish equipment, and otherwise help the firms meet their newfound demand. Although the office equipment industry is still a laggard in the recovery, there is evidence that the worst is over and that business conditions are modestly beginning to recover.

At the national level, the May 3 press release from the Institute for Supply Management, our parent organization, parallels our own survey. ISM's index of new orders rolled ahead to +44, up from +30. ISM's index of production rose to +42 from +25. The employment index surged to +20 from +11. All of these numbers drove the composite index to 60.4, up from 59.6. This index has now advanced for nine consecutive months. This is the best overall report since June 2004.

Automobile sales for April were stronger than expected. Ford again led with a 25 percent gain. Toyota was up 24 percent, but Honda had to make do with a 13 percent gain. For the first time in five years, Chrysler sales were up 25 percent. General Motors posted a more modest gain of 7 percent. Of the lesser brands, Nissan gained 35 percent, VW 39 percent, Subaru 48 percent and Hyundai 24 percent. For the industry as a whole, sales were up 20 percent. Needless to say, this all is good news for our local auto parts suppliers.

So with all of these good statistics, where are the jobs? Michigan is at 14.1 percent unemployment, Kent County unemployment is at 12.3 percent, and at 11.7 percent, Kalamazoo County is not faring much better. In apparent contrast, the firms responding to this survey are definitely adding to their work forces. However, for this recovery, several aspects of the advancement of the employment index are different.

First, as many economic writers have noted, a large percentage of the unskilled jobs that we lost in Michigan over the past 10 years are gone forever. The percentage of people out of work for more than six months is the highest it has been in more than 70 years. Most of the jobs that are now available require some kind of skill and some kind of experience. 

Second, many firms now prefer to hire temporary workers and take a long look at them before bringing them on board full time. If the temp worker does not pan out, getting rid of them is obviously easy. Furthermore, at least part of the screening is done by the temp agency in advance. Also, it is not necessary to run an ad in the “help wanted” section of the paper and be deluged with hundreds of resumes and phone calls. 

Third, word of mouth and reputation are more important than ever in finding a job. Human relations people are just as harried as every other department and have found that sorting resumes from newspaper ads is increasingly difficult and unreliable. Instead, they turn to people within their own work force to identify potential new recruits. This includes union workers, where union management is asked to “send us someone good.” To preserve the sanctity of their own union, they comply.

Other good news relates to growth rate of the national economy. As recent press releases have noted, the preliminary estimate for GDP for the first quarter of 2010 came in at +3.2 percent. Although the pace has slowed from the 5.6 percent reported in the last quarter of 2009, this rate is consistent with the growth estimates for the entire year of 2010.

On the caution side is the problem of industrial inflation. The numbers continue to grow worse. At ISM, the index of prices rose to +56. For the southwestern Michigan survey, our index of prices came in at +43. For greater Grand Rapids, we logged an index of +57. As noted in the past, the culprits are big-ticket commodities such as steel, aluminum, magnesium, corrugated, plastic resins and all oil-related products. Our list of commodities “up” in price continues to lengthen, as does the list of commodities in short supply. 

What is driving these prices up? Several factors. First, it is again worth noting that many countries in the rest of the world are recovering from the recession much faster than we are. Hence, worldwide demand is up.

Second, countries like China are buying up raw materials and simply storing them in anticipation that prices will soon be higher and/or that some commodities may be in short supply or unavailable. In other words, they think it is a better business decision to store their money in copper ingots than in euros that are falling in value or in dollars that pay almost no interest. On this theory, they just may be right. 

Third, given that the cost of carrying raw commodity inventories is relatively low, the buying policies of many domestic companies call for discarding the 1990’s religion of JIT. Furthermore, predications of higher prices and potential shortages loom on the horizon. These same firms are watching the Chinese and jumping on the wagon.

Last but not least, the speculators are getting back into the commodity markets. With interest rates around the world at record lows and the stock markets now seeming top heavy, the hedge funds and the big money speculators are creeping back into the commodity markets. Needless to say, this situation bears watching, lest we end up with another round of runaway speculation followed by another bust.

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

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