Economic improvements show a moderating trend
Still going strong, but moderating. That's the latest word on the greater Grand Rapids industrial economy, according to the data collected in the last two weeks of May. Our index of business improvement, which we call new orders, retreated to +40, down from last month’s near-record level of +51. In a similar move, the production index eased to +40 from +44. Activity in the purchasing offices backtracked +28 from +39. The employment index rose to a four-year high of +27, up from +22. Indeed, 35 percent of the survey respondents reported increases in staffing levels. All in all, our recovery remains on track. However, it is worth reminding everyone that depressed commercial and residential construction, as well as the depressed pricing for all real estate, despite some recent improvements, will limit our recovery.
Turning to individual industries, automotive is still leading the recovery, much as it has been since last year’s Cash for Clunkers program. Because of stronger production numbers in recent months, our industrial distributors continue to show strength. Although the office equipment industry is still a laggard, there are now significant signs that business conditions are starting to improve. Capital equipment firms turned in a mixed performance. Respondent comments continue to be cautiously optimistic, and several firms are at or near their all-time highs.
At the national level, the June 1 press release from the Institute for Supply Management, our parent organization, continues to parallel our local survey. ISM's index of new orders eased modestly to +38 from +44. In a similar pattern, ISM's production index moderated to +39 from +42. The employment index edged up to +22 from +20. ISM’s composite index came in slightly lower at 59.7, down from 60.4.
At the international level, the report from J.P. Morgan's Global Manufacturing report released June 1 continues to follow the same pattern as our local survey. The index of new orders moderated to 59.2 from 60.3. Greece was the only country to report a decline. Besides the U.S., growth was especially positive in Japan and the U.K. However, the growth rate in the Eurozone and most of Asia remained positive but retreated. The employment index increased for the fifth successive month. JPM's Global Manufacturing Index came in at 57.2, just slightly below the 70-month high of 57.8 posted last month.
Automobile sales for May were again stronger than expected. Miracle of miracles, Chrysler led the way with a 33 percent gain, followed by Ford with 22 percent. General Motors posted a more modest uptick of 17 percent. Even the lesser brands like Subaru gained 35 percent. All of this is good news for our auto parts suppliers. It’s worth remembering that the Cash for Clunkers program was the turning point. Michigan would now be far worse off had the program not been enacted.
Industrial inflation continues to be a problem for most of the firms in our area. However, there are now signs that the pricing for many major commodities may have topped out. For the greater Grand Rapids survey, the index of prices came in at +58, almost the same as last month’s +57. In southwestern Michigan, the index eased to +39 from +43. At the national level, ISM’s index of prices eased to +55 from +56. A couple of key commodities, namely copper and steel, now appear to be headed slightly lower. However, this apparent moderation is not the result of anything that we have done in this country. Instead, the recent softness in these markets can primarily be attributed to declining demand from China, the world’s largest user of most of the major commodities. Furthermore, capacity utilization in the steel industry has risen sharply in recent months.
In recent days, everyone with a 401(k) has been disappointed to see the setback in the stock market. Although many pundits reply that the market was overdue for a correction, even they did not forecast this much of a drop. To make matters worse, there is renewed talk about a double dip recession. Although it is worth repeating that there is no evidence in our country that a double dip is likely to occur, the possibility remains that we could be drawn into a recession through no fault of our own.
Two problems are currently causing a case of international economic jitters. The primary culprit continues to be the European sovereign debt situation, which appears to not yet be fully resolved. So far, all we have seen are various bail-outs aimed at keeping countries like Greece from defaulting on their loans. We have not seen significant spending reforms that would ensure a longer term solution. The PIGS countries, Portugal, Ireland, Greece and Spain, could begin to fail one by one. The general mood in Germany is that these countries have raised taxes, allowed labor productivity to sink, and discouraged investment to the point that they have created their own problems. When Germany’s government stepped in to help, there was a huge political backlash. To make it worse, the European banks have not fully disclosed what their risks are regarding some of these loans to PIGS. Hence, the euro continues to fall in value.
The second problem is China. In part, the government is trying to rein in some of the runaway segments of the Chinese economy, namely housing. They do not want to create a housing bubble like the one that devastated our economy in 2008. Unfortunately, China has become our third best customer in the world, and any kind of a slowdown will mean that our sales are reduced. Because of the lack of data, even the Chinese government is uncertain what is happening. Over the longer term, avoiding a boom-bust cycle is positive. Short term, reduced demand by a major customer is negative.
Although the news of the oil spill in the Gulf of Mexico continues to be a major concern for the environment, the short-term economic consequences are relatively minor. In terms of worldwide oil production, the Gulf is only a small factor. Psychologically, it could result in rising costs for gasoline in the summer months. In the longer term, increased restrictions on offshore drilling as well as increased regulation could force us to import more oil from foreign sources. The timing of this spill is very bad, given that it came just at the time when the Obama administration was starting to warm up to more offshore drilling.
Brian G. Long, CPM, is director, Supply Chain Management Research, Seidman College of Business, Grand Valley State University.