- change ups
Local industrial economy shows moderation trends
six percent of the firms in our survey are now adding staff in the form of callbacks, new temps from the temp service companies and new hires. The index rose to a six-year high of +36, up from +27. Overall, the recovery is still on track.
Turning to individual industries, automotive is still leading the recovery, but the pace has slowed just a little. Many auto assembly lines are now approaching capacity, which means that sales for some of our auto-parts producers are topping out. Most of our industrial distributors continue to show strength, primarily because of the strong production schedules posted by many local firms. The office equipment and furniture industry continues to show modest signs of recovery. The logjam in the capital equipment industry seems to have broken for a couple of local firms, but others are still waiting. A review of the respondent comments at the end of this report continues to note that several firms are at or near their all-time highs. Although several respondents are voicing concerns about the future, the mood is still upbeat.
At the national level, the July 1 press release from the Institute for Supply Management, our parent organization, moderated for the month of June. ISM's index of new orders eased to +22 from +38. In a similar move, the production index retreated to +22 from +38. The employment index retreated modestly to +15 from +22. All of these statistics indicate that the U.S. industrial economy is expanding, but that the national rate of expansion has moderated. ISM’s overall index fell to 56.2, down from 59.7, ending the almost unbroken string of advance which began 11 months ago. Again, any number over 50.0 is considered growth, so it is still fair to say that the industrial economy remains decidedly positive.
At the international level, the J.P. Morgan Global Manufacturing report released July 1 followed the same moderation pattern reported by ISM. The index of new orders backtracked to 55.5 from 58.9. Asia, Japan, the U.K. and Australia all reported modest retrenchment. The Eurozone bucked the trend and posted a solid gain. The employment index eased for the first time in five months, but the slippage was only to 53.1 from 53.9. JPM's Global Manufacturing Index came in at 55.5, down from 57.2.
Hence, we continue to see evidence that the world economy has probably starting to plateau. Further expansion beyond the present level will probably require the resolution of some of the world’s economic problems, such as the excessive sovereign debt of many nations.
Much as we expected, automobile sales for June moderated along with all of our other statistics. Chrysler posted a strong gain of 35 percent, up from 33 percent in our last report. General Motors posted a modest downtick to an 11 percent year-over-year sales growth rate, down from 17 percent. Honda and Toyota came in at a positive 6 percent and 7 percent, respectively. Lesser brands fared statistically better, rising 28 percent at Hyundai, 33 percent at Mazda, and 16 percent at Subaru. Overall, industry sales were up 14 percent for the month, much better than a year ago. This is part of the reason Michigan is now seeing the unemployment rate slowly declining.
Last week, a lot of headlines were grabbed by the Commerce Department’s downward revision of the GDP. The revision was fairly modest, falling to 2.7 percent from 3.0 percent. Contrary to some news stories, this revision is not unusual and most preliminary numbers are often modified, sometimes as many as six times. It is worth noting that these quarterly GDP numbers are quarter to quarter, not year over year. Hence, the economy still has a long way to go to get back to the 2008 peak.
For a change, there is some good news on industrial inflation. As noted by the JPM report, the growth pace of the international economy has slowed considerably, which reduces worldwide demand for most of the major industrial commodities. More importantly, it has shaken some of the speculators out of the market. ISM-Greater Grand Rapids recorded a significant drop in the index of prices, from +58 down to +26. At NAPM-Southwestern Michigan, the drop was from +39 to +27. However, the biggest drop came from ISM’s national index of prices, from +55 to +14. Again, the speculators now are starting to dump their inventories on the market, and commodities like steel, stainless steel, aluminum and many plastic resins are modestly falling in price. However, some types of steel, corrugated and plastics are still rising. Hence, industrial inflation could come back in a few months.
Another important piece of economic news came from the Chinese. After pegging the Yuan at about $6.70 for the past three years, the Chinese Treasury Department has bowed to worldwide economic pressure and agreed to let the currency drift higher in value. Although this action reduces demand by raising the price of goods sold to the rest of the world, the Chinese economists have been recommending that the current growth rate be reined in or moderated. By raising the cost of our firms importing from China, a stronger Yuan will help offset the huge trade imbalance that has been such a political hot button for many years. However, the downside of the stronger Yuan is that the Chinese are less likely to want to purchase our debt. As the Treasury Department tries to finance our huge budget deficits, this could become a problem in the future.
In summary, the pace of our recovery both here and around the world has slowed a little but remains positive. There are still parts of the economy that are causing us trouble, but most sectors are getting back on track and profitable, even though the production levels of 2006 may still be many months away. Despite increased hiring by some firms, the unemployment level remains unacceptably high. Despite the rhetoric, there is very little the politicians can do to fix this problem except get out of the way and let the economy fix the economy.
Brian G. Long, C.P.M, is director, Supply Chain Management Research, Seidman College of Business, Grand Valley State University.