Purchasing performance good but still on moderate side

August 9, 2010
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Very good, but still moderating. That's the latest word on the greater Grand Rapids industrial economy, according to the data collected in the last two weeks of July.

New orders, our index of business improvement, remained almost unchanged at +31, down from +32. In a similar move, the production index eased to +27 from +30. Activity in the purchasing office retreated to +23 from +34. After setting a six-year record, the employment index moderated to +33, down from +36. Although 43 percent of the firms reported adding staff, the unemployment rate in the Grand Rapids area remains high.

Turning to individual industries, our automotive parts suppliers reported that all of the assembly plants did not close for the traditional model changeover. However, some of the September-October production schedules are not as robust as a couple of months ago. Because of economic uncertainty, even plants that are at capacity are reluctant to add new equipment and personnel. The reports for the industrial distributors continue to be positive, although at least one noted a seasonal summer slowdown. For the office equipment and furniture industry, there is still evidence that conditions are slowly improving. One capital equipment firm noted that sales are improving, but most are still waiting for new orders to start coming back like they were a few years ago. Just as last month, respondents comments continue to be positive.

At the national level, results are not as positive. The Aug. 2 press release from the Institute for Supply Management, our parent organization, noted that the national report for July backtracked considerably from June. ISM's index of new orders eased to +7 from the +22 reported in June and the +38 in May. In a similar move, the production index retreated to +12 from +22. In contrast, ISM’s employment index rose to +18 from +15. Just as last month, all of these statistics indicate that the U.S. industrial economy is expanding, but the national rate of expansion has moderated considerably. ISM’s overall index fell to 55.5, down from June’s 56.2 and May’s 59.7. Again, it is worth noting that any number over 50.0 is considered growth.   

At the international level, the J.P. Morgan Global Manufacturing report released on Aug. 2 followed the same moderation pattern reported by ISM. The index of new orders backtracked to 55.3 from 56.9. The U.S., China and Japan were responsible for most of the backtracking, while the U.K. and the Eurozone bucked the trend. In contrast, the international employment index rose modestly to 53.5 from 53.2. JPM's Global Manufacturing Index came in at 54.3, down from 55.5. Hence, we continue to see evidence that the world economy has encountered some headwind. Probable culprits are the sovereign debts of many nations around the world, as well as more restrictive monetary policies by countries such as Canada and China. With evidence of the world economy slowing, JPM’s index of prices eased to 57.0 from 58.9.   

Why are firms not hiring? The fact is that many firms are hiring, but some of them are being very quiet about it lest they end up with a line at the door. The catch is that almost all of the new hires require some kind of skill, such as computer analysis, CNC operation, electronics repair, medical skills, etc. 

A bigger problem with unemployment relates to the inability or unwillingness of firms to expand. Unlike most recoveries in the past, many firms that are at full capacity are not expanding for several reasons. First, credit for small firms, even those that have been around for a long time, is still very tight. Because of the sweeping new regulations that have just been enacted, the financial institutions say that it may take months before the full impact of the new regulations are interpreted and understood. Since much of the legislation favors the borrowers over the lenders, they do not want to get trapped. Hence, banks are only loaning money to borrowers who can prove they don’t really need it. 

Second, there is a feeling among many firms that expansion is not necessary. Rather than incur a bunch of new debt, a lot of firms seem to be content to stay at their current size. In this same context, these firms now seem to be more risk averse. In the case of Tier I automotive, they are also resisting pressure from their customers to expand.

A third problem is pessimism. Since consumer confidence is almost as low as at the peak of the recession, it stands to reason that businesspeople, especially those with small businesses, remain pessimistic about the future. They feel that Washington and Lansing are out of touch. They fear the impact of the higher taxes coming their way, and they fear that more budget shortfalls at all levels of government may lead to even more taxes. 

Along these same lines, there is the feeling that the current economy is about as good as it is going to get. Part of this feeling is reflected in recent government data that tells us that the growth rate of the national economy is slowing. The GDP for the second quarter of 2010 eased to 2.4 percent, down from the 3.7 percent level of the first quarter. This report is similar to our own statistics. 

The news on industrial inflation continues to be good, primarily because of reduced worldwide demand for most of the major industrial commodities. For ISM-Greater Grand Rapids, the index of prices came in at +4, down from +26 last month and +58 just two months ago. This is the sharpest drop we have recorded for this index in our 22-year history. However, for NAPM-Southwestern Michigan, the index actually rose to a modest +30, up from +27. For the national ISM report, the index of prices came in at +15, virtually unchanged from last month’s +14, but well below the +55 reported in May. Overall, there is still evidence that speculators are finally reducing their holdings in the commodity markets, at least for now. Commodities like steel, stainless steel, aluminum and copper are now modestly falling in price.

Double-dip recession? Given that an official recession constitutes “two continuous quarters of negative GDP growth,” the odds are still only about 30 percent. What is far more probable is that we are in for slower growth for the rest of 2010 and possibly 2011. We may also return to a zigzag growth pattern like the period of a few years ago. We will have to watch the next few months very carefully.

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

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