Stronger than expected performance steadies outlook
Steady as she goes. That's the latest word on the greater Grand Rapids industrial economy, according to the data collected in the last two weeks of August. Our closely watched index of business improvement, which we call new orders, remained almost unchanged at +30, down from +31. However, the production index rose to +42, up nicely from the +27 we reported last month. In a similar move, activity in the purchasing office, our index of purchases, shot up to +46 from +23. The best news came from the index of employment, which rose to a 16-year high of +46, up from +33. In all, 54 percent of the firms reported adding staff. Overall, except for new orders, this month’s report is stronger than expected. We hope this trend will continue into the fall.
A look at individual industries is encouraging. Our automotive parts suppliers reported production to be strong for the month, but no rush of new orders. For August, GM sales were down 25 percent, and Ford declined 14 percent. This does not bode well for September. The reports for the industrial distributors were especially positive, although a couple of firms were still stuck in a seasonal summer slowdown.
For the office equipment and furniture industry, conditions continue to slowly improve. Two capital equipment firms noted better sales for the month, but most are still just holding their own. The respondent comments are slightly more positive for the month, with several firms continuing to report sales at an all-time high.
At the national level, the results followed the same pattern. The Sept. 1 press release from the Institute for Supply Management, our parent organization, reported some of the August statistics to be slightly higher. ISM's index of new orders remained unchanged at +7. However, the production index rose to +19, up from +12. It was gratifying to see ISM’s index of employment rise to +21, up from +18. This is the ninth month the index has been positive. All these statistics indicate that the U.S. industrial economy is expanding at a slightly faster pace. ISM’s overall index rose to 56.3 from 55.5. Clearly, the national economy is still growing, even though the pace has moderated in recent months.
At the international level, the J.P. Morgan Global Manufacturing report released Sept. 1 did not follow the same pattern reported by ISM. For the second successive month, growth rate in the index of new orders backtracked, this time to 52.5 from 54.0. While still positive, most of the backtracking was attributed to Japan, the U.K. and the Eurozone. New export orders for the entire survey hit a 13-month low.
In contrast, the international employment index rose modestly to 53.7 from 53.5. JPM's Global Manufacturing Index came in at 53.8, down from 55.3. However, the survey author noted that much of the “boom rates” earlier in the year can be attributed to rebuilding of inventories. He further noted that “conditions will continue to cool as the year progresses, but there looks to be sufficient traction remaining to sustain the recovery.” This is good news.
Since our last report, some economic news has been negative. In particular, the second quarter GDP was revised downward to +1.6 from +2.4 — a pretty substantial revision. Looking at the numbers more closely, the big problem continues to be imports, which are still rising in many categories from oil to cars to food and food products. Net imports are a subtraction to GDP — hence, a major cause of the downward revision of the second quarter growth numbers. Most estimates are for the third quarter to be weaker, but still positive.
At best, the news about the housing market continues to be mixed. The financial markets responded especially negative to the July drop in new home sales. In our local survey, firms associated with the housing industry have suffered. Unfortunately, we still have a national inventory of unsold homes that is running about a million units above average. Foreclosures continue to flood the market with houses, bringing down the average sale price of all homes. Our rate of new home construction remains about half of what it was at the 2006 peak, meaning that about half of the home builders are now still out of work, retired, or out of the business altogether.
On the positive side, the Aug. 31 release of the closely watched Case-Shiller housing index posted a small but significant gain. Since this is the most comprehensive national index of housing prices, it is good to see the trend going in the right direction. The index number for the latest period came in at 147.81, up significantly from the low of 140.83 in May 2009, but far, far below the high of 206.51 posted in April 2006. A little math tells us that the current index reflects a 28.4 percent loss in home values over the past four years. However, the trend is still modestly up, although the pundits are not sure that the trend will continue. Some of the recent improvement can be traced to government purchase incentives, which have now expired.
It is worth repeating that it will be many, many years before Case-Shiller returns to the level of 2006. Homeowners now feel 28.4 percent poorer, and it will take some time for them to adjust to this new reality. Furthermore, the mortgages for 21.5 percent of all homes are now inverted, which means that more is owed on them than they are worth.
Although inflation continues to moderate for most of the industrial market, the month of August saw a slight uptick. ISM’s index of prices rose to +23, up from +15. In greater Grand Rapids, the index rose to +18, up from +4. In the southwestern Michigan survey, we saw a slight decline from +30 to +23. Some of the big-ticket items like copper, stainless steel and plastic resins were generally the cause for the modest increase. Since we now live in a global economy, prices are also influenced by the international markets. Following the same pattern as our local surveys, J.P. Morgan’s index of world prices rose to 58.5 from 56.9.
Given all of this information, where do we stand with the possibility of a double-dip recession? It is worth repeating the previous projected odds of 30 percent. It is also worth repeating that the biggest cause of a DDR will be that we talked ourselves into it. A more likely scenario is that we will simply slide into a period of slow growth, with GDP falling to about 1 percent for one or even several quarters. Businesses remain worried about the impact of tax increases. Bankers continue to keep credit tight at all levels and are worried about the impact of the massive overhaul of the financial system recently passed by Congress. Business confidence and consumer confidence are still low. Industry-wide auto sales for August were down 21 percent. There will probably be no double-dip recession, but welcome to the 2010-2011 slowdown.
Brian G. Long, CPM, is director, Supply Chain Management Research, Seidman College of Business, Grand Valley State University.