Grand Rapids economy growing at moderate pace
Still holding steady. That's the latest word on the Greater Grand Rapids industrial economy, according to the data collected in the last two weeks of September 2010. New orders, our index of business improvement, rose modestly to +33, up from +30. However, the production index eased slightly to +36, down from +42 but still significantly above the +27 we reported for the month of July. Activity in the purchasing offices, our index of purchases, eased to +28 from +38. The index of employment moderated to +44 from +46. It was good to see that 50 percent of the firms in our survey reported adding staff.
Overall, this month’s report still depicts the greater Grand Rapids economy growing at a modest pace. So far, it looks like this trend may continue for a few more months.
Looking at individual industries, it is probably the revival in the office furniture business that is most responsible for the stronger sales number we are reporting. Our automotive parts suppliers are still doing well and production levels are stabilizing. The capital equipment firms were all over charts, with some very busy but others still stuck in the recession. Industrial distributors also were widely mixed, depending on their lines of merchandise.
At the national level, the results are slightly less optimistic. The Oct. 1 press release from the Institute for Supply Management, our parent organization, reported that new orders retreated to a modest +4, down from +7, and considerably below the +22 reported three months ago. The production index eased to +16 from +19. Whereas ISM’s index of employment is still positive, the growth rate retreated to +12 from +21. All in all, these statistics indicate that the pace of the recovery in the U.S. industrial economy is slowing. ISM’s overall index eased to 54.4, down from 56.3.
Hence, the national economy is still growing, but the pace appears to be moderating.
At the international level, the J.P. Morgan Global Manufacturing report released Oct. 1 followed the same pattern reported by ISM. For the third successive month, growth rate in the index of new orders backtracked, this time to 51.4 from 52.4. Any reading higher than 50.0 is considered positive, but the margin is getting slim.
In addition to the U.S., the slower pace was attributed to Eurozone, Japan, Germany and the U.K. Countries reporting improved performance included China, India and (surprise) France.
On another disconcerting note, the international employment index backtracked to 52.3 from 53.7. JPM's overall index of manufacturing came in at 52.5, the lowest level in 14 months. The survey author has turned modestly bearish, and further noted that index “is likely to fall further in coming months, based on the continued slide in the ratio of new orders to inventory. As a result, production is likely to stop growing or even contract in the next few months.”
This month’s good news came from the latest report on automobile sales, which rose at a rate of 29 percent for the industry as a whole. One of the stand-outs was Ford, which reported a 40 percent increase over September 2009. Much of the success was attributed to an unexpected increase in truck sales. Chrysler was also a big winner for September, where sales rose 60 percent, largely because of the success of new Jeep models recently launched. More modest growth was reported by Honda (26 percent), Toyota (17 percent) and General Motors (11 percent).
Whereas no one has offered a firm explanation for this surprise spirit in the sales performance of the auto industry, we will take good news anywhere we can get it.
Housing and construction continues to show signs of stabilization. The most recent Case-Shiller index of housing prices, released Sept. 28, showed that the annual growth rates in 16 of the 20 MSAs in the survey remained the same or higher than in previous months. The survey author notes that housing prices have generally moved sideways for the past year or so, despite the never-ending barrage of bankruptcies, foreclosures and short sales. Although everyone agrees that it will take years or even decades for the housing market to return to the levels of 2006, it is clearly good news that the slide in prices has stabilized and that homeowners can at least count the present value of their homes as a stable asset.
On the inflation watch, many of our respondents have become increasing frustrated with the attempts by manufacturers to make up excuses for price increases. Statistically, inflation in our local surveys is reasonable, with the index of prices coming in at +20 for greater Grand Rapids and +26 for southwestern Michigan. However, ISM’s index of prices shot up to +41 from +23. Prices for J.P. Morgan’s international survey also posted an ominous boost to 62.6 from 58.5. Whereas some of the increases can be attributed to a pickup in worldwide demand for many key industrial commodities, some of the demands for higher prices are based on near-monopoly power by some firms in their respective industries. The silver lining is that higher prices for commodities, when combined with the stability of home prices, have helped to quell the Federal Reserve’s worries about deflation.
For most of the next month, the news will be dominated by the mid-term election. As Nov. 2 draws near, about half of the commercials on television will be political advertisements. Our mailboxes will be flooded with fliers, and many candidate solicitors will be knocking at our doors. The markets dislike uncertainty, and the outcome of the election may help define the future. However, it is not until the new legislature meets in Lansing and the new congress convenes in Washington that we will have a clearer idea about the political environment that we will face for the next few years.
It is worth repeating that uncertainty about the future has been the biggest factor holding back businesses from investing and consumers from buying. Fortunately, as time goes on, there is less and less talk about a double-dip recession, although we cannot say with certainty that there is no chance of the economy backtracking in 2011. As we can deduce from our statistics, our local economy continues to be more and more influenced by the world economy. Hence, we still have to worry about wars halfway around the world, European countries with debt problems and the willingness of the rest of the world to continue to finance our massive budget deficits.
In summary, the economy will probably slow in the coming months, but there is still no evidence of an impending double-dip to the recession. The election, once it is over, should help reduce uncertainty and may pave the way for some attritional recovery. The poor housing market and high unemployment will continue to be wet blankets that will hold us back for some time to come.
Brian G. Long, CPM, is director, Supply Chain Management Research, Seidman College of Business, Grand Valley State University.