Area economic growth slow heading into new year
Slow growth continues. That's the latest word on the greater Grand Rapids industrial economy, according to the data collected in the last two weeks of November. New orders, our index of business improvement, remained virtually unchanged at +15, down from +16. In a similar move, the production index eased to +18 from +19. Activity in the purchasing offices, which we report as our index of purchases, rose modestly to +16, up from +9. The index of employment remained unchanged at +21. As a whole, this month’s report depicts very little change for this month from last.
It is clear that the Greater Grand Rapids economy is still growing, but the pace has slowed from the previous months. Hence, we will probably end the year with slow growth and should expect the slow pace to continue well into 2011. Much of the gloom and doom has subsided, but the pace of the recovery remains painfully slow.
Looking as we always do at individual industries, Michael Dunlop’s quarterly report for the office furniture industry posted an overall index of 58.49, not far from the record 59.72 he reported in July 2005. Our survey confirms that new orders are up considerably for most of the office furniture firms in our survey, although some respondents note that it will still take many months before the industry returns to the pre-recession levels of production.
Our automotive parts suppliers are still doing well, and one is even at a record level of production. The stabilization of auto sales continues to help. Some of the capital equipment firms are seeing a significant uptick in business, although others are still stuck in the recession. For November, performance for the industrial distributors was mixed.
At the national level, this month’s results are not quite as strong. The Dec. 1 press release from the Institute for Supply Management, our parent organization, reported that new orders eased to +5 from +11. ISM’s production index remained positive, but retreated to +6 from +23. The employment index edged down to +15 from +16. Unlike last month, these new statistics indicate that the pace of the recovery in the U.S. industrial economy is slowing a little. ISM’s overall index eased to 56.6, down from 56.9. This confirms the general feeling among economists that the U.S. economy is in for many months of slow growth.
At the international level, the J.P. Morgan Global Manufacturing report released Dec. 1 was a little more optimistic. JPM’s worldwide index of new orders edged up to 53.9 from 53.7. It is worth remembering that any reading higher than 50.0 is considered positive. Of the 29 countries included in the survey, the pace improved in France, Germany, India, China and the U.K. Weakness was reported in Japan, and to no one’s surprise, in Ireland, Spain and Greece. The international employment index edged up to 53.2 from 52.9. JPM's overall index of manufacturing rose to 53.9 from 53.7, a four-month high. Overall, the international economic recovery now appears to be outpacing the United States. The survey author further noted that “growth should gain speed heading into the New Year as the drag from inventory adjustment fades.”
From our local reports, it is obvious that the recovery from the Great Recession will be slower than any recession in the past 60 years. Four factors are still to blame. First, there is still a glut of unsold and unoccupied housing on the market, which will keep pressure on new construction for months to come. In addition, the rate of foreclosures will continue to be high, throwing more houses on the market. We are years away from the housing market returning to normal.
Second, consumers are not spending as much. The artificial boom of the 2004-2006 era was partially financed by extreme overspending and over borrowing. In the years before the collapse, consumer savings rates dropped to their lowest levels in history. In addition, consumers borrowed against the skyrocketing value of their homes both in the form of buying homes they couldn’t afford and in the form of home equity loans. The price of housing was automatically assumed to go up. With the nationwide fall in housing prices, even the frugal homeowners feel less wealthy. Many baby boomers saw the values of the 401(k) portfolios decline, and the recent surge in stock prices still has not brought them back to 2006 levels. Savings rates are rising, which would normally be regarded as a good sign. Unfortunately, this return to sound personal finance occurs at the same time that more spending would actually help the recovery.
The third problem relates to the tight lending policies of banks. Gone are the days of zero percent down. Gone are the easy (albeit high interest) loans for people with credit scores below 620. Loans for proprietorships employing less than 25 people are difficult to obtain, inhibiting hiring for this class of small business. Whereas most observers feel the recently enacted banking reform legislation will be good for the system over the long term, it leaves the banks with a host of new and, so far, undefined pro-consumer regulations. While it is certainly wise for the regulators to make sure that the failures of the banking system never happen again, the local loan officers now feel compelled to err on the side of caution. As a result, even good loans are being rejected unless the borrower can prove that he/she doesn’t really need the money in the first place or can provide 100 percent collateral.
Fourth, uncertainty about the future continues to keep both business and consumer confidence low. The new health care law contains numerous new taxes, and no one is sure of their impact on the overall economy. Because of congressional inaction, personal tax rates remain uncertain. Even the worldwide geopolitical situation is uncertain. The “feel good” era of 2006 is gone, resulting in business and individuals hoarding their cash and not spending on the future.
Collectively, all of these problems have heretofore been more than offset by the strong performance by the industrial economy, wherein some of the firms in our local area continue to report record sales and record profits. These same firms continue to add new people and equipment, albeit slowly. Exports sales for some firms and industries are booming. Ford and General Motors have returned to strong profitability, and their suppliers also are bouncing back. Despite all the grumbling, consumers are now expected to spend more on Christmas than any time since 2006.
Bottom line: In the coming months, barring some unforeseen tragedy such as the collapse of the euro, a significant terrorist attack, or some new war, we will continue to recover from the Great Recession. However, this recovery will probably be longer and slower than any recession in recent history.
Brian G. Long, CPM, is director, supply chain management research, Seidman College of Business, Grand Valley State University.