Moderate growth makes another appearance in the area

January 8, 2011
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Moderate growth returns. That's the latest word on the greater Grand Rapids industrial economy, according to data collected in the last two weeks of December.

New orders, our closely watched index of business improvement, rose to +31, up from +16. The production index edged higher to +19 from +18. Activity in the purchasing offices picked up modestly to +19 from +16. Growth expanded for our index of employment, which rose to +27 from +21.

Historically, December has been a slow month because of reduced production schedules and Christmas holidays. This month’s report for greater Grand Rapids broke the pattern. In this same vein, the survey participant comments are among the most positive we have seen since local recovery began in April 2009.

Turning to local industrial groups, the office furniture industry is clearly pulling out of the long recession as evidenced by an uptick in new orders in recent months. Our industrial distributors had one of their best months in recent memory. Although slowed somewhat by the Christmas holidays, our automotive parts suppliers posted a better month than usual. Some elected to forgo the usual holiday shutdown altogether. More capital equipment firms are seeing a significant upturn in business, although others are still slow. Performance for the firms related to the aircraft industry continues to be mixed.

At the national level, the economy is growing at a modest rate. The Jan. 3 press release from the Institute for Supply Management, our parent organization, reported that new orders edged up to +9 from +5. In a similar move, ISM’s production index rose to +12 from +6. The employment index retreated to +10 from +15. ISM’s overall index rose to 57.0 from 56.6, the 17th month that the index has been positive. All of this continues to confirm the slow growth forecast of many economists for 2011.

At the international level, the J.P. Morgan Global Manufacturing report released Jan. 3 also was moderately positive. JPM’s worldwide index of new orders rose significantly to 55.9 from 53.9. Of the 29 countries included in the survey, noteworthy expansion came from the US, China and the Eurozone, while Japan and Greece were laggards. The employment index expanded for the 12th consecutive month, and Germany set a record high. Considerable concern was raised all over the world concerning the rise in input commodity prices. JPM's overall index of manufacturing rose to 55.0 from 53.9. On a positive note, the survey author further noted that the “acceleration towards year-end suggest the sector will enter 2011 on a firmer footing than looked likely at the end of Q3.”

As we always do at this time of year, it is time to look ahead to factors that will define the 2011 economy:

Automotive. The major domestic firms have again turned profitable, and many new vehicles are selling well. The prospect is good that the industry will see modest growth throughout the year. This is good news for our local parts suppliers. However, it will be many years before total domestic sales reach the levels of 2005. 

Industrial inflation. As the U.S. and the rest of the world continues to recover from the recession, the demand for key commodities like copper, aluminum, zinc, lead and nickel will continue to rise. Because of the absence of other investment opportunities, many commodities like copper will continue to be targets for hedge funds and other big-money speculators. In the case of steel, a limited number of producers now exhibit almost monopoly-like power over the market. To a lesser degree, the same scenario may be true for plastic resins and some industrial chemicals. The good news is that most non-commodity inflation will be held in check by worldwide competitive forces. 

Consumer inflation. There is always a lag time between industrial and consumer inflation. Hence, if the economy continues to improve at its present rate, we will probably begin to see more consumer inflation in the second half of the year. Food prices should continue to rise, as will the cost of many types of consumer services. Gasoline will probably approach $3.50 per gallon by mid-summer. As the price of natural gas and home heating oil rise, the cost of home utilities will probably be higher by the end of 2011. 

Interest rates. As the U.S. and the rest of the world continue to recover from the recession, the demand for capital will cause rates to rise. The Treasury Department will have a much more difficult time throwing a trillion dollars in new debt on the market, resulting in treasury bonds rising in price as the year goes along. This will cause home mortgage rates to continue to increase, much as we have already seen in the rates of 30-year mortgages. Adding to this is the uncertainty of the worldwide credit markets created by the European countries of Greece, Ireland, Portugal, Spain and Italy. On the balance, the worldwide recovery from the recession should continue to stay on track, although higher interest rates will restrain the growth. However, if one of the aforementioned European countries were to default, all bets are off.  

Real estate. Although home prices are still falling at the national level, there is credible evidence that prices at the local level may have bottomed out and may even see some modest improvement throughout 2011. However, more bankruptcies and foreclosures for the foreseeable future will continue to add more houses to the market. Although mortgage rates will continue to rise, banks will slowly begin to loosen their very tight lending standards. For new home construction, rising prices for building materials will inhibit growth. On balance, there is little doubt that 2011 will continue to be a difficult year for both commercial and residential real estate. Any significant recovery is still years away. 

Unemployment. The national unemployment rate should continue to edge lower, but will still end the year in the 8.5 percent to 9 percent range. The unemployment picture for Michigan will remain negative but will probably drop faster than the national rate if the automotive industry continues to improve. Also on the negative side, the “brain drain” will continue to see many of our best and brightest leave the state in search of better opportunities, leaving us with a larger group of unemployables.

Overall economy. We expect the industrial economy to continue modest improvement throughout 2011. Overall GDP growth for 2011 should be about 3 percent. Many firms will continue to set new sales records. The state of Michigan fiscal budget will continue to be seriously in the red. A second leg to the recession is increasingly unlikely. However, another reminder: One successful terrorist attack and all bets are off. We will slide back into some form of recession.

Brian G. Long, CPM, is director, supply chain management research, Seidman College of Business, Grand Valley State University.

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