- change ups
Devastation in Japan begins to affect US industrial economy
Growth stabilizes. That's the latest word on the Greater Grand Rapids industrial economy, according to the data collected in the last two weeks of March.
New orders, our index of business improvement, moderated to +38, down from last month’s lofty +45. In a similar move, the production index eased to +39 from +41. Purchases edged up to +34 from +33. The employment index also edged up to +37 from +35. It was good to note that 41 percent of the firms in our survey are adding personnel.
Overall, the growth rate for the local economy appears to have stabilized at a moderate rate, and confirms many of the other positive numbers that have been posted in the local media. We now have posted 22 months of positive reports since the recovery began in 2009. The bad news, of course, is that this is still the slowest post-war recession recovery in history.
Turning to our local industrial groups, the recovery of the office furniture industry is still very much on track. The excellent improvement in auto sales has resulted in strong business conditions for our local auto parts suppliers. At long last, there are some convincing signs that the capital equipment business is on the road to recovery. For March, performance for the industrial distributors was good but not great. The performance for firms supporting the aircraft industry was generally stable, but not growing.
At the national level, the results were fairly similar. The April 1 press release from the Institute for Supply Management, our parent organization, reported that new orders edged up to +33 from +32. In an identical move, ISM’s production index rose to +34 from +33. The employment index backtracked modestly to +8 from +9. Because of statistical gyrations, ISM’s overall index of manufacturing edged down to 61.2 from 61.4, the highest the index has been in seven years. Although the industrial sector of the U.S. economy will continue to lead us out of this recession, no major economy on earth is totally immune to the impact of the destruction of productive capability as a result of the Japanese disaster.
At the international level, the J.P. Morgan Global Manufacturing report released April 1 remained positive even though the growth rate moderated. It almost goes without saying that the weakest report came from Japan, which partially contributed to JPM’s worldwide index of new orders retreating to 55.1 from 59.1. Although the growth rate moderated in the U.K., China and the Eurozone, the rates of expansion rose modestly in Russia and India. Greece and Spain are still not doing well. JPM’s Employment index eased to 55.8 from 56.4. Contrary to our domestic reports, the JPM international index of prices retreated modestly to 75.4 from 76.0.
This month’s major economic factor is the devastation in Japan by the horrific earthquake and tsunami. Because of the manner in which the world’s major economies have become increasingly interdependent, we knew the moment the earthquake hit that we would feel some economic impact here. The recent news has reported that almost every automotive firm with a supply chain reaching to Japan has had to curtail or halt production of some product lines.
All of this begs the question of what the impact will be on the U.S. economy. The brutal fact is that we still don’t know. We know that automobile sales will be hurt, but we do not know by how much or how long. We clearly know the impact from Tier I suppliers and some from Tier IIs. Tiers III and IV are a different story. That may take at least another month to figure out. We know there will be shortages in some industrial chemicals, paint pigments and electronic modules and components. For some of these, it simply may not be possible to find alternate sources any time soon. Hence, there will be an impact on automotive well into the summer. All of this is bound to lead to a revision of the wisdom of JIT delivery of some critical items.
Other economic news at the national level related to the drop in existing home sales. For the month of February, sales plunged nearly 10 percent to their lowest level in nine years. Furthermore, almost 40 percent were foreclosures or short sales. Fortunately, our local housing market is a little better off than the national market, and we are beginning to see some tentative signs of price stabilization. However, we are still a long way from declaring an end to the housing crisis, and an even longer way from seeing housing prices start to escalate again. Unemployment in the housing industry, for those people who have not already dropped out or given up, remains at about 20 percent, with no prospect of improving any time soon. Along with the psychological and personal financial dimensions of the weak housing market, we are seeing lower-than-normal consumer and small business confidence. In the case of the smallest of businesses, entrepreneurs often borrow against their homes to finance business expansion. Banks
are now reluctant to make those kinds of loans. This contributes to higher unemployment.
There is no good news for industrial inflation. In fact, conditions worsened during March. At the national level, ISM’s index of prices rose to the June 2008 level of +70, up from +64. For Greater Grand Rapids, our uptick was from +71 to +73. In Southwestern Michigan, the index leaped from +56 to +72. The lists of commodities in short supply and rising in price continue to grow with no immediate end in sight. Furthermore, the items listed include almost all of the big ticket industrial commodities. Although the pricing situation is still not quite as bad as 2008, there is no sign that we have topped out. What is also bad is that our index of Raw Materials Inventories continues to rise to near record levels. Historically, recessions have been spawned by inventory liquidation, so this situation bears watching.
For March, auto sales for the industry as a whole were up 20 percent compared to last March. For a change, Chrysler led the way with 31 percent, followed by Honda at 24 percent, Ford at 16 percent and GM at 10 percent. Sales declined for Toyota, partially because of reduced dealer incentives and partially because the company still has a cloud over its head. Despite considerably higher gas prices, pickups are selling at a much faster rate than expected. One dealer attributed the increased showroom traffic to fears of availability and selection now that the automotive supply chain has been interrupted. If this is true, then we may expect that sales for at least the next few months will not be as strong.
In summary, as the GDP and our own recent statistics show, the economy is definitely still growing, and the pace appears to be modestly accelerating. The frustration remains that the economic rebound is slow and unevenly distributed. We expect some disruption over the next few months because of the Japanese disaster, but the severity is still unknown.
Brian Long is director of Supply Chain Management Research, Seidman College of Business, GVSU.