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Economys growth rate is slowing but stays positive
Growth rate slows, but remains positive. That’s the latest word on the Greater Grand Rapids industrial economy, according to data collected in the last two weeks of May. New orders, our index of business improvement, moderated to +19, down from +29. In a similar move, the production index eased to +26 from +35. Activity in the purchasing offices eased considerably to +25 from +51. Fortunately, the employment index remained fairly strong at +43, down from +46.
However, Economics 101 tells us that employment is almost always a laggard. Given that many other indicators have pointed to slower growth for the second half of 2011, this month’s numbers are not a total surprise. It is worth repeating that all of our numbers are still positive. If this situation changes in coming months, it may become necessary to reassess the projection. Furthermore, some analysts now say the housing downturn may slip further and a full recovery could take eight to 10 years.
Turning to individual industries, the office furniture sector is still positive, although some firms are clearly doing better than others. Most of our auto parts suppliers remain stable, although some report production to be a little slower because of reduced production schedules. Overall, the performance for the industrial distributors came in fairly positive for May. Although some capital equipment firms reported business conditions to be the same as last month, other firms continue to improve.
At the national level, the results are a little more pessimistic. The June 1 report from the Institute for Supply Management, our parent organization, reported that new orders backtracked sharply to +14 from +41. Although the index is still positive by double digits, the growth rate has moderated considerably. In a similar move, ISM’s production index eased to +16 from +38. The employment index moderated to +22 from +29. ISM’s overall index of manufacturing fell considerably to 53.5 from 60.4, one of the sharpest reversals since 2008. However, the U.S. industrial economy is now in its 22nd consecutive month of expansion, and some backtracking is to be expected.
At the international level, the JP Morgan Global Manufacturing report released June 1 remained modestly positive but backtracked to its lowest level since September 2010. JPM’s worldwide index of new orders eased to 51.8 from 53.8. In addition to the U.S., growth moderated in the Eurozone, China and India. Trade volumes hit an eight-month low. The Japanese PMI rose sharply in May, indicating that recovery is now underway. JPM’s index of employment remained positive but backtracked to 53.7 from 55.1. The JPM international index of prices retreated sharply to 66.8 from 72.3. It is obvious that the entire world economy is starting to slow. At the same time, there is still no evidence that another recession is at hand.
For the housing industry, the bad news seems to be getting worse. The S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, show that the U.S. National Home Price Index declined by 4.2 percent in the first quarter of 2011. After five continuous months of decline, Case-Shiller is now declaring “this month’s report is marked by the confirmation of a double-dip in home prices across much of the nation.”
Furthermore, the report states, “home prices continue on their downward spiral with no relief in sight.” Ouch! The report credits the rebound in prices seen in 2009 and 2010 to the first-time homebuyer’s tax credit. Fortunately, the Case-Shiller report is a national report, and almost no one in our local market is quite this pessimistic. Whereas there is evidence that our local housing prices are now stabilizing, no one is predicting that there will be any significant increase in housing prices for many months or years to come. Nationwide, we are building about a quarter as many homes as we did in 2006. The huge layoffs in this industry are generally permanent. Despite lower mortgage rates, credit remains very tight, with the average down payment now about 23 percent. Thank you, Dodd-Frank.
To no one’s surprise, the disaster in Japan finally caught up with the auto industry in May, although the results were not nearly as bad as some of the pessimistic projections. For the Detroit 3, sales at Ford were down by 0.3 percent, General Motors fell 1 percent and Chrysler actually gained 10 percent. The Japanese brands took a considerable hit, with Honda down 23 percent, Toyota down 33 percent, and Nissan retreating 9 percent. For the industry as a whole, sales fell 4 percent. According to industry projections, this trend will probably continue for a couple more months. If the sales situation does not deteriorate further, the overall economic impact will be minimal.
The slowing economy and the slackening of demand have produced some good news for inflation. Last month, we indicated that prices for steel were beginning to moderate, and this trend continued for most of May. Some steel producers are still trying to push through higher prices, but many buyers are now negotiating price reductions. In Greater Grand Rapids, the index of prices eased to +53 from last month’s near-record level of +73. ISM’s index retrenched considerably to +53 from +71. Several big ticket commodities like copper, brass, stainless steel, carbon steel and zinc were reported as falling in price for some of our local buyers.
To anyone who drives a car, it is obvious that another factor dampening economic growth is the price of fuel, both gasoline and diesel. Drawing on the experience from 2008, economists noted little change in driving behavior until the price of gasoline approached $4 per gallon. For the consumer market, this means that trips to the grocery store may now be consolidated, vacations may be taken closer to home, and fuel-efficient cars are now in demand. For the industrial market, it means more fuel surcharges and/or higher freight bills. For overseas buyers, the shipping cost per container has risen considerably in recent months.
One final inhibiting factor is the worldwide financial situation, flanked by the same national, provincial and local situations throughout most of southern Europe. This includes the seemingly endless domestic budget deficits at the national, state and local levels. The so-called PIGS (Portugal, Ireland, Greece and Spain) countries have spent the last three years implementing various “austerity” measures and trying to restructure debt. From our perspective, they seem to have made little headway. Because of the interdependency of the world’s economy, a significant default by any of the European countries on their debt would reverberate around the globe. Would it pull the United States into a recession? This seems unlikely, but the fact is, we don’t know. What we do know is that every flare-up over the European debt situation is followed by a 100 point or more drop in the Dow-Jones.
Brian Long is director of Supply Chain Management Research, Seidman College of Business, GVSU.