Tasty summer treat no economic double dip in sight

July 8, 2011
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Moderate growth resumes. That's the latest word on the Greater Grand Rapids industrial economy, according to data collected in the last two weeks of June.

New orders, our closely watched index of business improvement, edged up to +23 from +17. The production index remained unchanged at +26. Activity in the purchasing offices also rose modestly to +29, up from +25. The employment index continued its strength of recent months, but the growth rate moderated to +34, down from +45.

Overall, our statistics indicate we are on track for continued economic growth, even though the rate of growth may slow in the second half of the year.

Turning to our local industry groups, the office furniture sector is still fairly positive, although some firms are clearly doing better than others. For our automotive parts producers, the schedule reductions resulting from the Japanese parts shortages appear to be over and business conditions look positive going into the summer months. For the second month in a row, industrial distributors came in fairly positive. Some capital equipment firms reported a decline in business conditions, while others remain stable.

At the national level, the results are slightly less positive. The July 1 report from the Institute for Supply Management, our parent organization, indicated that new orders backtracked modestly to +11 from +14. The production index remained unchanged at +16. The employment index came in with a modest uptick to +24 from +22. ISM’s overall index of manufacturing rose modestly to 55.3 from 53.5. In short, it appears that the sharp drop in ISM’s numbers was influenced by the convergence of several negative economic factors in April and May, fueling another round of speculation for a double dip recession. Fortunately, we are now in the 23rd consecutive month of expansion, and it appears that the threat has passed.

At the international level, the JP Morgan Global Manufacturing report released July 1 remained modestly positive, but still backtracked to a 23-month low. JPM’s worldwide index of new orders eased to 50.9 from 51.8. Expansions were noted in Germany, France, Austria and the Netherlands. Modestly weaker conditions were reported in Japan, China, India, Brazil, Russia and the U.K. Greece continues to slide at an accelerated rate. Despite all of this backtracking, the report notes “there are tentative signs that the PMI is nearing a bottom, consistent with the recent firming of some of the official data on manufacturing output.” The JPM international index of prices retreated sharply to 60.8 from 66.8. JPM’s overall index eased to a 23-month low of 52.3 from 53. Again, any number above 50 is considered positive.

Since the recession recovery began two years ago, we have been bombarded with threats of a so-called double dip. For the last couple of months, we have received numerous reports about various sectors of the economy starting to soften. With this month’s statistical uptick, it appears likely that there will be no double dip. Slow growth will continue.

Why did we have a slight dip in April and May? Several factors converged. First, the price of fuel skyrocketed to the levels of 2008 right before the crash. Part of the current bubble was caused by speculators taking advantage of the Libyan crisis, and part of the problem was a simple imbalance in supply and demand. Needless to say, oil prices now are down more than 20 percent from the highs of three months ago, and this problem appears to have passed, at least for now. A hurricane in the Gulf could change this overnight.

The second problem was the shock to the supply chains that imported products from Japan, especially for the auto industry. The Japanese firms now expect to be back to near-normal by September, much earlier than previously forecast. In short, the impact of the Japanese disaster on the U.S. economy is almost over.

The U. S. spring economy also was impacted by unusually destructive weather. Some of the worst tornados in history devastated towns and cities in the South. Flooding from the Mississippi River and its tributaries still is causing problems.

Finally, the Greek financial crisis has been abated, at least for a year or two. This has helped to stabilize the financial markets and restore business confidence around the word.

This month’s big economic news is the passage of Michigan’s new budget for FY 2012, which incorporates some of the biggest changes in taxation since the Headlee Amendment many years ago. With the goal of closing a huge budget gap, the new budget incorporates some controversial cuts in education as well as benefit cuts for state workers. Most important, the complicated Michigan Business Tax has been replaced with a 6 percent flat rate tax on profits. Will this attract new business to the state as proponents have claimed? Yes, of course. But it may take years before the major impact is felt. Indeed, the most immediate benefit to Michigan will be to retain jobs from firms that would otherwise move out of the state. This means that the total cost of business will now be reduced just enough to keep some firms in business or from seeking more favorable tax environments elsewhere. The simplicity of the new tax for planning purposes is also a plus. Hence, we should see some moderate improvement in the unemployment ra
te over the next couple of years. However, this should not be regarded as a total fix. Michigan must still continue to diversify its economy by balancing our automotive concentration with new industries over the long term.

As we look at auto sales for June, we are still feeling the impact of the Japanese disaster. Sales at GM were up 11 percent, Ford gained 10 percent and Chrysler rose 30 percent. The transplants took the hit, with Toyota and Honda both down 21 percent, largely because of depleted dealer inventories. Nissan increased 11 percent as it tries to gain share on Honda and Toyota. Overall, industry sales were up a modest 7 percent. However, with the Japanese crisis now subsiding, we should see some significant improvement in auto sales as we head toward the 2012 model year.

Finally, our fears of runaway industrial inflation continue to subside. In Greater Grand Rapids, the index of prices eased to +46 from +53. Regarding specific commodities, the prices for almost all grades and types of steel are moderating or falling. The same is true of some grades of plastic resin. With the price of oil now lower, most organic chemicals and fuels are edging down in price.

In summary, the expansion of the world economy continues to slow, but there is no evidence pointing to a double dip recession. In fact, the problems that raised concern have waned over the past month. Nevertheless, bank credit will remain tight and the housing market shows no sign of recovery. Hence, the national economy will probably slow in the second half of the year. If automotive sales pick up later in the summer, economic growth in Michigan could begin to outpace the national economy.

Brian Long is director of Supply Chain Management Research, Seidman College of Business, GVSU.

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