Second half of year growing more questionable

August 13, 2011
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The growth rate turns modest. That's the latest word on the Greater Grand Rapids industrial economy, according to the data collected in the last two weeks of July 2011. New orders, our index of business improvement, edged lower from +23 to +17. In a similar move, the production index eased to +21 from +26. Activity in the purchasing offices, our index of purchases, backtracked to +23 from +29. The only modest uptick this month came from the index of employment, which rose to +37 from +34.

Overall, our local statistics are actually stronger than the rest of the country, and we are still on track for continued economic growth. However, the second half of the year is now growing more questionable.

Turning to local industry groups, it is the office furniture and automotive sectors that are keeping the statistic positive. For our automotive parts producers, the annual uptick for the 2012 model year is well underway, but production schedules for the rest of calendar 2011 are not as optimistic as a few months ago. The office furniture market remains positive, although some firms are still doing better than others. For the third month in a row, industrial distributors came in fairly positive. Just as last month, some capital equipment firms reported a decline in business conditions, while others remain stable.

At the national level, the results are still positive but anemic. The Aug. 1 press release from the Institute for Supply Management, our parent organization, reported that new orders remained positive but backtracked significantly to +1 from +11. ISM’s production index fell to +4 from +16. The employment index came in at +11, but was considerably below last month’s +24. ISM’s overall index of manufacturing fell to 50.1, the lowest the index has been since May 2009. Despite last month’s modest uptick, this month’s statistics continued to soften, much as we have seen over the past several months. In general, these numbers are in line with the recent GDP growth numbers of 0.4 percent for the first quarter of 2011 and 1.3 percent for the second quarter. So far, the third quarter does not look any better.

At the international level, the JP Morgan Global Manufacturing report released Aug. 1 continued to backtrack to a 25-month low. JPM’s worldwide index of new orders sank below the breakeven point of 50.0 to 49.9, down from 50.9. In addition to the U.S., the countries that are backtracking include most of the Eurozone, most of the BRIC countries, as well as China and India. The only country really bucking the trend is Japan, largely because of the massive earthquake rebuilding effort. The survey author is far less optimistic than last month, and notes that “the global manufacturing sector drifted closer to stagnation in July.” The JPM international index of prices retreated to 57.7 from 60.8. JPM’s overall index eased significantly to 50.6 from 52.3, resulting in the weakest report since the recovery began.

Since our last report, Congress has passed a framework for a modest deficit reduction package along with an extension of the debt ceiling. Unfortunately, a promise for $6 trillion worth of reductions that was touted a few weeks ago was downgraded to a small fraction. As expected, our creditors around the world were also expecting a more robust package, and their displeasure has been reflected in the financial markets.

Why is the world economy slowing? Many factors are in play. First, countries like China that are having inflation problems are methodically raising interest rates trying to quell the upward escalation of consumer prices. On the industrial side of the world markets, much of the speculation has gone out of the commodity markets, and prices for most industrial commodities are now moderating. Since slower economies mean less demand, the price of commodities will probably continue to drift lower. This is especially true of the market for most types of steel.

A second more serious problem relates to the fact that much of the world has made unfunded promises for retirement pensions and health care that they are simply not going to be able to meet in their present form. We have seen numerous protests throughout Europe over the past few years as politicians try to take modest steps toward realistic reform. We have seen another bailout for Greece that does little to solve the long-term problem. We continue to see the phrase of “kick the can down the road” in local, national and international newspapers.

Is this a “new” discovery? Of course not. Economists have been warning of this problem all over the world for at least the last 30 years. Now that baby boomers are starting to retire, the problem is coming to the forefront. The situation in Greece is starting to spread to other countries, and investors around the world are beginning to understand just how difficult it is going to be to fix these problems without bankrupting the world economy. In short, investors are looking long term, and they are becoming uneasy. The United States, which the world looks to for leadership, has provided none. If, in fact, the world does sink into another recession, it will be because of the worldwide debt situation.

Turning to July auto sales, inventories are still low because of the impact of the Japanese disaster. Sales at GM were up a modest 8 percent, Ford gained 6 percent and Chrysler rose 20 percent. The major Japanese transplants continued to slide, with Toyota down 23 percent and Honda down 28 percent. Nissan posted a small gain of 3 percent. For the entire industry, sales were up only 1 percent. Even though the Japanese firms plan to be back to full capacity by September, the forecasts for fall sales are not as strong because of the slowdown of the overall economy.

Industrial inflation continues to wane. In the Greater Grand Rapids survey, the index of prices fell to +23 from +46. In a similar move, the Southwestern Michigan index dropped to +39 from +46. ISM’s index of prices declined significantly to +18 from +36. Just as last month, the prices for almost all grades and types of steel are still moderating or falling. The price of oil has bounced around in recent weeks, but the markets appear to be adjusting to crude oil in the $95 range.

To confuse the situation, some commodities may actually go up in price even though market conditions soften. Copper is a good example of a commodity that is increasingly becoming a “reserve” commodity and a place to store money outside of the financial markets. Gold, silver and platinum have traditionally been used for this purpose, but some world investors, especially the Chinese, have decided that copper, palladium and most of the rare earth elements can be used as a safe haven during times of economic upheaval.

In summary, the world economy continues to slow, and the U.S. economy is following suit. The good news is that the numbers are still modestly positive, and there is no clear evidence that we are in for anything worse than a period of frustrating stagnation rather than another recession. Unfortunately, bank credit will remain tight and will probably get tighter, and the housing market will show no sign of recovery.

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

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