World economys woes slow to reach West Michigan

October 10, 2011
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Modest growth and slightly improved. That's the latest word on the Greater Grand Rapids industrial economy, according to data collected in the last two weeks of September. New Orders, our index of business improvement, rose to +25 from +13. In a similar move, the Production index edged up to +25 from +17. However, activity in the purchasing offices backtracked to +14 from +21. The index of Employment moved up to +27 from +26. The percentage of respondents reporting staff reductions fell to 6 percent from 8 percent. Fortunately, our local statistics continue to be stronger than the rest of the country.

Turning to local industry groups, automotive parts producers are generally reporting improved business conditions, no doubt in response to the 10 percent improvement in auto sales. The capital equipment firms also are doing better than the past two years. Office furniture firms are holding steady, but the recent decline in business confidence is starting to erode the prospect for future performance. For the fifth month in a row, industrial distributors came in fairly positive.

At the national level, the results again remain flat. The October report from the Institute for Supply Management, our parent organization, reported that New Orders remained negative at -1, but came up from the two-year low of -3 last month. The Production index rose to +2, up from 0. For the Employment index, last month’s +7 dipped to +6. ISM’s overall index of manufacturing rose to 51.6, up from 50.6.

At the international level, the JP Morgan Global Manufacturing report continued to backtrack to a 27-month low. JPM’s worldwide index of New Orders remained below the break-even point of 50 at 48.5, down from 49.4. JPM’s overall international index declined to 49.9 from 50.2. Other countries that are backtracking include most of the Eurozone, Japan and Brazil. China saw a modest uptick. The survey author is still modestly pessimistic and notes that “the signs point to weak growth or month-to-month declines in industrial production in the next few months.”

One bright spot in this month’s report is automotive sales. Chrysler led the way with a 27 percent gain, followed by General Motors up 20 percent and Ford up 9 percent. Among the foreign nameplates, Nissan was up 28 percent and the Hyundai group gained 14 percent. However, the earthquake aftermath still left Toyota down 9 percent and Honda lower by 8 percent. The automotive forecasters are now predicting that this trend should continue for at least a few more months.

Industrial inflation appears to have dissipated for most products. The price of oil is down considerably from the highs of a few months ago. Copper is down 35 percent from earlier in the year. Aluminum is down 15 percent just in the past few weeks. The steel companies keep posting price increases that will be rejected. All of this would be a call for celebration if it were not for the fact that the lower prices signal a slowing of the entire world economy, which may be sliding into a recession.

A recent survey of economists says that we have a one-in-three chance of sliding into another recession, or a double dip of the 2007-2009 recession, depending on terminology. By the statistics in our current report, the odds are probably higher than that. By the recent statistics reported in the media, many indicators are down, including those related to business and consumer confidence. However, the big problem this time is not with the U.S. From the JP Morgan report, it appears that at least some economies abroad may already be in a recession. To most global observers, the 2007-2009 recession was the United States’ doing because of the mess with sub-prime loans. It seems ironic that if we do slide into another recession, many economists will blame the Europeans.

It is worth repeating that the accepted criteria for a recession, i.e., two continuous quarters of negative economic growth, are somewhat arbitrary. It is also worth pointing out that no two recessions are exactly alike. Whereas most recessions evolve as a fairly sharp downturn followed by an equally sharp recovery, it is obvious our recent recession did not follow that pattern. Many economists believe it is the unemployment statistics in most recessions that do the most damage. By these criteria, we never recovered from the 2007-2009 recession.

With the relatively weak GDP reports from the first two quarters of 2011, sliding into negative growth in the third or fourth quarters is not a quantum leap. Barring a severe worsening of the European debt crisis, it appears that a GDP drift into negative territory would be relatively shallow when compared with other recessions. There is also a possibility that a slightly positive quarter could be followed by a slightly negative quarter. This means that we could see a period of stagnation for a year or two. Of course, we would expect a rise in unemployment, and the attitudes of the consuming public, both at the industrial and retail levels, would remain negative.

Another note of caution has begun to surface regarding China. Winding its way through the U.S. Senate is a bill that would punish countries like China that appear to be manipulating their currency exchange rate to their advantage. Given that the Chinese have recently allowed their currency to gradually rise, most pundits thought the bill would not gain much traction. Current estimates indicate that it now costs approximately 30 percent more to do business in China than just a few years ago. Consequently, countries like India, Indonesia and even Vietnam are now of interest to importers. Unfortunately, it is still the misguided populist belief that all or most of our present problems can be traced to job losses to China. This concept is at best an oversimplification. Such thinking ignores the fact that China has become our third-best customer in the world marketplace. Bottom line: The last thing that we need right now is to start a trade war with China. This would be like repeating the mistake of the Smoot-Hawl
ey tariffs that helped precipitate the Great Depression.

The bright spot in all of this brings us back to the seemingly contradictory results of our local surveys, which appear to be both positive and relatively stable. Since 14 percent of the office furniture in the world is made in West Michigan, part of Michigan’s current stability can be credited to the furniture industry. However, it is the auto industry’s strong showing that is keeping our local auto parts suppliers busy. Even the industry itself seems surprised that sales have remained this strong, given the softness of other sectors and the continued restrictiveness of auto loan approvals. Hence, for the immediate future, we expect local statistics to stay positive. We may see little or no local impact of the world economic weakness for some time.

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

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