West Michigan economy is still holding its own

January 9, 2012
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Still modestly positive. That's the latest word on the Greater Grand Rapids industrial economy, according to the data collected in the last two weeks of December. New Orders, our closely watched index of business improvement, advanced to +18, up from +13. In a similar move, the Production index rose to +12, up from +7. The Employment remained positive, but retreated to +19 from +24. The percentage of respondents reporting staff increases remained at 30 percent. Since December is often a slower month, all of these numbers continue to be consistent with the slow growth we have been experiencing since our local statistics turned positive in May 2009.

Turning to local industry groups, the December reports are always somewhat skewed because of the holiday season. Some auto parts suppliers took two weeks of downtime, but most only took a few days because of strong demand. Just as last month, our industrial distributors were strong. The office furniture firms are still holding on to recent gains, but the strong upward momentum has stopped. The mood of the respondents remains one of cautious optimism.

At the national level, the results are very modestly improved. The Jan. 3 report from the Institute for Supply Management, our parent organization, indicated that New Orders edged up to +2 from +1. The Production index rose very modestly to +8 from +3. Even the Employment index came in at +4, up from +1. All of this resulted in ISM’s overall manufacturing index of manufacturing rising to 53.9, up from 52.7. Hence, we are entering 2012 on a sound footing, but the growth rate is modest.

At the international level, the JP Morgan Global Manufacturing report released Jan. 3 showed that the downward trend of the past few months has reversed itself. Since the break-even point for all of their indexes is 50.0, JPM’s worldwide index of New Orders flipped back to positive at 50.1, up from 48.8. After incrementally sliding for five months, the Production index rose to 52.1, up from 49.7. JPM’s overall international index edged up to 50.8 from 49.7. As we always caution, one month is not a trend. However, these statistics are the first that we have seen to indicate that the slowing of the world economy may not be as pronounced as previously expected.

It is time to look ahead to factors that will define the 2012 economy:

Automotive: The positive trend in auto sales should continue well into 2012. It is now more than four years since our latest round of economic troubles began, and most auto customers have paid down their auto debt considerably. Since the total miles driven have fallen very slightly in the past four years, the pent-up demand should propel auto sales for most of 2012. We are now well past the bankruptcies of the automakers, and the major firms have again turned very profitable. All of this is especially good news for our local auto parts producers. Continued positive auto sales will drive the Michigan economy forward, resulting in lower unemployment.

Industrial inflation: The middle of 2011 was plagued by another round of speculation for many key commodities like copper, aluminum, zinc, lead and nickel. As the world economy slowed beginning in mid-summer, prices for most commodities began to return to reasonable levels. Except for steel, the European recession and the slowing of economic activity in China should keep demand low enough to keep a lid on prices for most of 2012. However, in the steel industry, the limited number of producers now exhibit almost monopoly-like power over the market. With the ability to shut down mills to keep supplies tight, steel prices may edge up during the first half of 2012. For the second half of 2012, the prices for many industrial commodities will depend on the Chinese economy, since China is now the major user of almost every major industrial commodity in the world.

Consumer inflation: With the slowing of the world economy, the prices for most manufactured products should remain stable. However, food prices many continue to rise, given the rising cost of agricultural production as well as the rising cost of production and distribution. Consumer services of all types will also continue to rise, primarily because of shortages of skilled labor in many fields. If the world economy continues to slow, gasoline prices should remain in a trading range between $3 and $3.50, depending on the influence of world news events.

Interest rates: The European debt crisis will cause world investors to favor holding dollars rather than euros. Hence, domestic interest rates should remain low for most of the year. With the threat of inflation not appearing to be a significant problem to the Federal Reserve, it is unlikely that we will see any credit tightening for most of 2012. This will allow the Treasury Department to continue to borrow trillions of dollars with little short-term consequence.

Real estate: According to the latest Case-Shiller report, home prices are still falling at the national level. Locally, there is credible evidence that prices may have bottomed out. The market is increasingly fragmented, and some neighborhoods may even see some modest improvement. However, in neighborhoods where there are still more bankruptcies and foreclosures for the foreseeable future, prices will continue to be under pressure. Mortgage rates should remain near record lows for the first half of the year, but lending standards will remain tight. Overall, West Michigan is still better off than the rest of the state and new home construction should improve modestly. Unfortunately, the prices for many types of building materials did not come down with the recession, so the high cost for building materials will inhibit growth. In all probability, much of the new construction will center on multi-family housing. Apartment rental rates will probably continue to climb. On the balance, we may be defining a new nor
m, which will be very different than the market we saw in the 2001-2005 housing boom.

Unemployment: The national unemployment rate should continue to edge lower, but will still end the year in the 8 to 8.5 percent range. Unemployment in Michigan will probably drop faster than the national rate if the automotive industry continues to improve.

Overall economy: If it were not for Europe, we could have easily hoped that the U.S. recovery would begin to pick up significant steam in 2012. With the upticks we have seen in recent statistics, it could have been our best year since the recovery began. However, we now live in a world economy, and with the European economy either slowing or sliding into a recession, our growth will be moderated. The Chinese economy could also be a wild card. Hence, 2012 will most probably be another year of continued modest GDP growth in the range of 3 percent. The stock market will continue to be plagued by daily events as the Europeans continue “kicking the can down the road” in search of a long-term debt solution. This situation is politically volatile. We have to hope that no one stumbles. If we reach the end of the year with no European debt solution, the markets will not respond favorably. When kicking the can down the road, everyone sooner or later runs out of road. A collapse of the euro would be more than the recent
strength of our economy could offset and we would probably slide into a recession. Europe, on the other hand, would be in total disarray.

Brian Long, Ph.D., is director of Supply Chain Management Research, Seidman College of Business, Grand Valley State University.

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