State can expect slow growth for next two quarters

February 14, 2012
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Single digit positive. That’s the latest word on the Greater Grand Rapids industrial economy, according to the data collected in the last two weeks of January.

New Orders, our index of business improvement, remained positive but backtracked to +9 from +18. Following suit, the Production index eased to +7, down from +12. The Employment index resumed a positive course and advanced to +26, up from +19. The percentage of respondents reporting staff increases grew to 34 percent. Clearly, the numbers are still positive, but the pace has slowed. It is certainly no cause for concern, unless this trend continues. The slow growth mode is still intact.

Looking at local industry groups, January is usually a back-to-work month and a little stronger than December. However, the office furniture business, which had turned flat, appears to have turned slightly negative. Our automotive parts suppliers are offsetting this trend, and so are the capital goods firms. Business was good for the industrial distributors, but slower than in November and December.

At the national level, the results are much stronger than expected. The Feb. 1 report from the Institute for Supply Management, our parent organization, indicated that New Orders bounced up to +15 from +2. Given that this index was negative in August, September and October, the current report is very good news. However, the Production index backtracked very modestly to +7 from +8. The closely watched Employment index edged up to +5 from +4. All of this resulted in ISM’s overall index of manufacturing rising to 54.1 from 53.1 (adjusted) last month. Since the industrial sector is continuing to lead us out of the recession, these numbers are a good reason to believe growth should be good for at least the next two quarters.

At the international level, the JP Morgan Global Manufacturing report released Feb. 1 indicated the downward trend of the past few months has reversed itself from the mid-2011 slide. JPM’s worldwide index of New Orders strengthened to 51.6, up from an adjusted 49.3. The international Production index rose to 52.0, up from an adjusted 51.8. Considering that many European countries have slipped into negative growth for the fourth quarter of 2011, these numbers are encouraging. It implies that the impending European recession may be shallow and relatively short.

The biggest economic news over the past month has been the decline in the unemployment rate at both the state and national levels. After being known for many months as having the highest unemployment in the nation, the official unemployment rate for Michigan fell by 0.5 percent to 9.3 percent (seasonally adjusted), down considerably from the high of 14.1 percent just 29 months ago. However, nearly half of the drop is the result of 12,000 residents leaving the work force. Combining with the workers who are underutilized or discouraged enough to leave the work force, Michigan’s so-called “underemployment rate” now stands at 18.8 percent.

Even though the national rate of unemployment fell from 8.5 percent to 8.3 percent, we still have a long way to go to get back to a “normal” employment level. As in Michigan, a portion of the nation’s unemployment drop also resulted from discouraged workers leaving the work force. Fortunately, the national “underemployment” rate fell to 15.1 percent, down from 15.2 percent. For the moment, the unemployment trend appears to be headed in the right direction.

The other big economic news came from the report for the 2011 fourth quarter GDP. The preliminary estimate came in at +2.8 percent, up considerably from the +1.8 percent reported for the third quarter. According to U.S. Department of Commerce, “The acceleration in real GDP in the fourth quarter primarily reflected an upturn in private inventory investment and accelerations in PCE and in residential fixed investment.” In short, consumers did pick up their spending, which is almost always good news. However, businesses at the industrial level also contributed to the upswing by building inventory. Since last summer’s Japanese disaster, a lot a firms are reevaluating the wisdom of JIT systems that allow almost no cushion for anything going wrong in the supply chain.

As we have noted many times, Michigan’s recovery from the recession largely has been driven by the resurgence in automobile sales. Especially on the west side of the state, many of our auto parts suppliers are now operating at full capacity and are hiring. Many firms would hire more if they could find qualified candidates. The auto industry ended the year on a firm note, and the January sales report continued on the same track. Chrysler was the star, posting an 81 percent increase in sales. This is on top of the 22 percent increase posted a year ago. Ford gained 7 percent, Honda was up by 9 percent, and Toyota advanced 8 percent. Nissan rose 10 percent. Bucking the trend, General Motors was down 6 percent, primarily due to the expiration of several incentive programs.

Some of the smaller brands’ sales were up sharply: Volkswagen gained 40 percent, Subaru 21 percent, and Hyundai/Kia 20 percent. Overall, the total industry gain for January came in at a respectable 11 percent. An important point is worth repeating: As long as auto sales continue to improve at the present pace, Michigan’s economy will continue to recover from the recession. However, we cannot expect auto sales to continue to grow at an 11 percent rate for much longer. A good guess is that we will taper off to single-digit growth over the next few months. Why? Because the present growth is fueled by pent-up demand, low interest rates and the relatively high price of late model used cars. Furthermore, by not purchasing during the recession, many potential buyers have paid down their car loan balances or paid their cars off altogether, allowing them to easily qualify for financing for new cars. All of this will run its course, and we will settle into a new norm for auto sales. For our local auto parts firms, the
fact that all of the major auto producers are now profitable means that they are less likely to squeeze their suppliers into bankruptcy. There is also a pretense of “supplier cooperation” being floated around Detroit. We will have to evaluate the success of that theory as time goes along.

Regrettably, the biggest threat to our economy remains Europe. In fact, most of the current downturn in Europe can be traced to nervousness about (1) the stability of the European banks; (2) the fear of the potential collapse of the euro; and (3) the fear of contagion brought on by a collapse of Greece, Portugal, Italy, Ireland or Spain. Furthermore, non-euro countries like Hungary are having refinancing problems of their own. As we are well aware, the news about the ongoing debt crisis changes day to day. Currently, many eyes are on March 20, when €14.5 billion in Greek bonds are due ($18 billion). Right now, the Greeks simply don’t have the money and are still negotiating for a bailout. They are also negotiating with the bondholders over what percentage of the face value they will actually pay, which will probably be something like 35 percent. Even if the Greeks obtain refinancing for March 20, they have a string of other bonds coming due for the next three years. The Greek economic growth rate remains very
negative, unemployment remains very high, and the citizens that do have money continue to (1) buy gold and (2) move their money out of the country. All of this means that the European debt crisis is far from over. If all this consternation results in nothing more than a shallow European recession, the new-found strength of the American economy will probably be enough to keep our economy positive. However, no country is an island in today’s economic world, and a severe European recession will, to some degree, negatively affect us, as well.

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

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