Grand Rapids manufacturing still moderately positive
Unchanged since last month and still modestly positive. That’s the latest word on the industrial economy in the Greater Grand Rapids area. For the month of March, New Orders, our index of business improvement, remained virtually unchanged at +15, down from +16. There was also little change in the Production index, which edged up to +13 from +12. The Employment index rose to +15 from +13. Just as we noted last month, our survey results for the last year or so have oscillated in a fairly narrow, but positive, statistical range. Hence, the pattern of slow growth continues. As a matter of record, this month marks three full years since the Great Recession began its recovery in the Greater Grand Rapids area.
Looking at local industry groups, we find little change in the pattern of recent months. Many of our local automotive parts producers are at or near plant capacity, so we cannot expect much more expansion. The office furniture business remains flat or even slow for specific furniture types. The capital goods firms turned mixed in February and remained mixed in March. Most of the industrial distributors had a good month.
At the national level, progress continues to be modestly positive, much as it has been for the last 34 months. The April 2 report from the Institute for Supply Management, our parent organization, indicated New Orders edging up to +21 from +19. The Production index advanced to +21 from +20. It was gratifying to see the Employment index come in at +13, up from +10. ISM’s composite index of manufacturing rose a full percentage point to 53.4. Whereas this index is not as high as a few months ago, it still exhibits modest growth. Being consistent, all of the economic statistics we have seen in the last three years agree in reporting an unusually slow recovery compared to previous recessions.
Turning to the international level, the JP Morgan Global Manufacturing report for March came in modestly optimistic. After running slightly negative in late 2011, JPM’s worldwide index of New Orders for March came in at 51.4, up from 51.1. Any index number greater than 50.0 is generally considered positive. In addition to the USA, other countries reported improving business conditions include China, Japan, the United Kingdom, South Korea, Brazil and Russia. Countries offsetting the uptrend were generally in Europe, as well as India. JPM’s Global PMI for March was little changed at 51.1.
Volatility in the European financial markets continues to create uncertainty. Right now, it appears that Portugal may be the next country to beg the European Central Bank for help. Spain has noted that previous austerity programs may need to be expanded. Unfortunately, the European situation changes daily, depending on quotations from politicians, finance ministers and economists throughout the European continent. Weak bond auctions in any of the PIIGS countries (Portugal, Italy, Ireland, Greece, Spain) also upset the markets. In the case of Greece, the recent accord to refinance the country’s sovereign debt still depends on the implementation of additional austerity measures. Some of the country’s smaller political parties are gaining strength by campaigning against these measures. If they are successful, a coalition of several of these parties could overturn the agreement and reignite the crisis.
As we have often noted in past reports, the continued recovery of the auto industry is key to the recovery of Michigan’s economy. March sales numbers for cars and light trucks came in positive, but did not produce the new record sales that some pundits had predicted. Indeed, the seasonally adjusted sales rate for March hit 14.4 million units, up from 13.06 million a year earlier but down from 15.1 million in February. As has been the case for many months, Chrysler led the way with a 34 percent increase, followed by Toyota at 15 percent, Nissan at 13 percent, General Motors at 12 percent and Ford at 5 percent. Honda’s sales turned negative at -5 percent. For the industry as a whole, sales were up 13 percent. This is in addition to the 20 percent increase reported in March 2011 and the 25 percent in March 2010. It comes as no surprise that most Michigan auto parts producers surviving the recession are now at full capacity.
Industrial inflation continues to be a latent threat, although the mild recession that still plagues many of the European countries has kept the prices for many major commodities at bay. However, all of the purchasing surveys mentioned in this report showed slight increases in overall pricing for major commodities like aluminum, stainless steel, oil-based products, polypropylene, lumber and almost all forms of fuel. A few commodities like copper, corrugated and certain grades of steel were reported as falling in price. For many observers, all eyes are still on China, which leads globally in using almost all of the world’s major industrial commodities. The recent boom in the sale of motor vehicles has resulted in new demand for motor fuels.
People ask if sustained $4 gas could throw us back into a recession. The simple answer is no. Over the past several years, many economists have used $4 per gallon as a tipping point. In other words, below $4, people generally complained a lot but continued their driving habits, and kept buying inefficient SUVs and trucks. At about $4 per gallon, large numbers of people start thinking fuel economy in many forms, such as shorter vacations, fewer recreational trips, car pooling and so forth. They also start buying fuel-efficient vehicles. Priorities in this country are such that consumers spend $15 billion per year on bottled water and billions at Starbucks for coffee. Up to a limit, increased gas prices can be absorbed. If we stay at $4 per gallon, the higher price will probably become the new norm, and people will build a lifestyle around it. However, an increase to (heaven forbid) $6 per gallon would strain budgets such that the resulting economic crunch would mean a redefinition of our lifestyle.
At the industrial level, what most survey respondents complain about is fuel surcharges. For bulky products like chemicals, plastics, steel and most other metals, these charges can be substantial. These kinds of unexpected increases in the cost of doing business are difficult to pass along, and often have to be “absorbed” — another way of saying that an increase in fuels and freight costs may directly cut into profits. In the past, the price spikes have been relatively short-lived, and many managers just hang on and hope the prices will come back. Sustained higher prices will cut into corporate profits, which will depress the stock market or business confidence.
Looking forward, we can expect continued volatility in the financial markets because of the European debt situation. It is unlikely that, over the next six months, European economic and/or political gyrations will be volatile enough to inhibit our economic growth. Excluding Greece, the European countries that have slid into negative growth will probably find that their recessions are fairly shallow. However, because of the European recession, our sales of goods and services to Europe will slow considerably, thus affecting our growth here at home. All of this assumes that wiser minds will prevail in the world geopolitical environment, and that some kind of a war does not break out in the Middle East.
Brian Long, Ph.D., is director of Supply Chain Management Research at Seidman College of Business, Grand Valley State University.