Europe puts damper on US economic recovery

May 14, 2012
Print
Text Size:
A A

Modestly stronger. That’s the latest word on the industrial economy in the Greater Grand Rapids area. For the month ended April 30, New Orders, our index of business improvement, edged up to +24 from +15, and the Production index advanced to +25 from +13. The Employment index held its own, rising to +20 from +15. Employers continue to complain about the lack of skilled workers to hire.

Overall, the statistics are consistent with the narrow range we have seen. Three years into the recovery, everyone is still frustrated with the slow rate of growth.

Looking at local industry groups, most of our auto parts producers are still at full capacity. Unfortunately, many of them are unable to grow and contribute more to the local economy. Regrettably, sales for the office furniture business for most firms continue to soften. For capital equipment firms, the April bias was clearly to the up side. Just like March, most of the industrial distributors had another good month.

At the national level, the statistics picked up a little momentum. The May 1 report from the Institute for Supply Management, our parent organization, indicated New Orders rising significantly to +30 from +21. The Production index was even stronger, rising to +35 from +21. The Employment index came in at +22, up from +13, the best reading in nearly a year. All of these good statistics resulted in ISM’s composite index of manufacturing rising to 54.8, up from 53.4.

In short, if it were not for the softness in Europe and other pockets of the world economy, we would probably be seeing much stronger growth in the United States.

The JP Morgan Global Manufacturing report for April posted another modest uptick at the international level. JPM’s worldwide index of New Orders for April came in at 51.8, up from 51.4. The JPM Global PMI also rose modestly to 51.4 from 51.1. Any index number greater than 50 is generally considered positive. However, the Eurozone PMI posted its lowest reading in three years, led downward by Germany, France, Italy, the Netherlands and Greece. In addition, the U.K. and Spain officially slid into a state of recession. By contrast, all the BRIC countries except China were positive, along with the U.S. and Canada.

In recent days, we have received a few disappointing numbers from government reporting agencies. First, the initial reading on GDP for the first quarter of 2012 came in at a tepid 2.3 percent, down from the 3 percent rate in the last quarter of 2011. One factor cited was the unexpected rise in gas prices. A second factor relates to slower business spending, especially for capital equipment. Businesses are reluctant to commit too much money until the economic picture becomes clearer. Another factor is the continued shortage of trained equipment operators.

No matter what our GDP looks like, it is still primarily the unemployment numbers that have resulted in the weakest recovery since the Great Depression. In the most recent report, the national unemployment rate fell to a seasonally adjusted 8.1 percent, down from 8.2 percent. Unfortunately, the decline was primarily the result of 342,000 people dropping out of the work force. Only 115,000 new jobs were added. The percentage of people ages 16-64 now working or looking for work fell to a 30-year low of 63.6 percent, down considerably from the 67.3 percent workforce of January 2000.

In general, our economic recovery would be much stronger if it were not for Europe. Numerous European countries have officially fallen back into a recession. This has resulted in the political situation getting worse, not better. Since various austerity programs did not result in short-term fulfillment, political factions in many of the countries are calling for massive Keynesian government spending programs. The problem is, of course, almost all of the money would have to be borrowed, and the world monetary reserves are already strained. Just raising taxes to balance budgets won’t provide nearly enough revenue. The French have dreamed up a new bailout package for the euro that calls for the Germans to pay for the French, Greek, Italian and other European sovereign deficits. This idea is going over like the proverbial lead zeppelin on the German political scene, and could end up toppling Angie Merkel’s coalition government, thus adding further uncertainty to the region.

The unemployment rate for the Eurozone has risen to a record 10.9 percent. Of course, unemployment in Greece is very high at 19.7 percent and in Portugal at 14 percent. The highest rate belongs to Spain, at 24.1 percent. An alarming 51.1 percent of the Spanish workers under 25 are unemployed. In short, the political situation in Europe could get increasingly volatile as the summer progresses.

Auto sales for the month were a little disappointing. For the sixth month in a row, Chrysler led the industry with a 20 percent sales boost, and Toyota followed with a 12 percent gain. All the other majors were at zero or down. GM lost 8 percent, Ford declined by 5 percent, Honda was down by 2 percent, and Nissan was unchanged. Some analysts attribute the results to dealers carrying unusually low inventories, as well as a shift in preference from light trucks to fuel-efficient cars. As long as production schedules continue to hold up, Michigan’s auto parts producers will do fine. However, it seems obvious that we cannot depend on continued growth in the auto industry to propel our economy beyond the levels attained. It is worth repeating the caution auto sales may top out this summer somewhere near the present levels. Despite the higher prices we have seen for gas, the overall number of miles we are driving remains stable. We will soon work through the so-called pent-up demand, and realize the cars we buy tod
ay last longer than those made a few years ago. Hence, projections that the SAARS rate will soon go to 16 million vehicles are overly optimistic.

With all of this gloom and doom, at least some of the news is positive. After worrying about the possibility of $5 gasoline a few weeks ago, prices have started to fall. For most Michigan counties, the unemployment rate on the west side of the state is well below the national average. Many firms are still hiring, although the pace has slowed. Unlike our European brethren, the state and national economies are still modestly positive, and will probably continue on the same path unless there is a major political/fiscal crisis that severely threatens the euro. Because of all of the European political parties and politicians and egos, the final outcome of the European fiscal crisis is almost impossible to predict. Hence, here at home, we are stuck with the same slow growth we have been experiencing since this recovery began more than three years ago. But growth is still growth, and it certainly beats the alternative.

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

Recent Articles by Brian G. Long

Editor's Picks

Comments powered by Disqus