European crisis casts pall over US economic growth

June 8, 2012
Print
Text Size:
A A

Modest growth but slightly slower. For the month ended May 31, that’s the latest word on the industrial economy in the Greater Grand Rapids area. New Orders, our closely watched index of business improvement, moderated to +20, down from +24. However, the Production index, while remaining positive, eased considerably to +5, down from +25. The Employment index tapered off to +12 from +20. Staff reductions were reported by 13 percent of the survey respondents. The Raw Materials Inventory index came in at -12, indicating that some firms are starting to liquidate inventories built over the past six months in anticipation of higher prices.

Overall, our current statistics remain positive but slightly less robust than what we would like. Although the local economy is still growing, the future is starting to look less certain than a few months ago.

Within our local industrial groups, automotive parts producers continue to lead the pack. With the uptick in production schedules, this industry should keep statistics positive for a few more months. The office furniture business remains soft, but there are signs that several firms are stabilizing at the current level. Business conditions for the industrial distributors remain positive. Capital equipment firms continue their stable performance, largely due to the uptick in automotive. Respondents are still generally upbeat, yet several have turned much more cautious.

Looking at the international economy, the JP Morgan Global Manufacturing report dated June 1 continues to depict a slowing world economy. According to the JPM report, the “rate of expansion in global manufacturing production slowed sharply in May, as growth of total orders booked remained lackluster.” The index of New Orders backtracked to 51.4 from 51.8, and Production slid to 51 from 53.1. The overall indexes for the Eurozone and the U.K. fell to three-year lows. Besides the U.S., the only countries to show modest growth were Ireland and Japan. The statistics in China continued to soften. JPM’s global index remains marginally positive at 50.6, yet this is possible only because the economy in the U.S. is strong enough to offset the weakness from the rest of the world.

In the last three years, we have all added “sovereign debt crisis” to our vocabularies. Across the Atlantic, the news continues to change on a daily basis. Most of Europe is now in a shallow recession based almost exclusively on the turmoil in the Eurozone capital markets. As we have warned in the past, this crisis will inhibit world economic growth for months or even years before it is fully resolved. France has elected a new government that intends to roll back some of the recently enacted fiscal reforms, and that does not bode well. However, the big day to watch is June 17, when the Greeks will vote again to try to form a new government. This election could turn out to be one of the most important events in economic history. The leading left wing opposition party wants to reverse the terms of the bailout package that has already been agreed upon with the Europeans, especially Germany. If this happens, it will probably mean Greece will be forced out of the Eurozone, resulting in economic turmoil. If the Gre
ek elections go in the opposite direction, the country faces several years of austere restructuring of salaries and pensions. Either way, riots and economic instability are probable. If things get really bad, we also can’t rule out a military junta, not unlike the one that ruled the country from 1967-1974.

Other European countries have problems of their own. Spain has been in the news most recently, but Portugal, Italy and Ireland have similar problems. The outcome of the Greek election may well form the pattern for resolving the problems of the other countries. If they cannot be resolved, the euro could collapse. This uncertainty is at the core of the European recession now unfolding. Throughout Europe, investors are afraid to invest and consumers are unwilling to buy.

Jobs: In a political season, most politicians can’t go 30 seconds without inserting this word into the discussion. Most economists agree that about 200,000 new jobs are needed per month to absorb population increases and make a significant contribution to economic growth. Hence, last week’s report that only 69,000 jobs were created in May was not good news. The national unemployment rate pushed up to 8.2 percent. The same report noted that job creation for the previous month had to be revised downward to 77,000 from 115,000. If this trend continues, the unemployment rate will go higher.

In our local surveys, the job growth in the industrial sector has tapered off over the past few months. The main reason continues to be the lack of qualified candidates. In fact, by some measures, help-wanted advertising has increased to a higher level than before the recession began. Contributing to the uncertainty are other major problems of the future, especially regarding taxes and the business environment.

Consumer confidence is either falling or rising, depending on the data source. Last week, The Conference Board reported a drop to 64.9, down from 68.7. However, on May 25, the University of Michigan Sentiment Index rose to a four-year high of 79.3, up from 76.4. Over time, both of these indexes usually track each other. Right now, it appears that consumers are just as confused as economists about which direction the economy is going.

Another piece of bad news came from a downward revision of first quarter GDP growth to 1.9 percent from 2.2 percent. Since the fourth quarter of last year came in at a growth rate of 3 percent, there is now further evidence that the already-slow economy is worsening. Over the long term, we need to be at about a 3 percent growth rate to be comfortable.

On the positive side, auto sales for May increased by 26 percent over May 2011, fueled by added dealer incentives, easier financing and lower gasoline prices. Toyota, now fully recovered from last year’s Japanese earthquake, surged ahead with an 87 percent gain. Honda, which was less impacted by the earthquake, posted a 48 percent gain. For the Detroit Three, Chrysler led the way with a 30 percent gain, but Ford was up 13 percent and GM managed an 11 percent gain. Ford has attributed the lackluster results to an inadequate supply of cars and has boosted production by 5 percent. For our local auto parts suppliers, this is all good news. However, it is worth repeating our past warning that robust sales gains are not expected to continue. Sometime in the late summer or early fall, the supply will catch up with the pent-up demand that has been fueling sales since the 2009 Cash for Clunkers program. Hopefully, we will then settle into a more stable sales pattern, as long as the rest of the economy remains stable.

Another piece of positive news comes from the local unemployment rates in West Michigan. As of April, the unemployment rate in Kent and Ottawa counties has fallen to 6.1 percent, and in Kalamazoo County to 6.2 percent. Barry County came in at 5.8 percent. These readings are well below the national and state averages and should fall further over the next couple of months.

In summary, without the European instabilities, our economy would be much stronger. By itself, the European recession will probably limit our growth to a crawl, but should not be strong enough to drag us into another recession unless there is a collapse of the euro. Some pundits believe that a Greek pull-out from the Eurozone has already been factored into the markets, and will be a non-event. Others worry about the “contagion” impact on the other countries with financial problems, namely Ireland, Italy, Spain and Portugal. Either way, we are in for many more months of uncertainty.

Brian G. 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