Economy finally slips into negative territory

August 20, 2012
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Slightly negative. For the first time since the local recovery began in April 2009, the industrial economy in the Greater Grand Rapids area has dipped into the minus column. According to the data collected in the month ending July 31, New Orders, our index of business improvement, came in at -6, down from last month’s +9. The Production index also flipped negative to -5, down from +6. Because of its laggard nature, the Employment index remained positive at +18, but was not as robust as the +25 in the month of June. Activity in the purchasing offices, our index of Purchases, remained barely positive at +4 and a little softer than +11 in our last report.

As we have warned in previous reports, the future now looks far less certain than just a few months ago.

Looking at local industrial groups, it is no surprise to find our automotive parts suppliers are not sailing as high as a few months ago. Although July is a traditionally slow month for automotive, the September-October production schedules do not look as positive as they were projected to be. There is now more caution in the wind. The office furniture business continues to be soft for some firms, but most are stable and one firm is quite positive. On a positive note, Mike Dunlap’s Furniture Industry Index for the second quarter rose to 54.58 compared to 52.62 for the first quarter. Industrial distributors are stable, but most reported flat business conditions. The automotive firms continue floating the capital equipment firms, but we don’t know for how much longer.

Nationally, we see a slight downturn in last month’s numbers. According to the Institute for Supply Management’s “Report on Business” dated Aug. 1, the national index of New Orders dropped significantly from +1 to -9, and the Production index fell to -4 from +8. The Employment index is still positive at +5, but is less promising than last month’s +15. ISM’s overall index remained virtually unchanged at 49.8, up from 49.7.

The international situation continues to worsen. According to the JP Morgan Global Manufacturing report Aug. 1, the New Orders index retreated to 47.2 from 48.1, with 50 being the breakeven point. The Employment index turn negative at 49.5, down from 51. The manufacturing PMI indexes for both the Eurozone and the U.K. sank to their lowest levels in more than three years. It is unsettling to see the four major European economies sinking further into the recession. Greece continues to look even worse. Some pundits have suggested that humanitarian aid may be necessary if the Greek economy continues on its downward path for two more years. Countries like Canada, Mexico, Ireland, South Africa and Indonesia, however, fared much better than the rest of the world. The JPM overall Global PMI declined to 48.4, down from 49.1.

Among the economic headlines for the past month was the announcement of the GDP estimate of 1.5 percent for the second quarter of 2012, down from a revised growth rate of 2 percent in the first quarter. By comparison, the 2004-2009 average growth rate was 3.95 percent. We can conclude that the current rate of growth is well below where needed to improve the unemployment situation and to fully recover from the Great Recession.

Several economic reports addressed the closely watched unemployment rates. At the national level, the rate increased to 8.3 percent from 8.2 percent, even though 163,000 jobs were added. At least part of this uptick can be attributed to new people entering the work force, as well as some previously discouraged workers returning to look for work. The economy added an average 225,000 jobs per month in first quarter 2012. But even this good news fails to provide the growth stimulus the economy needs.

At the local level, the seasonally unadjusted unemployment rates reported for June were higher across the board. The Kent County rate rose to 7.2 percent from 6.4 percent. Kalamazoo County fared no better with a rise to 7.4 percent from 6.8 percent. Among the counties in our local area, Barry County continues to fare better than most, but the unemployment rate still rose to 6.2 percent from 5.9 percent. For the state as a whole, the rate edged up to 9.2 percent from 8.6 percent. Although some of this variation can be attributed to seasonality, these numbers still reflect Michigan’s limit in the amount of growth we can anticipate from the auto industry.

Auto industry sales reports for July were positive, but only for some firms and not for others. For the Detroit Three, Chrysler led the way with a 13 percent year-over-year sales gain. But Ford backtracked by 4 percent and GM’s 6 percent drop was even steeper. The overall industry advanced by 9 percent, largely due to restored production of parts by manufacturers hit by last year’s tsunami. Honda rose 45 percent, and Toyota was better by 25 percent. Despite the easing of gas prices, Toyota’s Prius posted a gain of 110 percent over 2011. Of the smaller brands, Nissan advanced 16 percent, Hyundai/Kia rose 5 percent and Volkswagen added 28 percent.

The price of gasoline is now approaching $4 per gallon, causing some concern about where the current round of increases will end. Fortunately, the problem appears to be a temporary setback resulting from a recent refinery fire in Indiana and a break in a major pipeline that has slowed crude deliveries to several key refineries. Right now, it appears gasoline should be down considerably over the next few weeks. The slowdown in the world economy should result in the price of crude starting to fall as the summer wears on, too.

Turning to industrial inflation, there is good news: Prices at the industrial level continue to fall. There is also bad news: Prices at the industrial level continue to fall. ISM’s national index of Prices came in at -21, the Grand Rapids survey yielded -5, and our Southwestern Michigan survey broke even at 0. While industrial buyers certainly appreciate the price relief, they recognize these numbers are similar to those reported in 2008 at the onset of the recession. Much of the drop in prices can be attributed to the worldwide economic slowdown and the new economic recession now gripping some countries. Actually, the international index of Prices has been falling steadily for five months, and is now at 44.5, or roughly -11 in terms of local statistics. From an overall economic standpoint, commodity prices falling at this rate is not really good news.

Finally, the housing market has provided some good news. According to real estate search engine Zillow.com, the national residential housing market “appears to have bottomed, posting its first year-over-year increase since 2007.” Checking local markets on the website confirms significant increases in certain areas and marginal increases in others. You can expect to see some local regions on Zillow.com that are still plagued with foreclosures and are not beginning to recover. But on the average there are signs the nation may have finally hit bottom and will now begin the long process of recovery — if the economic slowdown does not get out of hand.

Huge questions loom. Despite the softer statistics, it is still possible we may get away with nothing more than a flat, mushy economy but no real recession. Our economy could dance back and forth across the zero growth line for several quarters before finally resuming a slow recovery. Many future directions are possible and will be influenced by congressional actions as the election approaches, including post-election legislation during the “lame duck” session. The scheduled military cuts will devastate some firms if the budget problem cannot be solved, while tax increases could snuff out incentives for future investment. Of course, even slow progress assumes the ominous European debt situation continues to move toward long-term resolution and the euro does not collapse.

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

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