Area Economy

At best industrial economy is now drifting sideways

September 16, 2012
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Flat. In last month’s report, we reported the industrial economy in the Greater Grand Rapids area had slid into the minus column. Fortunately, this month turned out a little better. According to the data collected in the month ending Aug. 31, New Orders, our closely watched index of business improvement, returned to 0 from -6. The Production index flipped back to positive at +5, up from -5. Much as expected, the Employment index remained unchanged at +18. Activity in the purchasing offices remained in single digits, but rose to +8, up from +4. In short, a slowdown is upon us, and it remains to be seen exactly how slow.

Looking at local industrial groups, our automotive parts suppliers are still positive, but none are showing the rapid expansion we have had for most of the last three years. Despite strong sales figures for autos, there are considerable questions about production schedules for the rest of the year. Most major firms in the office furniture business continue to be stable. With last month’s positive report from Mike Dunlap’s “Furniture Industry Index,” it is possible the office furniture business will finish the year a little stronger than earlier industry projections. Industrial distributors also are stable for the month. The capital equipment firms are more widely mixed.

At the national level, the slight downturn of last month’s numbers has continued. According to the Institute for Supply Management’s “Report on Business” dated Sept. 4, the national index of New Orders remained negative at -8, about the same as last month’s -9. The Production index fell slightly lower to -5, down from -4. The Employment index still eked out a gain at +3, only a little below last month’s +5.

ISM’s overall index retreated to 49.6, from 49.8. At this level, the nation’s economy is not in a recession but is very much in a slowdown.

To no one’s surprise, the August international report indicates a continued sag in the world economy. According to the JP Morgan Global Manufacturing Report released Sept. 4, the international index of New Orders retreated to 46.8 from 47.1. Since 50 is considered the breakeven point, this marks the fourth month of decline for this index. The Employment index eased slightly to 49.3 from 49.5. JPM’s composite manufacturing PMI eased to 48.1 from 48.4, the lowest the index has been in 39 months. In addition to the United States, weakness continued in the Eurozone, the United Kingdom and most of Asia. Stronger reports came from Canada, India, Ireland, Russia, Mexico and Turkey.

In any recession, an economy must first hit bottom before the recovery can begin, and looking at Greece, there is still no bottom in sight. With money, resources and talented people leaving the country, some forecasters say it may be necessary to provide humanitarian aid in a few months if the situation does not improve.

For the past few weeks, the European debt situation appears to have quieted down. The value of the euro has come up a little. The European Central Bank has taken limited action to ensure the stability of some shaky banks. Greece seems to be trying to adhere to its austerity program. However, with most of the European countries still sliding into recession, the problems are far from over. It is still going to take a lot more work to solve the European sovereign debt crisis.

Some of the best news for the month came from the housing sector. First, the closely watched Case-Shiller price indices were all up. According to the Aug. 28 report, the 10 Cities Composite, 20 Cities Composite and the all-important U.S. National Composite indices each turned positive for the first time in more than two years. Michigan’s year-to-date sales are up 10 percent, and prices are up nearly 5 percent.

The recent housing upturn has been influenced by several factors. First, there is pent-up demand. Some buyers who have been waiting for the market to finally bottom out have decided now is the time to buy. The long wait has allowed buyers to accumulate a larger down payment, which pleases the lending institutions. This trend has been augmented by less stringent lending requirements, including the lowering of minimum credit scores and more reasonable and optimistic appraisals by the lenders. In that same context, buyers have become better at shopping around for better mortgage deals, and traditional competition is coming back to the lending markets. Lastly, mortgage rates are still very low and may never be this low again.

Another factor driving the housing market is the fact that fewer homes are on the market. On Aug. 23, the National Association of Realtors index of existing home sales rose 10.4 percent from July 2011. After four long years, most areas of the country have whittled down their inventories of unsold new houses. Locally, builders that survived the Great Recession have optimism that business conditions are getting better.

During the month of August, auto industry sales remained surprisingly strong. For the Detroit Three, Chrysler remained the “fastest growing” auto company with a 14 percent gain compared to August 2011. Ford gained 13 percent and GM was up by 10 percent. Building on last month, the biggest gainers were Honda, up 60 percent, and Toyota, 46 percent. The industry as a whole posted a 20 percent gain, making August one of the best sales months this year.

The unemployment reports at the local level continue to be troublesome. Seasonally unadjusted unemployment rates in the most recent report were again higher across the board. The jobless rate in Kent County rose to 7.7 percent from 7.2 percent. In Kalamazoo County, the rate jumped to 8 percent from 7.4 percent. For the entire state, the unadjusted rate rose to 10.3 percent from 9.2 percent. From a statistical standpoint, it is interesting to watch the segment of Allegan County that encompasses part of Holland. The current unadjusted rate rose to 3.2 percent from 3 percent. However, the 20-year low of this statistical segment is a scant 0.9 percent, and the high point in the most recent recession was 3.7 percent. There aren’t many places in the country where things are better than this.

So where are we now? An old adage says that if you have one foot in the cold water and the other in the hot water, on average, you should be comfortable. At best, the industrial economy is now drifting sideways. Since the industrial economy has been the main force behind the recovery for more than the past three years, a serious decline would throw us back into a recession. However, the current uptick in the housing sector when combined with slightly stronger consumer spending may be enough to keep the economy flat and keep us from sliding into another recession. If the consumer economy remains positive and the industrial economy turns slightly negative, on the average, we will be flat. There have been very few times in economic history that the economy has stayed dead flat without trending up or down, but this could be one of those times.

Every recession in history has had a root cause. In 1973-1975, it was oil. In 2001, it was the dot-com bust. In 2007-2009, it was the collapse of the housing market. A depression occurs when several of these “root causes” all come together. By the broadest measure, the biggest problem right now is the realization that our local, state and national governments have overcommitted on retirement benefits, in the form of pensions and health care. At this stage, the problem is still fixable, but it won’t be easy. If, however, it becomes apparent that the problem is not fixable because of politics, we could be in for trouble. Could we become another Greece? Of course. All we have to do is do nothing.

Brian Long, Ph.D., is director of supply chain management research at Seidman College of Business, Grand Valley State University.

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