Area Economy

Local economy barely escapes negative territory

October 15, 2012
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Flat again. Two months ago, we saw the Greater Grand Rapids economy slide into the minus column for the first time in three years. Although our local economy has turned flat, the downward trend did not continue. According to the data collected in the month ending Sept. 30, New Orders, our index of business improvement, edged up to +2 from 0. However, the Production index turned negative at -10, down from +5. Activity in the purchasing offices flattened to 0, down from +8. The Employment index is always a laggard in any statistical analysis, and after three months of our other numbers softening, this index eased to +4 from +18.

All of these statistics continue to depict a flat economy, not a recession. Because we have been reporting a relatively slow economy for many months, the fact that the economy has now turned flat will probably go unnoticed by most people. After four years of economic weakness, it seems as though a flat or weak economy is simply becoming the new norm.

Among our local industrial groups, it is of little surprise that our automotive parts suppliers are still positive. While they are no longer showing the rapid expansion of a few months ago, they are still holding their own. So far, supply has not caught up with demand in auto sales. As a group, office furniture firms remain stable. The industrial distributors are also stable, but this month’s performance was much more mixed. Because of the current level of economic uncertainty, the capital equipment firms are not doing as well.

Turning to national statistics, the Institute for Supply Management’s “Report on Business” dated Oct. 1 indicated that the national industrial market has recovered slightly. ISM’s index of New Orders came back to +2 from -8, which is at least positive. The Production index remained negative at -2, but was better than the -5 last month. The national Employment index edged up to +5 from +3. ISM’s overall index recovered to 51.5, up from 49.6. All of these statistics are characteristic of an ongoing slowdown. Although we see no statistical signs of a recession, the national industrial economy is now best described as flat.

The September international report indicates the world economy is still negative, although the statistics managed to recover slightly. According to the JP Morgan Global Manufacturing Report released Oct. 1, the international index of New Orders edged up to 48.1 from 46.7. This marks the fifth month in a row that this index has been below the break-even point of 50. The Employment index flipped back to positive at 50.7, up from 49.5. JPM’s composite manufacturing PMI recovered slightly to 48.9 from 48.1. Weakness continued in China, Taiwan and most of Asia. The four major countries in the Eurozone declined, as did Austria and Greece. Stronger reports came from Canada, India, Ireland, Russia, Mexico, the Netherlands and Turkey.

The economic news continues to be filled with mixed signals. Noteworthy negative news included the downward revision of the second quarter GDP growth to 1.3 percent from 1.7 percent. Although some economists have cited the dry weather as a negative factor, it is more likely the softer industrial markets have dampened the growth rate.

The European debt situation continues the pattern of jumping from one mini-crisis to another. Three weeks ago, there were more riots in Greece. The Spanish banks are still having problems, and riots in Barcelona have signaled extreme frustration over austerity measures. The European Central Bank continues to try to provide stability, but does not really have enough money to do everything that is needed. Greece has rolled out a new austerity program, but there are doubts it will pass in parliament. In the meantime, the Greek economy continues to sink further and further. In short, European investors lack confidence in the future.

The housing recovery continues to provide stimulus for the U.S. economy. Just as last month, the national Case-Shiller index released Sept. 25 pointed toward continued recovery in 16 of the 20 surveyed market areas. The local statistics also point toward recovery, and the number of homes being sold as well as the rising average prices clearly indicates things are finally improving. The overwhelming consensus is that we have finally turned the corner. Fortunately, even modest recovery in the housing sector results in consumer confidence rising. For many families, their home is their biggest asset, and stability in home values results in people feeling more confident about their own finances. For an economic recovery, confidence is very important. On the caution side, we are still not out of the woods in terms of foreclosures, and some geographic areas are plagued with older real estate in disrepair.

It is no secret that Michigan’s recovery has largely been driven by improved auto sales. It is therefore good news that the September sales report from Automotive News came in at a four-year high. For the Detroit Three, Chrysler led the way again with a 12 percent sales gain compare to September 2011. GM posted a modest 2 percent growth rate, and Ford came in flat at 0 percent. Among the foreign nameplates, Toyota gained 41 percent, Honda 44 percent, Volkswagen 32 percent, Subaru 32 percent, and Hyundai-Kia 23 percent. For the industry as a whole, sales were up 15 percent. We would like to see stronger sales among the Detroit Three, although many of our local parts suppliers are more and more supplying the plants of foreign brands.

In an election year, the unemployment rates are closely watched. It is therefore good news that the most recent seasonally unadjusted unemployment rates show some modest improvement. For Kent County, the jobless rate fell to 6.8 percent from 7.7 percent. In Kalamazoo County, the rate eased to 7.1 percent from 8.1 percent. Barry County, which has consistently been lower than most of our local counties, came in at 6.5 percent, down from 7.2 percent. For the entire state, the unadjusted rate fell to 9.2 percent from 10.3 percent. However, when the seasonal adjustment factor is added, the rate translated to the 9.4 percent rate widely reported by the media.

So where do we stand? In just a few more days, the election will be over, and we will have a clearer picture regarding which direction our nation will go for the next four years. The European situation will continue to influence our domestic economy, but with the multitude of political parties and personalities among the various countries, no solution is imminent. In fact, some experts say that long-term solutions for Europe may be years away. The industrial sector will probably remain flat for at least a couple more months, but there is no evidence at this time of a serious downturn. The improvement in the housing sector will help offset weakness in other sectors. Barring a collapse of the euro, a terrorist act, or a subsequent new war, there is no concrete evidence that another recession is imminent. We are, however, continuing on a path of very slow economic growth. This path will probably change in 2013.

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

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