Area Economy

Grand Rapids manufacturing shows minor improvement

November 10, 2012
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Very modestly up. Our local economy has been flat for the last three reports, so even a modest uptick is good news. According to the data collected in the month ending Oct. 31, New Orders, our index of business improvement, edged up to +6 from -2. However, the Production index remained negative at -1, although improved over the -10 we reported last month. Activity in the purchasing offices, our index of Purchases, slid back to negative at -7, down from 0. The Employment index remained unchanged at +4. Although an Employment index of +4 is modestly positive, it is still far below the +46 we reported 18 months ago.

It is worth repeating that our current statistics do not show us sliding into a recession. However, the future is still filled with plenty of uncertainty with the so-called Taxmageddon showdown less than two months away. According to the Congressional Budget Office, ignoring the situation will probably lead to a recession. We can only hope the lame duck Congress understands it has lots of work to do before adjourning.

Turning to individual industrial groups, most of our auto parts suppliers are positive, although a couple have reported slower sales. The automotive recovery has favored the gas economy of smaller cars because of higher fuel prices, and some lines of trucks and SUVs have not sold as well. Part of the recent strength of our local economy relates to the uptick in the office furniture business, which shows significant gains for several firms. For industrial distributors, this month’s performance can best be described as mixed. Ditto capital equipment firms, who are complaining that some customers are in a “wait-and-see” mood. There is evidence of a slowing industrial economy, but no one is talking about a recession.

The Institute for Supply Management’s “Report on Business” dated Nov. 1 indicated the national industrial market has again backtracked. ISM’s index of New Orders fell to -5 from +2. The Production index remained unchanged at -2. The ISM national Employment index remained positive but eased to +3 from +5. After statistical adjustment, ISM’s overall index edged up to 51.7 percent from 51.5 percent. Repeating the status from last month, the national industrial economy is now best described as flat.

Historically, from 1947-2012, the U.S. GDP growth rate averaged 3.25 percent. Since our last report, the Commerce Department reported that the preliminary estimate of the GDP for the third quarter came in at 2 percent, up from a revised 1.7 percent in the second quarter. The sobering fact is that if we continue at a 2 percent growth rate, it will take five or six years to get back below 6 percent unemployment.

It is no surprise that many international reports are still negative, although some countries are bucking the trend. According to market.com, business conditions over the past month have improved in countries like Russia, India, Ireland, Mexico and Turkey. Output in Brazil rose to a seven-month high. But business conditions in the 17-nation Eurozone continue to slide, as do China and South Korea. Even the otherwise strong Canadian economy is turning flat, primarily because of its neighbor to the south.

After three quarters of mildly negative economic growth, the U.K. has emerged from a recession with the report of 1 percent gain in GDP for the third quarter. Twenty years ago, the British wisely decided not to go in on the euro for fear some of the participants would not adhere to the terms of the agreement. However, most of the foreign customers for U.K. goods are among the 17 nations of the Eurozone that compose the euro. Clearly, prospects for growth in the U.K. are limited.

On the European continent, the news obviously is not good. Taken as a group, the 17-nation Eurozone is our largest export customer. According to Eurostat, the European Union’s statistical agency, the jobless rate in September rose to a record 11.6 percent. But 11.6 percent is the average. In Germany and Austria, the rate is 5.4 percent, leaving Spain and Greece at about 25 percent at the other end of the scale. The agency went on to say the debt crisis is now “entering its fourth year with no full resolution in sight. Commercial lending has dwindled, and investors have taken flight.” The (shaky) coalition government in Greece is still grappling with a round of austerity cuts demanded by international lenders. In the traditional battle of the “haves” versus the “have-nots,” some Greek and Spanish politicians are demanding that the Germans bail them out. One rationale: Germany owes Greece “war reparations” for the Second World War. You can imagine how this goes over with the German electorate.

On the good-news side, the beleaguered housing industry continues to show signs of significant recovery. As we have noted, the housing market has been a huge drain on the economy. The glut in unsold real estate has not only been a disaster for the construction industry and its supply chain, it has inhibited the sale of homes and options for new opportunities. The most recent S&P/Case-Shiller index of property values in 20 cities rose 2 percent from August 2011, the biggest year-to-year gain since July 2010, after climbing 1.2 percent the prior month. Kent County reported housing starts up 32 percent over a year ago. With the housing market now nicely recovering, potential buyers are taking advantage of record-low mortgage rates. Another factor is the more optimistic outlook of bankers coupled with less stringent lending requirements. A third factor is the skyrocketing cost of rent, which makes it financially advantageous to own. For the first time in five years, homeowners feel more financially secure because their home values are stable or rising. We expect these modest increases in housing prices to help reduce the 31 percent of all Michigan mortgages still under water. However, this optimism needs to be tempered with the fact that we have not seen the end of bankruptcies and foreclosures resulting from the bad loans over the past 20 years. Unfortunately, excessive foreclosures in a neighborhood drag down the values of surrounding homes. This could well be the long-term legacy of the housing crisis.

The news from the auto industry remains good, although the double-digit year-over-year market gains are now a thing of the past for many firms. The hurricane on the East Coast, which struck about a quarter of the U.S. market, probably shaved a few percentage points from month-end sales. GM reported a 5 percent gain, but Ford was flat. Chrysler added 10 percent, Volkswagen 23 percent and Toyota 16 percent. As long as automotive sales stay up, our auto parts suppliers on this side of the state will be busy.

In summary, the industrial market remains flat, partially because of the deteriorating export markets in Europe and partially because many firms have reached capacity and are not expanding. Many businesses are waiting until after the election and after the Taxmageddon situation have been resolved before committing new resources. Businesses do not like to expand or hire new people in an environment of extreme uncertainty, and the way forward should be more defined in January. Any weakness in exports to Europe will probably be offset by the new strength in housing and construction, leaving us with the same pattern of slow growth that we have come to expect.

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

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