Local economy flat, but European recovery offers hope
New Orders, our index of business improvement, came in at 0, down from +4. Following the slowdown trend, the Production index flipped negative to -6, down from +11. Activity in the purchasing offices also turned negative at -1, down from +11. The Employment index remained modestly positive at +10, although down from +14.
Positive is still positive, however. As noted last month, we have some firms at full capacity. Some are reporting all-time highs in sales, and some are very optimistic about 2013.
Looking at individual industrial groups, Mike Dunlap’s quarterly report on the furniture industry came out this month and more or less confirms what we have been hearing from the individual firms for the past few months. To quote the report, “The industry remains on a very steady, albeit flat, trend line.” At an index of 54.30, the report notes the industry is on “solid ground.” Like our survey, 50.0 is the break-even point. The auto parts suppliers remain positive, but with quoting activity now down a little, many of our local firms may be topping out. Of course, topping out at full capacity is certainly not a negative. Just as last month, the capital equipment firms were widely mixed. For industrial distributors, once again the performance came in mixed, but this month’s bias was to the down side.
At the national level, the Feb. 1 report from our parent organization, the Institute for Supply Management, came in more positive than expected. After six continuous modestly negative reports, ISM’s national index of New Orders bounced to +7 from -7. The Production index also shot up to +6 from -4. ISM’s Employment index rose from 0 to +5. All of this resulted in a 2.9 percent increase in ISM’s composite index, which rose to 53.1 from 50.2. In confirmation, the U.S. industrial survey from the British economic firm of Market.com came in at 55.8, up from 54.0. According to the report, much of the gain can be attributed to new export orders.
At the international level, the Feb. 1 J.P. Morgan international manufacturing report also turned in a better-than-expected performance in what the author called a “bright start to 2013.” JPM’s Global Manufacturing PMI edged up to 51.5 from 50.1, representing a 10-month high. For the 17-country Eurozone, the index came in at 47.9, an 11-month high. France, Greece and Spain are still sharply negative, but upticks in Ireland and Germany helped to improve the index. The U.K. index edged up to a 16-month high. China posted its best report in nearly two years. In short, many of the stronger countries are slowly picking up steam, although there is still considerable concern about the “contamination effect” of countries like Greece, Spain and Portugal. The survey author continues to believe that the strong countries will do more than offset the weak countries as 2013 unfolds. All of this obviously still requires that current efforts to refinance the European sovereign debt remain on track, and that the U.S. will avoid a governmental shutdown over the upcoming debt ceiling negations.
This month’s bad news came from an unexpected drop in the preliminary estimate of GDP for the fourth quarter of 2012. At -0.1 percent, the GDP is about as close to flat as statistically possible, although it is far below the +1 percent consensus that a cross section of economists had projected. Again, this is a preliminary estimate, and by past history, we have seen the Federal Reserve readjust GDP numbers as many as four times. Hence, the next revision could swing back to positive, although a downward revision to a more negative reading also is possible.
December local unemployment numbers caused analysts some concern, but most of the problems are more statistical than fundamental. In Kalamazoo County, the jobless rate jumped to 9.1 percent from 7.7 percent. For Kent County, the increase was to 6.2 percent from 5.3 percent. Even our Cinderella corridor around Holland/Zeeland moved up to 2.8 percent from 2.2 percent. State economists consider part of the problem to be seasonal layoffs after the Christmas season. Because the area’s sizeable student population joins the work force upon graduation, they subsequently increase the unemployment figures due to the absence of jobs. Two other things to keep in mind are that these numbers are not seasonally adjusted, and the sample sizes are small, causing the numbers to jump around a lot more from month to month.
At the national level, some modestly bad news came from a slight uptick in the national unemployment rate to 7.9 percent from 7.8 percent. The marginal improvement in the economy has resulted in some of the discouraged workers who dropped out of the work force to jump back in. This raises the official number of people looking for work when computing the unemployment rate. Hence, we saw a slight uptick to 7.9 percent. Furthermore, most analysts continue to say we need to see job growth of about 200,000 before we can expect the unemployment rate to start dropping significantly. Although 157,000 payroll positions were added last month, we hope to see better numbers in future months.
There is some additional good news coming from across the pond. In the Eurozone, the fourth quarter of 2012 saw the first inflow of capital in months, signaling a positive outlook to the ongoing debt crisis. Several countries, including Greece, Spain, Ireland and Italy, have seen limited success to their austerity programs. Interest rates have fallen considerably in many countries, signaling a sluggish return of confidence. Critics also note the slow improvement in some key economies like Germany and the U.K. are helping. Indeed, the crisis in Europe is still far from over. However, a consensus is emerging that the potential meltdown is now less likely than a few months ago. A serious European recession would drag the U.S. down with it, so it is good news that the odds of this happening are falling.
This leaves us with two big elephants in the room: the problems with the March 1 budget sequester and the debt ceiling, due to hit about March 20. Right now, it appears that the probability of a federal government shutdown is about 70 percent. Over the long term, even the congressional budget office calls the current rate of spending “unsustainable.” March could be a difficult month, and it’s only a few days away.
Brian Long, Ph.D., is director of supply chain management research for Seidman College of Business, Grand Valley State University.