Area Economy

Auto suppliers are still carrying West Michigan economy

April 12, 2013
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Inching up a little more. That’s the latest word on the West Michigan economy, according to the data collected in the last two weeks of March. After a lackluster ending to 2012, business conditions posted a nice upturn in February. It is good to see that this trend has extended into March.

New Orders, our index of business improvement, came in at +23, up from February’s +16, and up considerably from +0 in January. The gain in the Production index from moving to +22 from +21 was very modest, but still an indication the industrial economy is sound. The Employment index rose to +26 from +22, which should help reduce unemployment rates in West Michigan.

Looking at individual industrial groups, auto parts suppliers are still underwriting the strength of the Michigan economy. The production schedules continue to be revised upward for some lines of cars and trucks, which generates optimism among local firms. Capital equipment firms are still widely mixed, but this month’s bias is clearly to the up side. Partially because of the season, industrial distributors reported a good month, as well. Just as last month, office furniture firms are positive, but the market shows signs of topping out or stabilizing at the current level. An improvement in the office rental market would help to boost sales.

At the national level, the April 1 report from our parent organization, the Institute for Supply Management, was not quite as positive. The upward momentum in ISM’s index of New Orders eased to +14, down from +21. But +14 is considerably better than the -7 we reported in December. In a similar move, the Production index eased to +17 from +21. The Employment index advanced very modestly to +8 from +7. However, when all of the statistics are added together, ISM’s overall index eased to 51.3, down from 54.2. The report further notes new export orders are still expanding but slower domestic orders dampened the overall index. In contrast, the British economic firm of Markit.com posted a U.S. industrial survey index of 54.6, up modestly from 54.3. Markit’s U.S. index of New Orders remained unchanged at 55.4, which the survey author called a “solid rate of expansion.”

At the international level, the April 2 JP Morgan international manufacturing report is uneven, primarily because of the mixed performances of many key European countries. JPM’s Global Manufacturing PMI edged slightly higher to 51.2 from 50.9. New Orders rose modestly to 52.1 from 51.5.

In the Far East, the rate of expansion accelerated in China and Japan returned to growth for the first time in 10 months. Unfortunately, the Eurozone, the U.K. and Brazil are among the countries pulling the statistics lower than we would like to see. However, on average, the survey author finds the current report “consistent with moderate, stable growth in global production.” In short, as the U.S. growth remains modestly positive, worldwide economic growth also is modestly positive.

An April 2 editorial in Automotive News refers to an “odd, pleasant feeling” in the current automotive market. The author is obviously referring to the apparent stability of the industry for suppliers, manufacturers and dealers. For the March sales statistics, the industry posted an increase of 3 percent, which is right in line with the expectations for 2013. In terms of absolute numbers of units sold, March was the best month since August 2009 when the Cash for Clunkers program peaked. Almost all of the major brands were up single digits, with Ford and GM both posting a 6 percent gain. The Chrysler group rose 5 percent, Honda added 7 percent, and Toyota and Nissan eked out a 1 percent gain. Of the major firms, only Hyundai-Kia posted a loss: 8 percent.

For our auto parts suppliers, all of this is good news. After five months of sales at the SAAR rate above 15 million units per year, the dealers are now profitable, the manufacturers are profitable, and although there are exceptions, the auto parts suppliers are profitable, too. In West Michigan, some of our auto parts firms are quietly expanding, which bodes well for the Michigan economy. Furthermore, many auto suppliers have been successful spreading their business among more nameplates, which helps insulate them from a downturn in any one segment.

This month’s international crisis emerged in Cypress. This small country is often forgotten as one of the 17 members in the Eurozone. Cypress has never had much of an industrial base, so it set itself up like Grand Cayman to be a safe-haven banking center to attract large depositors from all over the world, especially Russia. Unfortunately, like many of the countries in the Olive Belt, the government has over-committed generous pensions to its retirees and large salary increases to its work force. The European Central Bank offered a partial bailout, but required that the Cypress government cough up about 40 percent of the package. Again, although this country is comparatively small, the uproar focused on the government’s plan to seize a percentage of the bank deposits. The new fear is that this could become a pattern for rectifying other countries in fiscal trouble. In the U.S., legislation has already been introduced to seize 401(k) assets upon the death of account holders as a means of reducing the deficit. This legislation hasn’t gone anywhere — yet.

As we look at the mess in Washington, we continue to see the games of political theater being played out as we try to address our national fiscal crisis. The Congressional Budget Office has made it clear that our current path of borrowing 30 percent of every dollar spent is not sustainable. In fact, on a percentage basis, we are as bad off as Greece. We just are fortunate (or unfortunate) that the dollar is still the major reserve currency of the world, and that we can proverbially print more money and get away with it — so far. The so-called sequester has come to pass, and the impact has been minimal, except for political maneuvering to try to make it worse than it is.

The timeline on a continuing resolution expired in late March, and Congress kicked the can down the road again. In early May, the debt ceiling will be reached, and again there will be the possibility of a government shutdown. Unfortunately, we now have both parties looking ahead to the 2014 elections in hopes to swing a majority toward a path for more spending cuts or tax increases. The economy and the general population (and the stock market) now seem to be ignoring the wrangling, and modest growth continues on the same slow pace since 2009. Let’s hope nothing else pops up to slow the pace. It will take many years for the unemployment rate to return to 5 percent, given that some economists are suggesting 5 percent is the new norm. Not that many years ago, it should be remembered, 5 percent unemployment was considered to be characteristic of a recession.

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

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