Recovery signals leave firms 'cautiously optimistic'

November 7, 2009
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The recovery continues. That's the latest word on the greater Grand Rapids economy, according to the data collected in the last two weeks of October. New orders, our index of business improvement, rose to +36, up from +31. The production index remained positive, but backtracked to +29 from +38. Activity in the purchasing offices moderated to +21, down from +24. The index of employment rose modestly to +17 from +14. For the third successive month, 31 percent of the firms responding to this survey reported that employment levels are rising. This is offset by 14 percent of the respondents that are still cutting jobs.

All in all, our statistics continue to be very positive. For this survey, we are now in our seventh month of recovery.

Turning to individual industries, it almost goes without saying that much of our current economic strength can be attributed to the auto parts suppliers. This success spilled over to the industrial distributors that serve the auto industry. However, non-automotive distributors continue to struggle. The capital equipment firms turned in a mixed performance for the month. The same was true for the major office furniture companies, with some firms reporting increases in orders, while others reported a drop. Most remain stable. All in all, the participant comments at the end of this report are still cautiously optimistic.     

At the national level, the Nov. 1 press release from the Institute for Supply Management, our parent organization, shows that the national economy has lost a little steam but is still expanding. ISM's index of new orders, which had been as high as +27 two months ago, moderated to +10. The production index regained some lost ground and came in at +22, up from +18. The good news came from the employment index, which came in at +4, the first positive reading since 2007. ISM's overall Index of Manufacturing rose to 55.7, up from 52.6. The survey author notes that "inventories are balanced and manufacturing is in a sustainable recovery mode."

The news at the international level continues to be positive.  The composite index for J.P. Morgan's Global Manufacturing Report Nov. 1 came in at a 39-month high of 54.4, up nicely from 53.0. Manufacturing output rose at the highest rate since July 2004. JPM's October index for new orders backtracked modestly to 56.9 from 57.0. Strong reports came in from countries such as China, Taiwan, India, Germany, France and the UK. However, at 49.7, JPM's index for worldwide employment is still below the break-even point of 50.0.

Overall, the world economy continues to bounce back from the recession even faster than the U.S.

Unfortunately, we are still waiting for better news from the automotive scene. A Nov. 2 story from Reuters notes that we may never return to the 2005 sales level of nearly 17 million units. The article further notes that the inflated sales in the 2003-2006 time periods were inflated by the auto industry's unique version of "subprime" financing, and lenders are unlikely to repeat the mistakes of the past. For October, sales were up 3 percent at Ford and 5 percent at GM, but Chrysler was down 30 percent.

On the inflation watch, many buyers are concerned about the increasing number of "big ticket" items that are rising in price. Commodities such as copper, nickel, plastic resins and aluminum have rebounded from their recession lows of just a few months ago. Most forms of steel are both in short supply and up in price. However, in the case of many grades of steel, anecdotal evidence has begun to surface that enough mills are now back on line to more than cover the existing worldwide demand, despite the increase in demand resulting from the worldwide economic recovery. If this is true, steel prices should stabilize at the current level, or even begin to fall.

In terms of general industrial inflation, ISM's index of prices came in at +30. For Southwestern Michigan, the index came in at +15. For greater Grand Rapids, our current index is +17. Since any rapid escalation in prices index has usually been follow by tightening on the part of the Federal Reserve, we will continue to monitor the prices of all commodities more closely in coming months. Right now, there is no cause for concern.

It almost goes without saying that this month's big economic news is the announcement that the Q3 GDP rose to 3.5 percent, apparently marking the end of the recession. However, with Michigan's unemployment rate at 15.3 percent, it doesn't seem like a recovery is anywhere in sight. Although we certainly don't always like the laws of economics, it remains a fact that employment is a laggard in any and all recessions. Looking at previous recessions where the ends were marked by a positive GDP report, we find that the unemployment rate continued to climb for 12-18 months after the economists trumpeted that the recession was over. The jobs will eventually come, but the wait may be painful.

Our report, which reflects the manufacturing of industrial products and their accompanying industrial distributors and industrial services, is really a look into the economic future. For our local survey, the closely watched index of new orders indicated that new business coming into the firm has now returned to the pre-recession levels of 2005-2006. But incoming orders are just the beginning of the industrial process. Very often, no money will actually change hands for weeks or even months into the future. However, with an increase in new orders, the firm will begin ordering raw materials and components — and people — necessary to fulfill the order. Hence, adding one production worker may ultimately create as many as 10 additional jobs throughout the entire supply chain. In the case of distributors, it will be necessary to place orders to restock the shelves, although tough economic times may cause the firm to delay reordering for a month or two just to make sure the economic recovery is real. Again, money d
oes not actually move for weeks or months. 

Another corollary problem is the so-called jobless recovery. Except for JPM, all of the surveys mentioned in this report are reporting employment indexes that are positive. Unfortunately, these statistics in the recovery phase of a recession often reflect workers being called back, not new jobs created. Firms that have been running four-day weeks are now shifting back to standard 40-hour weeks. With the widespread use of temp agencies, many firms prefer to bring in temporary workers rather than new workers who may not be needed in a few weeks or months.

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

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