Area economic growth displaying accelerated pace

March 5, 2011
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Growth accelerates. That's the latest word on the greater Grand Rapids industrial economy, according to data collected in the last two weeks of February. New orders, our closely watched index of business improvement, advanced to +45, up from +25. In a similar move, the production index rose to +41 from +29. Activity in the purchasing offices edged up to +33 from +29. The employment index posted a modest gain and rose to +35 from +29.

Overall, the growth rate for the local economy has accelerated, and confirms many of the other positive numbers posted in other economic sectors. However, one month does not indicate a trend. The important fact is that we have now posted 21 months of positive reports since the recovery began in 2009.

Turning to local industrial groups, the recovery of the office furniture industry is part of the strong report for this month. Since auto sales are still on track and even expanding, business conditions for auto parts producers remain positive. Performance for industrial distributors is good, although one firm noted a down month. Just as last month, the results for the capital equipment firms are still mixed. For the second month, performance for the firms supporting the aircraft industry was generally down.

At the national level, recovery from the recession continues at a moderate pace. The March 1 press release from the Institute for Supply Management, our parent organization, reported that new orders edged up to +32 from +28. A similar increase was noted in ISM’s production index, which rose to +33 from +24. The employment index advanced to +26 from +17. ISM’s overall index of manufacturing rose to 61.4 from 60.8, the highest the index has been in seven years. Lest there be any doubt, the industrial sector of the U.S. economy is leading the nation out of the recession. With this much momentum, March should build on this success.

At the international level, the J.P. Morgan Global Manufacturing report released March 1 continued to rise at a record pace. JPM’s worldwide index of new orders rose to 60.0 from 59.7. Of the major countries included in the survey, noteworthy expansion came from Germany, the U.S., the U.K., Ireland, Japan and Italy. Business conditions in China continued to cool, largely because of tighter monetary policy. Greece, Spain and India were among the weaker performers. The employment index rose to 56.4, another new record for the survey. On the negative side, the indexes of prices rose to 76.7 from 73.6.

Whereas many of last month’s comments from participants were upbeat, the comments for this month’s report center on a new problem. For most industrial buyers, industrial inflation is once again getting out of hand. One respondent commented that the recent price escalations are beginning to look like “2008 all over again.” Unfortunately, if this run-up in prices goes much further, it is a possibility that we could repeat the boom-bust cycle of 2008.

Why? For that answer we have to go back to the end of the 2001 recession and the soft money policy of the Federal Reserve. When the economic history books are written 50 years for now, Alan Greenspan will probably be tagged as a major culprit. Numerous economists have noted that the Federal Reserve held rates too low for too long after the 2001 recession was over. One noticeable problem the low rates created was the overstimulation of residential and commercial construction, which in turn resulted in more homes and buildings being built than the market could absorb. Hence, we ended up with a boom-bust cycle for housing, which has left more than 20 percent of homes below their value and mortgage balances.

Although almost everyone is aware of the low interest policy on housing, few are aware of the impact of low interest rates on financial institutions. The fact is that endowment funds, short-term money funds, conservative money managers, and even the conservative hedge funds have relied for many years on high-quality corporate and government bonds as primary investment media. When interest rates hit record lows, many of these money managers were forced to look for other places to invest. Part of the record rise for stocks in 2008 was the result of money managers looking for higher returns, even though the level of risk was obviously increased. The prevailing rates of less than 1 percent were simply too low to be acceptable.

As the stocks became more fully priced in 2008, attention shifted to commodities. Although the run-up in gold was obvious, speculators began running up almost every other major commodity, including most of the non-ferrous metals, corn, wheat and other agricultural commodities. The Chinese, with trillions of dollars and euros to invest, were in on this speculation, as well. Like every boom-bust cycle, the bust finally occurred for most of these commodities in mid-2008. The speculative commodities were dumped on the market. Firms began liquidating their bloated inventories. Literally trillions of dollars were withdrawn from the market overnight. The economy was in a free-fall.

This brings us to 2011. Numerous major commodities are now 40 percent higher in price than 10 months ago. Although worldwide bad weather has been blamed for much of the run-up in agricultural commodities, it now seems obvious that we have also returned to speculation. Hence, we could be on the front edge of another boom-bust cycle for commodities.

When will the bust occur? The best guess relates to a significant rise in interest rates. This could occur suddenly if the Federal Reserve decides to change policy, or more slowly if the U.S. starts to have trouble floating another trillion dollars in debt over the next year or so. As previously noted, the higher interest rates will tend to pull money out of commodities and the stock market. If the Federal Reserve can accomplish this task very gradually, it is possible that the commodity markets will have a “soft landing” and simply drift lower. We are going to keep a close eye on this situation over the next few months.

On a less pessimistic note, Michigan is still an automotive state, and the strong auto sales posted for the month of February will quickly translate to more new orders for our auto parts suppliers. General Motors led the way for February, posting a 46 percent increase. Sales at Ford were up 10 percent. For Chrysler, the gain for February was 13 percent. Even Toyota, which has been plagued by bad publicity for the past year, rose 42 percent. 

In short, the economy at both the state and national level is picking up steam. Increased employment by industrial firms will begin to have a noticeable impact on employment statistics. If it were not for the menacing problem of the over-built housing markets, we would soon be back to normal. But that is a very big if.

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

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