Economy remains positive for 23rd month but caution surfaces

May 9, 2011
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Growth remains positive. That's the latest word on the Greater Grand Rapids industrial economy, according to the data collected in the last two weeks of April.

Our closely watched index of business improvement, which we report as new orders, moderated to +29, down from +38. The production index eased to +35 from +39.

On the up side, activity in the purchasing offices rose significantly to +51 from +34. The employment index also posted a nice gain and rose to +46 from +35. Indeed, 50 percent of the firms in our survey are still adding personnel.

Despite this month’s moderation in new orders, the growth rate for the local economy appears to be stabilizing at a moderate rate.

We have now posted 23 months of positive reports since the recovery began in 2009. However, our local industrial sector has not had nearly the impact on local unemployment statistics as we would like. In this same light, the strength in the industrial sector has had little or no impact on the housing and construction crisis.

Turning to individual industries, the local automotive parts suppliers continue to do well, and none of our local firms has as yet reported any impact from the Japanese earthquake and tsunami. The report from the office furniture sector is still positive, but there are signs that it may be peaking at the current level. Performance for the industrial distributors came in fairly mixed, but the bias is still to the upside. Like last month, capital equipment firms continue to improve. Unlike last month, the respondent comments are still positive, but there is a new note of caution from several.

At the national level, results are a little more optimistic. The May 2 press release from the Institute for Supply Management, our parent organization, reported that new orders edged up to +41 from +33. In a similar move, ISM’s production index rose to +38 from +34. The employment index rose to +29 from +25, the highest the index has been in 38 years. Because of the usual statistical gyrations, ISM’s overall index of manufacturing edged down to 60.4 from 61.2.

Overall, the U.S. industrial economy is now in its 21st consecutive month of expansion. The survey author further noted that inventories are once again growing, but attributed the growth to the expansion of new orders rather than price hedging because of the near-record price increases.

At the international level, the JP Morgan Global Manufacturing report released May 3 remained positive but backtracked to its lowest level in five months. JPM’s worldwide index of new orders retreated to 53.8 from 55.0. Growth rate moderated in the U.S., U.K., Eurozone and India. Japan and Greece turned in the weakest reports. JPM’s employment index eased modestly to 55.1 from 55.7. For the second successive month, the JPM international index of prices retreated, to 72.4 from 75.3. February was the high at 76.0.

Looking at automotive, sales at Ford were up 13 percent for April. GM gained 24 percent. Buyers are flocking to showrooms to avoid the predicted summer shortages. The trade publications are still abuzz with assessments of the impact of parts shortages on automotive production over the next few months. For example, about 41 percent of the automotive microcontrollers are manufactured by one small firm called Renesas Electronics. Renesas is moving production from the damaged Kaka plant to one farther west. Production at the Kaka facility will not resume until July. Supply for microcontrollers and other electronic components was already tight before the quake, which means that it could be well into October or November before supply catches up with demand. Power outages are also a problem.

Our surveys this month yielded only a few notes of optimism about inflation. In Greater Grand Rapids, the index of prices was unchanged from the near-record level of +73. At the national level, ISM’s index came in at +71, up slightly from +70. While there is no optimism for impending price relief in the survey statistics, there are some anecdotal notes that inflation may soon start to ease. Several survey respondents noted that steel prices may at long last be topping out. Copper is down 8 percent from its recent high. Nickel is down about 7 percent. Tin fell about 3 percent. Cotton is down 17 percent. Sugar has fallen 34 percent from its peak. It is too soon to call this a trend, but these lower prices may bring the industrial market some badly needed relief.

While our report remains positive, there were several items in this month’s economic news that were negative. First, Standard and Poor’s downgraded the outlook for U.S. government debt to “negative” from “stable.” For now, they reaffirmed the AAA rating for government bonds, but probably wanted to express concern over the unwieldy rate at which the debt is expanding. Some market insiders believe that S&P is hoping for some evidence that Congress and the White House are working toward a long-term solution to the debt problem. If they do not see any significant progress, they will take the unprecedented step of downgrading the U.S. bond rating.

The second note of caution came from an International Monetary Fund forecast that the Chinese economy will surpass the U.S. economy by about 2016. Because the dollar has been the currency standard for the world since 1944, we have been able to just print money and have people, institutions and other countries buy our debt to pay for our excess spending. With rising prices for gold and silver, it suggests that investors are losing interest in the dollar. The dollar will probably decline further if the massive federal deficits show no signs of being resolved any time soon.

The third note of caution came for the Commerce Department’s report on the GDP. After posting a 3.1 percent gain for the fourth quarter of 2010, the preliminary estimate for the first quarter of 2011 came in at 1.8 percent. Whereas the recovery from many recessions is zigzag, the drop to 1.8 percent was greater than many economists expected. This resulted in a considerable downgrade by many economists for projected growth of the U.S. economy in the second half of the year. In addition to the gloomy attitudes among consumers and small business, other negative factors included high gasoline and diesel prices, the impact on automotive from the Japanese disaster, deficit inaction, the falling dollar, the continuation of tight credit and the unstable housing markets.

Needless to say, there are a lot of negative forces still at work in the economy. However, as the results of our survey shows, the industrial sector of the economy continues to be positive, even though the rate of increase may be slowing. We still do not have an accurate projection of the total impact of the Japanese disaster on our economy, much less the world economy. Until the rebuilding gains momentum, Japan will be in a short-term recession. However, it is safe to conclude that the impact will not be enough to put us into a recession. All we know for sure is that there will be a worldwide “Japanese” downside for the next six months or so, and some firms will be impacted more than others.

Brian Long is director of Supply Chain Management Research, Seidman College of Business, GVSU.

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