Greece puts world economy on a slippery slope

November 14, 2011
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Growth slows. That’s the latest word on the Greater Grand Rapids industrial economy, according to the data collected in the last two weeks of October.

New Orders, our closely watched index of business improvement, retreated to +9 from +25. In a similar move, the Production index edged lower to +8, down from +25. Activity in the purchasing offices, our index of Purchases, backtracked to +6 from +14. Even the Employment index came in less robust at +15, down from +27. Ominously, the percentage of respondents reporting staff reductions edged up to 13 percent from 6 percent.

Despite these lower numbers, they are all still positive. Slow growth by any measure is better than no growth. Just as last month, our local statistics continue to be stronger than the rest of the country, and even the rest of the world.

Turning to local industry groups, it is the automotive parts producers that are keeping our statistics positive. In October, auto sales for the industry were up by 8 percent, keeping several local Tier I firms at full capacity. For the capital equipment industry, the results are stable, and two firms are very positive. The office furniture firms are still holding steady, but the slowdown in the world economy is starting to erode the prospect for future performance. The industrial distributors are steady, but the slowing of the local economy has caused their sales to moderate.

At the national level, the results remain flat. The Nov. 1 report from the Institute for Supply Management, our parent organization, indicated that New Orders eased slightly to -3 from -1, tying the two-year low reported for August. The Production index eased to +1 from +2. The Employment index edged up modestly to +7 from +6. ISM’s overall index of manufacturing settled at 50.8, down from 51.6. Again, an index over 50 is considered positive.

At the international level, the JP Morgan Global Manufacturing report released Nov. 1 continued to depict stagnation. JPM’s worldwide index of New Orders remained below the break-even point of 50, but came back to 49.5 from 48.5. JPM’s overall international index rose modestly to 50.0 from 49.8. The euro area and U.K. saw the largest declines, while very modest gains were noted in China, India, Russia and Turkey. The survey author considers the world economy to be very stagnant and still looking for direction.

Despite the modestly positive numbers in our local survey, the caution remains that the world economy is still slowing and many countries may soon slide into a technical recession, i.e., two continuous quarters of negative economic growth. For us, the big question remains about how much we will be drawn in if the economy for most of the rest of the world turns slightly negative. In the case of the Eurozone, the most recent GDP numbers are just barely positive, and many forecasts for the fourth quarter expect the numbers to turn slightly negative. The main problem continues to be the heightened caution over the European debt situation, which has caused businesses and consumers alike to hunker down.

For automotive, October was another good month. As in past months, Chrysler was the leader with a 27 percent gain, followed by Ford at 6 percent and General Motors up 2 percent. Among the foreign nameplates, Nissan continues to outperform most of the group, and posted an 18 percent gain. Hyundai was up 22 percent and BMW gained 17 percent. Honda sales were lower by 1 percent and Toyota lost 8 percent: Both are blaming the floods in Thailand for parts shortages. In general, auto sales are expected to remain positive for at least the next few months, as long as the world economic situation remains stable and the price of gasoline continues to fall.

Since our last report, we have been inundated with economic news — some good and some bad. One item on the good side was the announcement Oct. 27 from the Bureau of Economic Analysis that the GDP for the third quarter has been estimated to have grown at a rate of 2.5 percent, up nicely from the 1.3 percent for the second quarter. Factors driving the GDP improvement included higher consumer spending, higher levels of capital expenditures by companies and improved exports. Although the 2.5 percent is a preliminary estimate and subject to several revisions, it has lessened the fear that we may have already sunk into another recession. Furthermore, many of the statistics that turned slightly negative last month have now flipped back to positive. One noteworthy example is the monthly business outlook survey conducted by the Philadelphia Federal Reserve, which posted a sharp drop for September but recovered in October.

Other significant economic news came from Europe, where all of the financial markets gyrated with negotiations over the Greek bailout package. Although a deal was finally struck, the euphoria only lasted a day or two before it became clear that the solution was just another stopgap and not a permanent fix. As a result of cutting the value of Greek bonds by 50 percent, interest rates were forced up for the other marginal euro countries such as Spain, Italy and Portugal. Furthermore, the so-called solution assumes that all of the European economies would improve consistently over the next several years, even though the growth statistics for most of Europe are now sliding. In addition to unsupported optimism, the plan has also been criticized for too many generalities that don’t add up to as good a solution as the proponents projected. In short, even with the so-called austerity programs that have been announced, considerable doubt remains that the budgets have been balanced.

Then the Greek problem turned even worse. The austerity measures continued to generate demonstrations and street riots, so the prime minister called for a national referendum on the austerity package agreed upon only last week. Since a majority of Greeks do not favor the package, the main creditors, namely France and Germany, have now turned skeptical. Furthermore, Greece needs cash now and the referendum vote — if it ever occurs — won’t happen until January. In the meantime, the current government could collapse, requiring new elections. Adding to this is the overhanging fear that Italy and Spain may have to be bailed out. Since there is not enough money to bail everyone out, the euro could collapse. This would throw Europe into a recession, some of which would spread to us. As of this writing, the situation is still changing on a daily basis.

In summary, barring an immediate collapse of the euro, we expect to see the current pattern of slow growth to continue in West Michigan for the next few months. If we do slide into another recession, chances are that we can blame it on the Europeans. As long as automobile sales remain positive, we should continue to stay modestly positive in Michigan for at least a few more months. But the fact remains that the entire western world has awakened to the fact that politicians have vastly overpromised pensions and benefits to baby boomers that are unfunded and unsustainable. Greece, the first country to run out of money, was simply the proverbial canary in the mine. Fortunately, the problem is still fixable, and the sooner we start, the better.

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

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