GR manufacturing economy still modestly improving

December 11, 2011
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Modestly positive and still improving. That's the latest word on the Greater Grand Rapids industrial economy, according to the data collected in the last two weeks of November. New Orders, our index of business improvement, advanced to +13 from +9. The Production index remained virtually unchanged, but retreated to +7 from +8. The Employment index posted a gain, rising to +24 from +15. It was good to see that the percentage of respondents reporting staff reductions edged lower to 7 percent from 13 percent. Hence, the slower movement we reported last month appears to be just a short-term interruption. Our local economy continues to be stronger than the rest of the country, and even the rest of the world. At least for the next few months, the momentum is positive, and we expect this trend to continue.

Turning to local industry groups, our survey — as well as the state of Michigan — still has the automotive parts producers to thank for the positive numbers we are reporting. Our second strongest group for November was the industrial distributors, many of whom appear to be having a good year. The capital equipment industry remains stable. Office furniture firms appear to be leveling out, although one firm turned in a stronger performance than the group as a whole. Overall, the mood of the respondents remains one of cautious optimism.

At the national level, the results continue to be very flat. The December statement from the Institute for Supply Management, our parent organization, reported that New Orders flipped back to minimal growth of +1, up from -3. The Production index rose very modestly to +3 from +1. However, the Employment index retreated to +1 from +7. Despite the flat performance, statistical aberrations resulted in ISM’s overall index of manufacturing rising to 52.7 from 50.8. Again, any index over 50 is considered positive.

At the international level, the JP Morgan Global Manufacturing report released this month continued its trend of a downward slide. The survey of purchasing managers from 30 industrial nations indicates a retreat to 48.6 from 49.5, according to JPM’s worldwide index of New Orders. The Production index dipped to 49.7 from 49.8. JPM’s overall international index eased modestly to 49.6 from 49.9. China, Japan, and South Korea posted losses. The European Union recorded the biggest decline since June 2009.  Since these countries are some of our best customers, it is disappointing news for U.S. domestic firms that depend on high foreign demand. Further confirmation of the downturn comes from the OECD, which flat-out predicts that the European Union will experience a mild recession for at least the first half of 2012.

It is no surprise that most of the economic news for the past month has been dominated by Europe. In fact, during certain periods of time, volatile news reports changed direction almost every day. Clearly one aspect remains unchanged: Europe is still sliding into a recession. Although much of the blame has been leveled at the unrest in the Greek and Italian credit markets, the fact remains that the root cause of the problem still rests with unsustainable entitlement and retirement promises made by politicians in order to gain favor. With the possible exception of Germany, all of the European governments have awarded their citizens overly generous pensions, early retirement dates, and free health care, all of which are funded out of current revenue. Like most Ponzi schemes, they work fine until there is a downturn, and then the lower income does not match the outflow. For years after joining the Eurozone, the Greeks used the leverage of the euro to issue more and more debt. There is evidence that they anticipa
ted that the Germans would come in to support their debt, but they were wrong. The survival of the euro is still in question.

Unfortunately, a permanent solution for Europe has not been created. The current model means weathering recurring crises as threats of various defaults occur. Right now, we are simply between crises. Until all of the PIIGS countries (Portugal, Ireland, Italy, Greece, Spain) come up with a permanent solution to their fiscal problems, there will be periodic flare-ups of instability that will cause Europe — and indirectly the U.S. — to look for another temporary solution. With the recent announcement of a restructuring plan by Italy, the future looks a little more hopeful. But even these efforts do not signal an end to the current European debt crisis.

The other big economic news for this month is the drop in the national unemployment rate to 8.6 percent from 9 percent. Unfortunately, a large number (315,000 calculated in the decrease) were discouraged workers dropping out of the workforce altogether. As a result, the labor participation dropped to 64 percent in November, down significantly from three years ago when the U.S. participation rate was 66.3 percent. Although 120,000 new jobs were created in November 2011, roughly half of these jobs were seasonal Christmas hires. The number of long term (more than six months) unemployed workers remained stubbornly stuck at 5.7 million. At the state level, Michigan unemployment fell to 9.2 percent from 9.9 percent, partially driven again by workers dropping out of the workforce and more significantly by the continued recovery of the auto industry. In Kent County, the jobless rate fell to 6.9 percent and in Kalamazoo County to 7 percent. Compared to the nation as a whole, the above statistics are not a bad showing,
although there is still plenty of room for improvement.

The auto industry continues to strengthen. Since much of Michigan’s recession recovery can be attributed to the auto parts suppliers and assemblers, it is especially gratifying to see industry sales for November rise by 14 percent, up from October’s increase of 8 percent. For the Big 3, Chrysler led the way, up 45 percent, followed by gains of 13 percent at Ford and 7 percent at GM. Among the foreign nameplates, sales gainers included Mercedes-Benz (44 percent), Volkswagen (29 percent), Hyundai-Kia (29 percent), Nissan (22 percent) and Toyota (7 percent). The only major loser was American Honda, down 6 percent.

Although industrial inflation remains relatively tame, November saw a few prices start to edge higher. The rapidly escalating prices for rare earth elements continue to cause trouble for three of our local firms. For several firms, titanium dioxide continues to create a cost squeeze. However, steel and copper are still falling in price, and ISM’s index of Prices remained negative at -10. In our local area, the Greater Grand Rapids index of Prices came up significantly to +15 from -5. For Southwestern Michigan, the index moderated to +9 from +19. Both of our local indexes are well below their 20-year averages.

In assessing where we go from here, it is worth repeating that our positive numbers are still the result of positive automotive sales. These positive sales have resulted in many of our local auto parts suppliers to be operating at full capacity. As a result, these same firms have called many workers back to work and hired hundreds of new people over the past year. We see no reason why positive auto sales should not continue well into 2012. However, for the rest of the year, the national and international economies hold influence. If it were not for sagging economies of Europe, China, and much of the world slowing or sliding into recession, our slow but steady recovery would probably continue unabated. Unfortunately, the U.S. is not an island. It is difficult to assess the drain on our economy from exposure to an impending European recession. Regrettably, the best the U.S. can hope for is continued slow growth.

Brian Long, Ph.D., is director of supply chain management research at Seidman College of Business, GVSU.

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