Economic momentum should continue into summer
Modestly positive. Although it sounds redundant, the February data follows the same pattern we have been reporting since the recovery began almost three years ago.
New Orders edged up to +16 from +9. In a similar move, the Production index rose to +12 from +7. However, 37 percent of this month’s respondents added staff, but 14 percent reduced headcount. This resulted in our Employment index backtracking to +13 from +26. This modest recovery remains in a 10-month narrow statistical range, which corresponds with the 35 positive reports we have filed since our local survey first turned positive in April 2009. Growth is growth, but the slow pace has been frustrating.
A look at local industry groups provides another dimension. There has been little doubt that our automotive parts producers have buoyed local survey results since the 2009 “cash for clunkers” program, and February confirmed the trend. The office furniture business still is mostly flat or even slow for specific furniture types. The capital goods firms turned mixed in February, although the bias was still to the up side. It was good to see industrial distributors pick up the pace, but global uncertainties justify worries about the future.
At the national level, the results continue to improve. The report from the Institute for Supply Management, our parent organization, indicated that New Orders edged up to +19 from +15. The Production index bounced to +20 from +7, one of the best gains since last April. Good news also came from the Employment index, which rose to +10 from +5. The only real contrary statistic comes from ISM’s composite index of manufacturing, which edged -1.7 lower to 52.4 because of seasonal adjustments. Any reading over 50.0 is considered positive, so the upward trend should resume next month. Overall, the national industrial economy continues to strengthen.
Much of the world economic uncertainty is still coming from the Greek debt situation. Whereas the short-term problem over refinancing the €14.4 billion bond issue (coming due March 20) seems to have been resolved, very few European economists outside of Greece believe that the Greeks have arrived at a long-term solution. Overly optimistic estimates for future GDP play a role in this pessimism. With most of Europe sliding into what appears to be a shallow recession, the already-weakened Greek economy is apt to fare worse than most other countries in the Euro Zone. A second factor is capital outflow. Because of the weak Greek economy and continued economic unrest, money and capital are flowing out of the country, and almost no money is coming back in. There will be no recovery unless this trend stops. Finally, the general population of Greece still seems unable to confront the public sector employees in a meaningful way. Governmental cutbacks have been minimal, and yet they try to tax the private sector more to
make up the difference. Unlike 15 years ago when Greece shipped industrial products all over the world, 60 percent higher labor costs and higher taxes have reduced exports to a mere 2 percent of GDP.
Is Europe now in a shallow recession? The evidence points in that direction, but we are not sure. The formal definition of a recession is two consecutive quarters of negative economic growth. Hence, an actual recession can only be declared after the numbers are calculated after the fact. Either way, the European economy shows definite signs of a slowdown phase, largely brought on by the euro debt situation. Clearly, our exports to Europe have been hurt by the downturn, but so far not enough to drag our economy negative. Some European pundits are claiming the worst is over, meaning the world economy may have dodged another bullet. It will take a few months until we know for sure.
Back in the U.S., other economic news includes an upward revision of the 2011 fourth quarter GDP to 3.0 percent. This is a good number, and current projections indicate that the first quarter of 2012 should be equally strong. In fact, some estimates predict a number as high as 3.6 percent. All of this correlates with the current reports of statistics that depict a gradual increase in the recovery pace.
Turning to auto sales, it was another good month. Partially because of a mild winter, the SAAR statistic (Seasonally Adjusted Annual Rate) rose to a three-year record of 15.1 million units for February. For the Detroit 3, Chrysler led the way with a 40 percent gain. Ford came in at a respectable 14 percent gain, but GM could only claim a 1 percent advance. Transplants such as Honda rose 16 percent, Toyota 12 percent, Hyundai 26 percent, and Nissan 16 percent. Industry wide, sales were up 16 percent. Although the industry outlook still looks encouraging, it is doubtful this record upward pace will continue for many more months. Sales will eventually hit a saturation point, and we will settle into a stable growth rate. At this level, our auto companies will remain very profitable and our local parts suppliers should benefit.
Industrial inflation, for the most part, remains in check. Without the monopoly power of some major steel producers, the softer markets around the world should have resulted in prices falling. At best, steel prices have moderated. Some commodities like copper are becoming speculative reserves, resulting in stable prices when they should be falling as demand declines. Our indexes of Prices for both of our local surveys remain in the low 20s, and ISM’s national Prices index edged up in February to +23 from +11. Our biggest inflation risk comes from a declining dollar. It’s a complicated prognosis, but if the Europeans get their house in order, the euro will rally, the dollar will decline, and industrial inflation for many commodities will rise because more dollars will be needed to buy the same quantity of goods.
Where do we go from here? Aside from Iran, Syria, Egypt and North Korea, our biggest economic obstacle remains Europe. Right now, it appears that the European debt managers have kicked the proverbial can down the road far enough to create some optimism that the worst may be over. Of course, it isn’t “over,” but at least enough confidence has been regained to stop the slide. Our domestic numbers have continued to improve, and the upward economic momentum appears to be positive well into the summer months. However, we remain vulnerable to another stumbling block in the European debt crisis. We know other stumbling blocks are out there, but we don’t know how big they are. Furthermore, Michigan’s auto recovery will begin to show signs of topping out in a few months, albeit at a fairly solid level. At that time, the wave of hiring we have seen from the auto firms and the auto parts producers will taper off, and we will need to start depending on more industrial diversification for future employment growth.
Brian Long, Ph.D., is director of supply chain management research at Seidman College of Business, Grand Valley State University.