Area Economy

GR manufacturing economy bucks downward trend

December 15, 2012
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Better! After five lackluster reports, the data collected in November depict a return to modest growth in the Greater Grand Rapids area. New Orders, our index of business improvement, rose significantly to +17 from +6, and the Production index jumped to +21, from -1. Activity in the purchasing offices came back to +8, from -7. The Employment index modestly improved to +13, up from +4.

Even though the future is still filled with uncertainty, November’s statistics clearly bucked the trend. For the last four years, our local economy has often been stronger than either the national or international economies, and this is no exception. However, manufacturers are starting to strike a few notes of caution, even though numerous firms are at full capacity and reporting all-time highs in sales.

Looking at individual industrial groups, our auto parts suppliers remain positive, but at least two firms have expressed the widely held opinion that we are nearing the top of the expansion in the auto industry. Firms supporting lines of smaller cars are continuing to do better than those supporting large SUVs and trucks. This month’s statistics were bolstered by the recent uptick in the office furniture business, which has resulted in several firms ending the year much better that expected. For industrial distributors, this month’s performance came in mixed, although the bias was clearly to the upside. Two of our capital equipment firms reported strong sales, but now others see customers in a “wait and see” mood because of the upcoming fiscal cliff.

Our parent organization, the Institute for Supply Management, tells a different story. ISM’s Report on Business dated Dec. 3 still indicates the industrial market at the national level is backtracking. ISM’s index of New Orders for the U.S. remained modestly negative at -5. The Production index remained virtually unchanged at -1, up from -2. The weakest news came from the ISM national Employment index, which fell to a three-year low of -7, down from +3. After statistical adjustment, ISM’s overall index edged back below the 50.0 break-even point to 49.5, down from 51.7. Although this is the fourth negative report in the past six months, the survey author does not see us sliding into a recession if a solution can be found to the fiscal cliff.

At the international level, the Dec. 3 JP Morgan international manufacturing report “stabilized” in November. JPM’s Global Manufacturing PMI remained below the 50.0 break-even point, but rose to 49.7 in November, up from 48.8 in October. The slightly softer numbers from the U.S., Japan and the Eurozone were offset by better numbers from China, Brazil, India, Russia and the U.K. The Canadian economy remains flat, primarily because of its neighbor to the south. Yet the JPM survey author is very optimistic and believes the current statistics “herald faster output gains” for the world economy. The fact remains that this tenuous assumption is based on optimism which projects success in refinancing debt in the Eurozone and the U.S. avoiding the fiscal cliff.

At long last, the national election is over. Unfortunately, little has been addressed to resolve the differences in fiscal ideology, largely because almost none of the people have changed. The Republicans still control the House, and the Democrats still control the Senate and White House. The hotly debated list of solutions, such as they are, still claim that each is the best tonic. Some pundits on both sides of the aisle are already looking ahead to the mid-term elections to be the next juncture of change.

The recovery of the housing industry continues be good news for the economy at both the local and national levels. The most recent S&P/Case-Shiller index of property values posted another significant gain. Housing starts continue to rise, partially because of the tightening of residential units available for sale, and partially because of the low interest rates. The unusually mild weather adds an extra lift. We see that higher rents have caused some people to rethink the idea of owning. As headlines spread the news of a housing market revival, properties are beginning to be listed now that sellers feel they can expect a fair price.

Consumer confidence also receives a boost. It is a basic fact that many people consider their home to be their biggest financial asset. However, unlike previous housing recoveries, some neighborhoods that suffered under the downturn are still plagued with bankruptcies and foreclosures, making it difficult, if not impossible, for these neighborhoods to participate in the Case-Shiller housing valuation revival. Excessive foreclosures in some neighborhoods will continue to contaminate the values of surrounding properties, creating problems for years to come.

In Michigan, the economic recovery continues to be driven by rising auto sales. This month’s report from Automotive News bodes well for the Michigan economy. “As customers were suddenly able to find financing to keep replacing aging vehicles, and with a post-storm bounce from easterners digging out from Hurricane Sandy … we are now surpassing sales records set pre-recession.” Honda recorded the best November ever, with U.S. sales rising 39 percent. VW America rose 31 percent, Toyota gained 17 percent and Nissan rose 13 percent. The Detroit Three did not fare as well, with Chrysler up 17 percent, GM up 3 percent and Ford up 6 percent. The industry as a whole rose 15 percent to a SAAR rate of more than 15 million units per year for the first time since 2008. Again, analysts continue to cite pent-up demand, but also note that good weather, loosening auto credit and strong dealer incentives were significant factors. However, some analysts have predicted sales will soon top out and probably settle into a SAAR rate of 14.5 to 15 million units per year. For Michigan, this is very good news. Our Detroit Three firms are very profitable, and most of our suppliers are very profitable.

Where do we go from here? Many forecasts are for continued slow growth and, barring changes in the present situation, no recession. Others believe growth in 2013 will be very slow, with quarterly GDP gaining less than 1 percent for the first two quarters. Still others feel there are enough new taxes coming to push us into a recession. Of course, there is still concern that the European debt crisis will influence our economy.

Needless to say, the fiscal cliff crisis remains the proverbial 800-pound gorilla in the room. In short, the dilemma involves $600 billion in spending cuts and tax increases set to automatically be triggered if a budget solution cannot be reached by Jan. 1. A dislocation of this sort is likely to trigger another recession or a second dip in the present recession, depending on one’s point of view. Until recently, most pundits were nearly certain that some kind of an agreement could be reached, even though it might be hammered out at the last minute. However, there is now a movement brewing that some legislators would like to see us go over the fiscal cliff in order to secure a huge de-facto tax increase and a huge reduction in defense spending, both of which they have wanted for years. They feel these goals cannot otherwise be achieved for many years, given the current and probable future congressional configuration. They are willing to risk a recession and the loss of jobs for 3.4 million people to accomplish these goals, and suggest the new-found revenue be used to provide extensive benefits for the newly unemployed. Of course, if there is another recession, there will be no “new-found” revenue. This scary scenario is aptly referred to as the “nuclear option.” Let’s hope wiser minds will prevail.

Brian Long, Ph.D., is director of Supply Chain Management Research at Seidman College of Business, Grand Valley State University.

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