Economic growth shows moderate climb in local market


    Moderate growth continues. That’s the latest word on the greater Grand Rapids industrial economy, according to the data collected in the last two weeks of January. New orders, our index of business improvement, eased slightly to +25, down from +31. However, the production index rose to +29, up from +19. Activity in the purchasing offices advanced to +29 from +19. The employment index remained virtually unchanged at +29, up from +27. Overall, the steady growth reported for the past 20 months continues unabated.

    Turning to local industrial groups, the recovery of the office furniture industry is still on track, although there is a long way to go to get back to the sales levels of 2005-2006. Stronger auto sales have resulted in more business for local auto-parts suppliers, and several local firms are approaching full capacity. In general, performance for industrial distributors remains positive. Although capital equipment firms are still recovering, this month’s performance was mixed. Performance for the firms related to the aircraft industry was generally down.

    At the national level, recovery from the recession picked up considerable speed. The Institute for Supply Management, our parent organization, reported that new orders posted a near-record increase to +28, up from +9. ISM’s production index also posted a substantial increase, and rose to +24 from +12. The employment index edged up to +17 from +10. ISM’s overall index of manufacturing rose to 60.8, the highest since May 2004. We hope February will build on this success.

    At the international level, the JPMorgan Global Manufacturing Feb. 1 report rose at a survey record pace. JPM’s worldwide index of new orders increased to 59.8 from 56.4. Of the 29 countries included in the survey, noteworthy expansion came from Germany, the Netherlands, the U.S., the U.K., and Eurozone. For the first time in recent months, positive reports came from Japan and Spain. Greece is still sliding. The employment index rose to 55.3, the highest the survey has recorded in its 12-year history. On the negative side, the index of prices rose to a four-year high of 73.6.

    This month’s most significant economic news came from the Commerce Department’s press release that the fourth quarter of 2010 showed a tentative growth rate of 3.2 percent. Although this is up considerably from the 2.6 percent reported in third quarter 2010, it disappointed some analysts who had projected rates as high at 4 percent. Further analysis shows that the .8 percent uptick was fueled by increases in personal consumption expenditures and residential fixed investment for household goods of all sorts. A sharp downturn in imports for the fourth quarter also helped. GDP for all of 2011 is estimated by many economists to grow at a rated 3.5 percent, but this number still seems optimistic. The rising cost of commodities as well as the inevitable increases in interest rates will probably limit the 2011 GDP to something less.

    Another important economic consideration is the ominous drum beat of higher prices for most industrial commodities. Some grades of steel are up in price by 60 percent in the space of two months. Other key commodities like copper, aluminum, zinc, lead and nickel also are rising at a rapid rate. The preliminary cause of this inflation is the resurgence of worldwide demand for these commodities, especially from Chinese manufacturers. Even our domestic demand has risen in recent weeks. However, it is disturbing to note that some of these commodities have become vehicles for speculation and hoarding. Firms that had virtually eliminated raw materials inventories under the JIT banner are starting to build stock because of fear of higher prices. If this inventory accumulation and speculation gets out of hand, it could create another bubble, which will eventually burst.

    Will industrial inflation spill over into consumer inflation? Yes, but only over the long term. Unlike the economy of 50 years ago, domestic producers of consumer goods are restricted from raising prices too rapidly because of foreign competition. The lack of acceptance of higher pricing by consumers is also a factor.  Some manufacturers have turned to productivity enhancement in order to hold the price on finished products as input costs rise. So far, these measures have held consumer prices fairly constant. In fact, the U.S. has less consumer inflation than any other nation in the industrialized world.

    Among the good news in recent months has been the resurgence of optimism. As previously noted, the recovery from this recession has been the slowest in 70 years. But as it builds momentum, businesses are beginning to spend more on plants, equipment and new hires. So far, a lot of the expansion in our index of employment has been from calling workers back and from employment through temp agencies. Fortunately, we are now seeing more firms hiring permanent workers. As we head toward spring, these new hires should start to reflect lower unemployment numbers. By the end of the summer, the unemployment situation should look better, but it still won’t be great, especially for Michigan.

    There is also good news regarding automobile sales for January. Of the major firms, GM and Chrysler led the way with increases of 22 percent and 23 percent. Ford was up 9 percent. Toyota posted the best results in months at +17 percent. Honda was up 13 percent. Nissan gained 15 percent, VW 7 percent and Subaru 21 percent. For the industry as a whole, sales were up 17 percent. All of this is good news for our auto-parts suppliers.

    The recovery is far enough along that there is now very little talk about a “double dip.” However, global events could upset this balance. Sustained financial instability in any of the European PIIGS countries could put the Euro into a tailspin. The trouble in Egypt shows how quickly the world economy can be thrown into turmoil. All-out war in the Middle East will run the price of oil up to record levels. 

    Brian G. Long, CPM, is director, supply chain management research, Seidman College of Business, Grand Valley State University.

    Facebook Comments