Long-awaited recovery may have finally arrived


    Still positive. That’s the latest word on the Greater Grand Rapids economy, according to the data collected in the last two weeks of July. New orders, our closely watched index of business improvement, remained positive at +19, slightly below last month’s +26. Given that this is the fourth consecutive month the new orders index has been positive, it is now safe to say that the Grand Rapids economy probably hit bottom in March and the long-awaited recovery has begun. The production index edged up to +19 from +14. For the first time since July 2007, our index of purchases turned positive at +4, up from -3 last month. Although the index of employment remained slightly negative at -4, it is encouraging to see that 17 percent of the firms in our survey are now adding personnel. What does not show in this statistic is that some firms that had cut back to a 32-hour workweek are now resuming their normal schedules. However, some firms are still cutting back, and for them, the new wave of optimism has yet to arrive.

    Turning to individual industries, our auto parts suppliers are still weak, but some firms are now stabilizing. One even reported conditions improving for the first time in many months. It was a better-than-usual month for the industrial distributors. For the third consecutive month, our local capital equipment firms are reporting better business conditions. The major office furniture companies appear to have stabilized and are now reporting some modest improvements in sales. The smaller office and steel furniture firms are also doing a little better. All in all, the comments at the end of this report clearly point toward cautious optimism, although some firms are still buried in the doldrums.  

    At the national level, the Aug. 3 press release from the Institute for Supply Management, our parent organization, shows the national economy is modestly improving.  ISM’s index of new orders came in at +11, up from +4, the highest since July 2007. The production index moved up to +16 from +10, the highest since June 2007. The employment index remained negative, but moderated to -8 from -16. The overall Index of Manufacturing came in at 48.9, up considerably from 44.8, but still not to the break-even point of 50.0. 

    The news at the international level continues to be positive. The composite index for J.P. Morgan’s Global Manufacturing Report dated Aug. 3 rose to 50.0, up from 46.9. New orders rose to 53.3, up from 49.0. Countries reporting business conditions as improving included China, India and the U.K. Although still declining, moderation in the rate of decline was noted in countries like Germany, France, the Netherlands and Australia. Ireland and Brazil were cited as countries where conditions are still worsening. The employment index stayed below the break-even of 50.0, but moderated to 45.1 from 42.3. Although only China and Turkey posted employment readings above the break-even point, the survey author noted that “… signs are that the worst of the labour market retrenchment may be behind us.”

    Since last month, the big news for Michigan has been the Cash for Clunkers (Car Allowance Rebate System) program. Although it was supposed to start July 1, it took the NHTSA three weeks to get the 136-page rule book written and the Web-based computer approval system in place. The framer vastly underestimated the impact that $3,500 to $4,500 would have on the car market. The initial $1 billion was used up in just six days, and as of this writing, the bill to extend the program by another $2 billion has been passed by the House and sent to the Senate. Some dealers have had their lots stripped of all vehicles eligible under the program, and there is talk among the Detroit Three of bumping up production schedules of the 2010 models just to get cars back on the lots. Clearly, this is great news for Michigan, especially for our local auto parts suppliers. 

    It is no real surprise that the CARS program resulted in a boost for automobile sales for July. At +2.4 percent, Ford posted its first positive sales increase in 19 months. The losses for the other major firms are less than they would have been had it not been for the “clunker” program. General Motors dropped by 19.4 percent, Chrysler fell 9.4 percent, Honda slipped 17.3 percent, and Toyota was down by 11.4 percent.

    At the national level, there was some good news for the housing market. Although it received only modest media attention, Case-Shiller, the national index of housing prices in 20 major metropolitan areas, again saw the rate of decline subside by about a half percentage point. More importantly, the Detroit market posted a similar uptick for the first time in many months. Again, year-over-year prices are still falling in all markets, but the rate of the decline is definitely moderating. This has resulted in some analysts suggesting that the overall housing market may have bottomed out last January or February.

    The news for the inventory situation is good at the local level, but ISM’s index of inventories is still a problem. At -35, ISM’s index of inventories remained near a record low. However, the Greater Grand Rapids index of purchased material inventory recovered to -17 from -28. For southwestern Michigan, the index turned positive at +4, up from -6. All in all, the prices for “big ticket” commodities like steel, copper and aluminum are starting to rise, indicating that liquidation may be ending and prices will stabilize. It is again worth noting that price stabilization is essential to economic recovery. 

    In summary, the long-awaited recovery has arrived, but a slow recovery should still be expected. The Cash for Clunker program may have been the catalyst that the auto industry needed to stage a turnaround, but time will tell. The worldwide economy is improving, which will help our domestic economy, especially for firms that do a lot of export business.  All of this could still be tripped up by the massive treasury funding and refunding that we expect the world to purchase over the next few months. Finally, we should not expect the jobs to come roaring back any time soon. Employment is always a laggard in any recovery, and this one will be no exception.  

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

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