Surge to boost automotive inventories brings jump


    More positive. That’s the latest word on the greater Grand Rapids economy, according to the data collected in the last two weeks of August. New orders, our index of business improvement, edged up to +24 from +19. This index has now been positive for five consecutive months. The production index fared even better, rising to +34 from +19. Activity in the purchasing offices, which we report as our index of purchases, rose sharply from +4 to +33.

    For the first time in more than two years, the index of employment turned positive, rising to +19 from -4. Indeed, 31 percent of the firms that respond to this survey noted that employment levels are rising, partially from people called back to work and partially from hiring a few additional people. On the other side, 12 percent of the firms in our survey are still reducing their labor force.

    Turning to individual industries, much of the improvement in this month’s statistics can be attributed to the decision by many of the automakers to boost production to rebuild inventories depleted by the Cash for Clunkers program. Hence, new orders are up for many of the auto parts suppliers in this survey.

    Just like our last report, it was a better-than-usual month for the industrial distributors. The picture was mixed for capital equipment firms. Some are doing better, but most are just holding their own. The major office furniture companies remain relatively stable, but one firm was clearly down. All in all, the comments at the end of this report tell us that the optimism for most firms is spreading and they are increasingly convinced this recovery is here to stay.

    At the national level, the Sept. 1 press release from the Institute for Supply Management, our parent organization, shows the national economy has clearly turned positive. ISM’s index of new orders jumped to +27, up from +11. This index has not been at this level since February 2006. In a similar move, the production index rose to +25, up from +16. Just as last month, ISM’s employment index remained negative, but moderated to -28, up from -35. The overall Index of Manufacturing came in at 52.9, up from 48.9, and well ahead of the economic break-even point of 50.0.

    The news at the international level is equally positive. The composite index for J.P. Morgan’s Global Manufacturing Report, dated Sept. 1, rose to a 26-month high of 53.1, up from 50.0. New orders jumped to 58.2, up from 53.3. Gains were posted by almost all of the Eurozone nations, except for Italy. Japan and China turned in strong reports, and Brazil turned positive for the first time since August 2008. The survey author also noted that “signs are that these gains will be sustained in coming months.” Since recovery for the United States is partially predicated on a recovery for the rest of the world, this is very good news.

    Although the Cash for Clunkers program (a.k.a., CARS) is now over, the auto sales reports for this month reflect solid gains for some firms based on the sales of cars in early August when the program was extended. Of the major firms, the big winners were Ford (up 17.2), Toyota (up 6.4 percent) and Honda (up 9.9).  Of the smaller firms, Hyundai gained 52.1 percent, Volkswagen gained 14.1 percent and Subaru rose 51.5 percent. General Motors and Chrysler did not fare as well, and posted sales declines of 20.1 percent and 15.4 percent, respectively. For the entire industry, sales were up 1.0 percent, the first monthly gain in 21 months. However, many analysts fear that August sales may have “robbed Peter to pay Paul.” In other words, sales for September and October may have been moved up to August. We will have to see the September sales results hold up before we can say that the clunker program marked the beginning of a recovery for the auto industry. In the short run, it has certainly helped Michigan.

    Turning to the ongoing problem of inventories, the situation remains positive at our local level, but ISM’s national index remains out of line at -28, only slightly better than the -35 reported last month. However, the Greater Grand Rapids index of purchased material inventory turned positive at +5, up from -17. For Southwestern Michigan, the index turned flat at +0, down from +4. Many respondents are now concerned that the absence of inventories at both the manufacturer and distributor levels are driving up the prices for “big ticket” commodities like steel, copper and aluminum. ISM’s national index of prices shot up to +30 from +10, raising new fears of a potential resurgence of inflation. If it isn’t one thing, it’s another.

    After all of this good news, it is important to put everything in perspective. First of all, the recession is NOT over just because this survey and various other economic reports have turned positive. We are simply at the bottom of a very deep hole and are finally starting to crawl out. The industrial market is almost always at the forefront of a recovery from any recession, but it takes a long time for positive growth in the industrial sector to work its way through the supply chain and generate more income for the consumer and drop the unemployment rate. In fact, unemployment may actually rise for the next few months in certain regions of the country or in the state.

    Second, the specter still looms that there could be a problem with the massive amount of debt that the Treasury Department is trying to float over the next few months. If a major foreign creditor were to balk at one of our major treasury auctions, interests rates would soar and the recession would go into a second phase.

    Third, keep in mind that the fiscal situation for the state of Michigan is still dire. Revenues are down considerably, and significant cuts in spending will still have to be made. It is worth repeating that the west side of the state is much better off than the east side. However, since the probability of West Michigan seceding from the rest of the state is low, we will feel the budget ax falling on us, as well.

    In summary, the recovery is under way but don’t expect overnight miracles. The bloated housing market, tight credit and slow recovery for the auto industry are still major problems that will generally have to heal on their own. Many of the automotive jobs that have been lost will never come back to Michigan. The state’s decision to transition development efforts to biotechnology may bear fruit, but it will take many years to happen.
    Brian Long is director, Supply Chain Management Research, Seidman College of Business, Grand Valley State University.

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