Strong. That’s the latest word on the Southwestern Michigan industrial economy, according to the data collected in the last two weeks of June, 2010. NEW ORDERS, our closely watch index of new business coming into the firm, bounced to 42 from 22. In a similar move, the PRODUCTION index rose to 40 from 30. In a more modest move, the EMPLOYMENT index edged up to 23 from 17. The PURCHASES index follow suit with the other statistics, and rose modestly to 42 from 34. Hence, our statistics remain positive but the results have continued to zig-zag. This month is very positive, but next month may be less robust. Although there has been at least some good news recently about slight improvements in the depressed housing markets, our industrial statistics are not strong enough to offset the weak unemployment numbers for the entire economy in our local area. Hopefully, if our statistics will continue to stay positive, we should see the unemployment rate edge lower later in the summer. But full employment recovery from this recession is still many months away. In fact, it may be years away.
Turning to individual industries, our automotive parts producers are still leading the recovery because of stronger-than-expected auto sales. Some local firms will not shut down for the tradition summer model changeover. It seems hard to believe, but we are still benefitting from last year’s cash for clunkers program. Performance for our industrial distributors has turned fairly positive, although one firm was down. Capital equipment firms remain mixed. The respondent comments at the end of this report are generally positive, although many firms feel squeezed between rising commodity prices and demands for better pricing for their customers.
At the national level, the July 1, 2010 press release from the Institute for Supply Management, our parent organization, moderated for the month of June. ISM's index of NEW ORDERS eased to 22 from 38. In a similar move, the PRODUCTION index retreated to 22 from 38. The EMPLOYMENT index retreated modestly to 15 from 22. All of these statistics indicate that the U.S. industrial economy is expanding, but that the national rate of expansion has moderated. ISM’s overall index fell to 56.2, down from 59.7, ending the almost unbroken string of advance which began 11 months ago. Again, any number over 50.0 is considered growth, so it is still fair to say that the industrial economy remains decidedly positive.
At the international level, the J.P. Morgan Global Manufacturing report released on July 1, 2010, followed the same moderation pattern reported by ISM. The index of NEW ORDERS backtracked to 55.5 from 58.9. Asia, Japan, the UK, and Australia all reported modest retrenchment. The Eurozone bucked the trend and posted a solid gain. EMPLOYMENT index eased for the first time in five months, but the slippage was only to 53.1 from 53.9. JPM's Global Manufacturing Index came in at 55.5, down from 57.2. Hence, we continue to see evidence that the world economy has probably starting to plateau. Further expansion beyond the present level will probably require the resolution of some of the world’s economic problems such as the excessive sovereign debt of many nations.
Much as we expected, automobile sales for June moderated along with all of our other statistics. Chrysler posted a strong gain of 35 percent, up from 33 percent in our last report. General Motors posted a modest downtick to an 11 percent year-over-year sales growth rate, down from 17 percent. Honda and Toyota came in at a positive 6 percent and 7 percent, respectively. Lesser brands fared statistically better, rising 28 percent at Hyundai, 33 percent at Mazda, and 16 percent at Subaru. Overall, industry sales were up 14 percent for the month, which is much better than a year ago. This is part of the reason why Michigan is now seeing the unemployment rate SLOWLY declining.
Last week, a lot of headlines were grabbed by the Commerce Department’s downward revision of the GDP. The revision was fairly modest, falling to 2.7 percent from 3.0 percent. Contrary to some news stories, this revision is not unusual, and most preliminary numbers are often modified— sometime as many as six times. It is worth noting that these quarterly GDP numbers are quarter to quarter, not year over year. Hence, the economy still has a long way to go to get back to the 2008 peak.
For a change, there is some good news on industrial inflation. As noted by the JPM report, the growth pace international economy has slowed considerably, which reduces worldwide demand for most of the major industrial commodities. More importantly, it has shaken some of the speculators out of the market. ISM-Greater Grand Rapids recorded a significant drop in the index of PRICES, from 58 down to 26. At NAPM-Southwestern Michigan, the drop was from 39 to 27. However, the biggest drop came from ISM’ national index of PRICES, from 55 to 14. Again, with the speculators now starting to dump their inventories on the market, and commodities like steel, stainless steel, aluminum, and many types of plastic resin are MODESTLY falling in price. However, some types of steel, corrugated, and plastics are still rising. Hence, industrial inflation could come back in a few months.
Another important piece of economic news came from the Chinese. After pegging the Yuan at about $6.70 for the past three years, the Chinese Treasury Department has bowed to worldwide economic pressure and agreed to let the currency drift higher in value. Although this action reduces demand by raising the price of goods sold to the rest of the world, the Chinese economists have been recommending that the current growth rate be reined in or moderated. By raising the cost of our firms importing from China, a stronger Yuan will help offset the huge trade imbalance that has been such a political hot button for many years. However, the down side of the stronger Yuan is that the Chinese are now less likely to want to purchase our debt. As the Treasury Department tries to finance our huge budget deficits, this could become a problem in the future.
In summary, the pace of our recovery both here and around the world has slowed a little, but the pace remains positive. There are still parts of the economy such as residential and commercial construction that are causing us trouble, but most sectors are now getting back on track and profitable, even though the production levels of 2006 may still be many months away. Despite increased hiring by some firms, the unemployment level remains unacceptably high. Despite the rhetoric, there is very little that the politicians can do to fix this problem, except get out of the way and let the ECONOMY fix the economy.
COMMENTS FROM SURVEY PARTICIPANTS
"There has been a general trend on a number of OEM suppliers to raise prices after having held them for the last 18 months or more.”
“This month is starting out great. Let's keep our fingers crossed that it keeps up the rest of the year.”
“Business remains strong, but sentiment is still skeptical.”
“Things appear to be steady for the time being. We will see if this trend continues.”
“Major domestic aluminum mills did a conversion price increase, stating that transportation costs, tightening billet supply, and consumer demand as the reason for the increase.”
“Everything is remaining pretty steady this month.”
“We’re on pace for another record year, which I know is not the norm for most Michigan businesses. We're counting our blessings, and are optimistic for the upcoming year.”
“We’re seeing increases in volume for every category. This is a good sign for the economy.”
“Business remains strong, even though this is traditionally slow time of the year for us.”
“Lead times have extended, and freight carriers are less flexible and busy.”
“The see-saw continues. We’re slightly better than last month (which was down). Quotations have been more active, but it looks like many are just ‘shopping.’”
“Stainless steel surcharges were higher in May than previous months.”
“Specialty steels continue to have long lead times. The mills have extended lead times and are missing deliveries.” | | UP | SAME | DOWN | N/A | June
Index | May
Index | Apr.
Index | 22 Year
Average | | Sales (new orders) | 54% | 34% | 12% | | 42
| 22
| 66
| 11
| | Production | 42% | 43% | 0% | 15%
| 42
| 30
| 52
| 10
| Employment
| 27% | 69% | 4% |
| 23
| 17
| 30 | 2
| | Purchases | 46% | 50% | 4% | | 42 | 34 | 39
| 7
| Prices Paid (major commod.)
| 27% | 73% | 0% | | 27
| 39
| 43
| 2
| | Lead Times (from suppliers) | 38% | 62% | 0%
| | 38
| 35 | 35
| 27
| Purchases Material Inventory
(Raw materials & supplies) | 27% | 43% | 15% | 15% | 12
| 31
| 22
| -6
| | Finished Goods Inventory | 12% | 63% | 12% | 15% | 0
| -4
| 8
| -4
| Items in short supply: Solvents being used as part of BP cleanup in the gulf (e.g. Isopar G), electronic components, specialty steels, some wire, some glass filled plastics.
Prices on the UP side: Wood packaging materials, corrugate packaging, some solvents (e.g. xylene), ABS, stainless steel, contract machining, electric motors.
Prices on the DOWN side: Aluminum, bags and items made with poly resins, plastics, plastic resins.
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