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Published in Economic Development

Survey: Strong industrial expansion comes amid growing concerns of inflation, material shortages

BY Wednesday, May 12, 2021 10:36am

West Michigan’s industrial economy grew at a “significant pace” in April, although rising prices and material shortages continue to pose worries for purchasing managers.

In economist Brian Long’s monthly business trends survey, responses generated an index reading 81 for prices paid for industrial materials, four points shy of the record reading of 85 in February and more than five times higher than the 25-year average. The index for lead times came in at a record reading of 93 for April, which compares to an 83 in March and 25-year average of 11.

Brian Long COURTESY PHOTO

“Looking back at the entire history of our West Michigan survey, the current rate of price inflation is just about as bad as it has ever been,” Long wrote in a report on his April survey of purchasing managers in Grand Rapids and Kalamazoo.

“Almost all big-ticket commodities like plastic resins, steel, copper, aluminum, and corrugated containers are rapidly rising in price and in short supply. On the service side, almost all forms of transportation (truck, rail, container) are also in short supply and rising in price,” according to Long, the director of supply chain management research at Grand Valley State University’s Seidman College of Business. “With all of the talk about trying to get America back to work, almost nothing has been done to relieve the U.S. customs backlog at most major ports.”

As the U.S. economy continues strong growth following the sharp decline early in the COVID-19 pandemic a year ago, inflation has emerged as a key economic threat.

A U.S. economic outlook Comerica Inc. issued this week reported that the overall trend in the last month “has been astonishing” and that “demand is so strong in so many industries that supply chains are straining to keep up.”

“That is a much better problem to have than too weak demand. However, strained supply chains are driving up input prices across the board. Higher industrial input prices, higher basic commodity prices, higher financial asset prices, higher house prices and the likely prospect of higher consumer prices sure sounds inflationary,” Comerica economists wrote in Monday’s updated national economic outlook that questions how much inflation the Federal Reserve will allow before taking action and increasing interest rates. 

Overall, Comerica economists project a “weird” U.S. economy ahead.

Economists noted that one Federal Reserve governor, Richard Clarida, recently said he wanted to wait until the end of the year to determine the economic risk of inflation.

“The pressure on the Fed to speed up that timetable has been increasing with each blockbuster economic data point in recent weeks,” Comerica economists wrote in their May outlook.

Comerica projects a consumer price index for 2021 that would more than double to 2.9 percent followed by 2.7 percent in 2022. The consumer price index for last year was 1.2 percent.

Economists expect Real GDP to grow 5.5 percent nationally in 2021, with a peak of 6.6 percent in the fourth quarter alone, followed by 4.7 percent growth next year.

Driving the strong economic growth is a “highly manipulated economy buffeted by three rounds of massive fiscal stimulus, social mitigation policy, new federal spending to come and other unusual policies all making for a highly distorted labor market,” according to Comerica.

“We should not be surprised to see the occasional strange data point in these extraordinary times. Also, we suspect that enhanced unemployment benefits, extended until early September, are disincentivizing some, but not all, reemployment and throttling back potential job gains,” economists wrote. “The aftershocks and aftereffects of the global coronavirus pandemic will be felt for years to come. Extraordinary policy comes with unintended consequences and is challenging to unwind. Things will be weird.”

In West Michigan, key indexes out of Long’s monthly survey for sales, purchases, production and employment all remained high for April and well above 25-year averages, although each dipped from March.

Survey respondents’ short-term outlook for the next three to six months registered an index of 44, three points higher than March and 13 points above February.

“By almost any standard, 2021 will be a historical year for the U.S. economy. The average estimates of annual growth are running between 7 and 9 percent, which will be the fastest growth rate in over 60 years. Needless to say, a growth rate of this magnitude is not sustainable,” Long wrote in his report, noting that the expansion is “fueled by unprecedented peace-time borrowing, massive stimulus packages, low interest rates, and the hope that inflation will somehow be held at bay.”

“The current wave of industrial inflation has not spilled over to the consumer market, and the Federal Reserve leadership contends that a new round of inflation is unlikely,” Long said. “Hence, some economists are looking ahead to 2023 and 2024 when most of the stimulus money has been spent and the debt levels of all types will be at record highs. Their concern is justified.”

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