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SE Michigan Economic Index Shows Risk Of ‘Stagflation’

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The Southeast Michigan Purchasing Managers Index declined to 67.7 in May from 67.9 in April, according to economists at Wayne State University’s business school.

The index measures a variety of economic indicators from new orders to employment to prices. Index figures above 50 show a growing economy, while figures below 50 indicate recession. May’s figure means the economy in Southeast Michigan is still growing, but expanded at a slightly slower pace over the past month.

The local PMI has grown at a healthy rate for 16 straight months, showing continued strength in metro Detroit’s economy.

Wayne State officials said the most notable factor in this month’s report is inflation in the raw materials markets. The commodity price index slipped slightly from 86.7 to 83 during the past month, but the 82.7 three-month average points to an inflationary environment that may also reflect the steep increase in fuel costs over the past six months.

“With the sharp increases in fuel prices, purchasing managers have hinted that transportation surcharges are under consideration,” said Nitin Paranjpe, an economist and supply chain faculty member at Wayne State who analyzed the survey data provided by the Southeast Michigan chapter of the Institute for Supply Management.

“These raw material price increases may start to trickle down to the finished goods market, and we may start to see price increases at the retail level,” he said.

Also significant in the May report are changes in the employment index. Though Michigan recorded the largest statistically significant jobless rate decrease of all states over the one year period from April 2010 to April 2011, it was one of a handful of states where job growth slowed slightly from April to May of this year.

According to Paranjpe, it is too early to say whether these employment numbers indicate the start of a slowdown. But if a slowdown does occur, and the increases in raw materials prices percolate through the economy to the retail level, then the economy could begin to experience stagflation.

“Stagflation is what occurs when a rise in inflation combines with an economic slowdown,” Paranjpe said. “The U.S. last encountered stagflation in the 1970s along with a similar spike in oil prices.”

Despite the price increases and slower growth in employment and new orders, production activity ramped up. Only 3 percent of purchasing managers surveyed predicted a less stable business environment over the next six months and more than half expect conditions to become more stable.

The complete Southeast Michigan Purchasing Managers Index report for May is available for download at www.ism-sem.org/uploaded_pics/pdf-20110523110306.pdf.

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