Promising conditions
Yet high prices still have buyers worried
Tom Stundza -- Purchasing, 12/9/2004 2:00:00 AM
Gross domestic product is expanding at a respectable pace, companies are hiring and consumers are inclined to spend. But a majority of buyers still see the high prices of energy products, raw material commodities, fabricated parts and components slowing any economic recovery.
"I don't think the economy is all that great," says the purchasing manager of an industrial chillers assembly plant in Indiana. And many buyers agree: Just over half (52%) of those polled in November plan to boost purchasing through the end of January, and only 16% plan to increase their materials inventory. "The overall business outlook is only conservatively optimistic," agrees the technical manager of a telecommunications equipment plant in Illinois. And that's backed up by statistics, which generally indicate that the monthly growth rate of an expanding overall economy has slowed to a crawl.
PURCHASING magazine's post-election Business Conditions Index rose slightly in November to the highest monthly level since July. However, less than half of the buyers polled expressed any optimism about business for the fourth consecutive month—and second-half business activity remains lower than it had been in the first half. "For the so-called peak season, things are very slow," says the procurement manager of an audiovisual equipment manufacturer in Texas.
Other buyers concur: "New-business levels stabilized in November but they had decreased dramatically in September and October," says the purchasing manager at a Massachusetts manufacturer of specialized equipment used by the electronics industry.
"Overall future business conditions are promising, but we're only cautiously optimistic about the fourth quarter," adds a buyer at a papermaking plant in North Carolina. "Our sales are good but end-product prices are only fair."
Price imbalance
That underscores one of the biggest dilemmas in the industrial sector—the inability to obtain prices for finished products that adequately reflect the increased costs they are paying for materials and energy.
"Our sales are up, but profits do not match due to increased costs," says the purchasing agent at a paper packaging plant in Virginia. Prices are up for everything from metals to industrial gases, from chemicals to electronic memories, from electro-mechanical parts to transportation services—and everything in between. "Every firm that makes a commodity or intermediate part is trying to raise its prices," says the commodities manager of an Illinois tooling manufacturer.
But they're not always able to pass all of their higher costs along to their customers, as third quarter results have proven. "Business is strong, but price pressures are of great concern [because of] our inability to pass on our material increases to our customers," says the purchasing manager of an Illinois safety containment systems producer.
"The escalated and erratic pricing of steel and nonferrous metals is wreaking havoc with our bottom line," says the materials manager for an Indiana tube mill. "We will be lucky to end up the year breakeven. If something doesn't break with this current pricing climate, our viability as a company may be in jeopardy."
Besides pricing, leadtimes are a bugaboo. Late deliveries are creating supply chain problems for buyers of semiconductors, titanium tubing, paper packaging materials, steel castings and forgings, bare copper flat wire and aluminum extrusions. Part of the problem: shortages of flatbed trucking, short-haul transportation services and big-rig trucks.
Interestingly, 93% of the buyers continued to source offshore in November, even though the dollar hit a new low against the euro in November and has lost 10% of its value against the currencies of the nation's major trading partners since mid-May. Some analysts think the dollar's decline is being engineered—or at least blessed—by the Bush administration, which wants to help U.S. companies boost overseas sales. If so, it may be working: The Commerce Department says exports of goods and services grew to a record $97.5 billion in September. Still, the dollar's decline carries the risk of sparking inflation as foreign goods become increasingly expensive.
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