Buyers says manufacturing economy's growth has slowed
Tom Stundza -- Purchasing, 11/4/2004 2:00:00 AM
Based on commentary from the nation's buyers in early October, which mirrors reports from previous months, it's a good bet that economic growth will not snap back anytime soon to the pace seen early in the year.
"The first three quarters of this year have shown business activity 15% stronger than the last," says the general manager of an industrial fasteners company in Pennsylvania. "However, the final quarter now is expected to be flat." Upshot: While buyers in manufacturing may stay busy through year's end, they won't be accelerating purchasing activity anytime soon.
"Business, overall, is slower," reports the materials manager for a Wisconsin manufacturer of pressure vessels, "and the quantity and quality of inquiries is down." The purchasing manager of another pressure vessel maker, this one in Pennsylvania, says "there has been a falling off of inquiries in the last few months. The beginning of the year looked very promising. By the months of July and August, however, we noticed a sharp falling off."
And slowing growth isn't just an issue for makers of industrial products: "Business growth has slowed," says the purchasing manager of a commercial bakery in Illinois. "Also, increases in energy and commodity costs are challenging our margin targets." A senior buyer for a food conglomerate in Illinois says commercial activity has been flat for some time, while the purchasing manager at a similar firm in Minnesota reports that retail sales are down, "reducing overall production by 15%." And, while there may be signs of possible increased activity in next few months, a buyer at a clothing firm in Texas says: "For now, business is slow."
On the other hand, some buyers say certain markets, such as the one for resistance welding equipment, in North America remain strong and sales of mining equipment, sports gear and recreational equipment have increased from previous years. Sales within the fire supply industry are benefiting from Homeland Security grants to commerce and industry, while economic conditions are good for the medical device industry.
The purchasing director of an off-road machinery manufacturer in Illinois says that business conditions "are extremely good right now," and adds: "Our sales are up across our range of products, and in some areas at a 15-year high." In fact, many of the firm's suppliers are unable to keep up with the demand for commodities, parts and components. "Business continues to be strong compared to a year ago," says the purchasing manager for an industrial controls manufacturing plant in Indiana. "Orders through September are running 25% to 30% above last year. Sales for our location continue at levels approximately 50% above a year ago."
Another North American industrial controls operations, this one in Tennessee, says cumulative sales through the third quarter have risen by 50% over a year ago.
Also, there were some higher levels of activity in Florida among retail and commercial operations replenishing depleted stocks in stores before or after the series of hurricanes in September. But don't read too much into this optimism: Compared to September, incoming orders rose in October for only 46% of the buyers polled by PURCHASING. Buyers are showing no interest in expanding inventories and the rate of growth in new-material purchasing continues to slide.
All this doesn't surprise some economic gurus. In fact, "regardless of month-to-month gyrations in the data, the U.S. economy is clearly experiencing a cyclical downturn in growth," says Lakshman Achuthan, managing director of the Economic Cycle Research Institute, an independent forecasting group in New York. "The throttling back in growth this summer was no soft patch, but rather a cyclical downturn in the growth rate of the economy that will continue through early 2005."
Following the summertime economic slowdown—which many analysts attribute to high oil prices and warm-weather lethargy—the ongoing deceleration into September and October is more broad based, driven by weaker business activity and lower growth in new orders, which was further reflected in less outstanding new business. Moreover, early autumn's high oil prices, persistently weak domestic demand and cooling global growth appear to have put pressure on both the manufacturing and service sectors.
Beyond that, buyers say competition from Asian sources continues to plague the hardware industry. "Big box stores continue to play Asia against U.S. manufacturers, just to do it," says the purchasing director of a stamped metal parts plant in Illinois. "Why drive U.S. manufacturers out of business, just because they can?"
Still, don't translate such pessimism as auguring another manufacturing recession. The optimists, who constitute the majority of economists and market analysts, prefer to believe that record-high oil prices are what are troubling the manufacturing economy these days. "The cost for raw materials continues to increase as the price for oil is at record high," says the purchasing director for a chain of ethnic restaurants, who traces energy costs as the reason for increased prices of paper, plastic and styrene products.
Buyers agree, with some survey respondents saying recent energy costs rose by as much as 20%. "Once again, oil prices have broken records in the trade," agrees Andrew Morison at Global Insight in Waltham, Mass. "Oil inventories data are disappointing, so the New York Mercantile Exchange crude oil futures have been hitting new peaks. There also is a forecast for a cold winter in the U.S., causing heating oil demand to affect all sectors of the economy."
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