Buyers give mixed reviews on the state of economic growth
Mary Clair Austin -- Purchasing, 10/7/2004 2:00:00 AM
The rate of expansion in business activity slowed through August and into September—much like a car reducing speed while still moving forward. At the same time, pricing pressures from energy and raw materials continued to mount. For every two buyers saying, "business is going well," there are another two saying "business is flat at about the same level as a year ago," and another one saying "business has slowed." A string of late-summer government reports continued to offer a mixed picture of the U.S. economy, mirroring the attitude of buyers surveyed separately by PURCHASING magazine and the Institute for Supply Management (ISM).
Manufacturing activity rose in August for the 19th consecutive month, according to the magazine's monthly survey of buyers, but at the slowest rate of growth since last October. PURCHASING's index for manufacturing activity was 60 in August while ISM's indicator stood at 59 (on a gauge where 50 separates expansion from contraction).
In support of these indexes, the latest Federal Reserve's Beige Book also indicates that, although economic activity continues to expand, the rate of growth has moderated across the nation. "Business is still on a roller coaster—one week booming, the next week in the basement," says a manager at a surface finishing industry supplier in Michigan. "Any improvement in business volume seems to trip itself up when it gets going at a good pace," says a purchasing manager of a Midwest heating, ventilating and air conditioning equipment maker. "The expansion seems to be stalling out while competition is fierce, material costs are up and customers are running away."
Orders up, growth unpredictable
The market is "unsteady and has poor predictability," notes a purchasing director for an electric products manufacturer in Missouri. "Business is up over last year, but still not robust," says a purchasing director for a packaging producer in Ohio. Relatively atypical are comments from a purchasing manager of manufacturer of industrial lubricants in Ohio that "the economy has improved considerably."
"Sales are up," says the president of a Texas metals fabrication firm, adding that prices for the metals he buys are rising faster than the prices for the processed materials his company sells, creating margin pressure.
"This is going to be the strongest year in our company's history to date," says a purchasing agent for a retail communications company in Illinois.
Demand for manufactured goods is coming into question. August auto sales fell 12.4% from a year earlier, for example, with nearly every major automaker reporting sales declines, according to sales tracker Autodata. And, while the Census Bureau says new orders for manufactured goods increased 1.3% in July to $369.6 billion, many buyers in August expressed a belief in a leveling off in business conditions. "Retailers are continuing to increase purchases, but margins are eroding and price increases are nearly impossible to implement," says a senior buyer of a ready-to-assemble furniture company in New York.
Most economists feel growth will be less than robust through 2004, while inflation will be higher, largely due to rising energy prices. "It's still a healthy rate of expansion, and some of the details of the government's reports support increases in payrolls and strength in production," says Gary Thayer, chief economist at the A.G. Edwards & Sons brokerage in St. Louis. He says the higher price for energy and basic materials are "headwinds" that are beginning to slow the pace of growth in manufacturing activity. "They're not real problems—yet," he says, "but they are conditions that tend to slow things down."
"There is improvement over earlier sales statistics, but still lower than our average from 2000 through 2003," says the purchasing agent of a machine tool company in Ohio. "We are holding ground but still struggling to see numbers prior to September 11th." The program director of supply chain services at an electronic manufacturing company in North Dakota says, "I have a nervous optimism due to instability of oil prices, terrorism and the upcoming election." The supply chain coordinator of a printing company in Wisconsin adds: "We are busy with business from new avenues, but the general business that we have had is the same or down."
"It's been a little slow and looks like it may slow down even more," reports the president of an electronics manufacturing company in California. A purchasing manger of an interconnect products company in Pennsylvania agrees, saying electronics business has leveled off. Since business has slowed and quoting for new projects is sluggish, "the general outlook is down," says a purchasing agent of a Nebraska tooling company.
High prices, inflation problematic
Manufacturers continue to pay higher prices for materials. Buyers complain most about the rising prices for such energy products as distillates and natural gas; several forms of carbon, alloy steel, and stainless steel; nonferrous metals such as aluminum, copper and titanium; resins like ABS, polystyrene, polypropylene and polyvinyl chloride, chemicals including benzene, butadiene, caustic soda and styrene, and paper products such as paperboard, linerboard and corrugated containers. "Significant price increases are making business decisions close to impossible," says the purchasing manager of a metalworking firm in Tennessee.
PURCHASING's monthly survey confirms that buyers are uneasy about current inflationary conditions because most buyers expect prices to climb higher throughout autumn. A sales control director of an energy company in Texas says he is "hopeful, guarded and uncertain." Out of 14 families of commodities in the poll, buyers expect every one but computers to see prices increases over the next three months.
"If metal prices continue to rise without any relief we will be out of business in six months," says a purchasing manager of a wire fabricator company in Alabama. "We are experiencing moderate increases in pricing and leadtimes are growing," says a materials planner of a design building company in Virginia. "Prices continue to rise, end-user demand remains flat at a high level and domestic supply is constrained," says a procurement director of a communications equipment company in Illinois.
Material shortages aren't helping: For the sixth consecutive survey, concerns about shortages of raw material—especially steel and other metals—abound. "Flat-rolled steel products are higher in price almost daily, with surcharges, but that doesn't guarantee they'll get delivered anywhere near on time" says a purchasing director of an automotive components corporation in Michigan. "This has to stop, and the market has to get back to more realistic levels; I can't continue in business this way." The materials manager of a shipbuilder in Virginia says he "will have concerns about availability of steel and other production metals for the next six to 12 months, at least."
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