Buyers, economists agree: Signs of better business abound
Buyers are getting busier at firms that make high-tech equipment, sophisticated machinery, construction equipment and aircraft.
By Tom Stundza -- Purchasing, 4/6/2006 2:00:00 AM
Recent business data indicates that the economy accelerated in the first quarter after sputtering late last year. In fact, the economic outlook got a big thumb's up from buyers, who reported in March that business conditions have strengthened, larger orders are coming in and purchasing needs are expanding.
The latest Federal Reserve compilation of regional economic reports—the periodic Beige Book—reported that economic activity continued to expand in January and February. Nationwide consumer spending continued to expand, generally powering the overall economic expansion.
"Business has remained steady in the first quarter of 2006," says Pat Livesey, director of materials at New Jersey-based Alfa Wassermann, which makes bench-top clinical chemistry analyzers. "The forecast remains steady through June, followed by an expected summer slowdown before we resume a big push through fourth quarter." Livesey adds that Wasserman's "subcontract machine shops and plastic molding shops have all shown delivery issues over the past 60 days"—a sign of tight supply.
Likewise, "January through March have been strong for incoming orders and finished-product shipments," says Eric Johnson, purchasing and materials control manager for Titan Air, a Wisconsin manufacturer of heating, cooling, and ventilation equipment. "Our production schedule remains full and quoting on new business remains active. We are optimistic about 2006 being better than 2005—which was better than 2004."
Business investment is expanding at close to a double-digit pace for a wide array of goods. "The past four months have been very strong and bookings continue to outpace shipments," says Woody Woodworth, president of ATG Group in Houston, which provides custom machined plastic parts for a wide variety of industries. The firm's latest book-to-bill ratio was 1.4:1 and Woodworth sees nothing to indicate this will let up prior to the end of the third quarter in September.
Commercial construction in the first quarter was more active than at the end of 2005. In contrast, the housing market is clearly slowing down. The Commerce Department says new home construction fell in February. Although the level of early 2006 activity has been higher than economists had expected, most observers believe hammering and sawing eventually must quiet in response to falling home sales.
More buying
Buyers say strong demand has triggered expanded raw materials purchasing and product manufacturing for construction products, electrical equipment, defense products, aircraft, boats and barges, tractor trailers, heavy trucks and consumer products of all stripes. Steel production has perked up and steel shipments have increased, but demand conditions in nonferrous metals industries remain erratic.
Semiconductor manufacturers are also enjoying some good news as the book-to-bill ratio for February jumped up to 1.01 from 0.9. That's the first foray above new-order booking and old-order shipping unity since August 2004 and it fits with buyers' views strengthening business ahead. With strong growth in integrated circuit purchasing being forecast for 2006, the analysts expect utilization rates for the overall semiconductor industry to jump from 92% exiting 2005 toward 96% by mid 2006.
"Commodity prices are the problem for buyers because they have continued to increase," comments Johnson. Corrugated packaging buyers, for example, are voicing concern about higher prices early this year due to supplier consolidations and the closing of paper mills. "Reductions in inventory at the paper mills are being used to artificially inflate prices," complains a veteran paper products buyer in Ohio.
Also, gasoline prices have remained high and fuel surcharges remain a major headache for transportation buyers in particular. "Both rail and truck transportation continues to be expensive and difficult to get," says James Pazzanese, senior purchasing agent at W.R. Grace in Massachusetts. He adds that "while some price increases still are happening the energy (primarily natural gas) impact is softening."
That has helped slow the inflation that had caused the prices of chemicals and plastics to explode earlier.
With crude oil prices at record-highs, many petrochemical buyers stocked up during the fourth quarter and early 2006, on the assumption that oil would keep on rising, pushing the prices of petrochemicals to even higher levels.
But slightly lower crude oil prices and higher U.S. petrochemical inventories have begun to pressure prices downward for chemicals and resins.
Forecasts of key indicators
(U.S., % change)
| Source: Blue Chip Economic Indicators |
|||||
| Forecast | |||||
| '03 | ''04 | ''05 | ''06 | ''07 | |
| Gross domestic product | 2.7 | 4.2 | 3.5 | 3.4 | 3.0 |
| GDP price index | 2.0 | 2.6 | 2.8 | 2.6 | 2.2 |
| Consumer price index | 2.3 | 2.7 | 3.4 | 2.9 | 2.4 |
| Disposable personal income | 2.7 | 3.9 | 3.6 | 3.2 | 2.9 |
| Consumer spending | 2.9 | 3.9 | 3.6 | 3.2 | 2.9 |
| Unemployment rate | 5.8 | 6.0 | -7.3 | -5.8 | 2.1 |
| Industrial production | 0.6 | 4.1 | 3.3 | 3.8 | 3.4 |
| Non-residential construction | 1.3 | 9.4 | 8.7 | 7.9 | 6.3 |
| Residential starts | 8.2 | 4.9 | 4.6 | -7.2 | -5.2 |
| Motor vehicle sales | -2.3 | 8.2 | -1.2 | -2.9 | 0.0 |
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