Economic pulse displays strong beat
By Anne M Porter -- Purchasing, 3/12/1998
E conomic pessimists number very few among industrial buyers, according to Purchasing's latest national reader poll. Indeed, three in four purchasing pros think the macro economy will exhibit growth again in '98, and 73% think the same will hold true in manufacturing.Small wonder that procurement pros feel so sanguine. Nearly half (46%) claim that '97--the seventh year of economic expansion--was a "very good" growth year (+2.5% or more) for their companies and 23% rate '97 growth as "good" (up to 2.5% growth). Best way to describe sales expectations for '98: More of the same. Forty-six percent of buyers expect a very good growth year (2.5%-plus) for their companies, 27% see moderate revenue growth (up to 2.5%), and 23% think business will run at least on par with 1997.
Prime movers
Technology, it seems, remains a major driver of economic growth. For example, the purchasing director for a home-entertainment company in the middle South attributes very strong growth to "emerging new technologies." Tim Barrett, purchasing manager for Pinnacle Mfg. Co. in Chandler, Ariz., says, "We supply machined components and automated equipment to the semiconductor industry. Our business is up because our industry is thriving." Meantime, Jim Villwock, director of procurement, worldwide procurement, for Unisys Corp.--a maker of global computer and systems integration products in Blue Bell, Pa.--says, "Top 1,000 major corporations are requiring our capability for global rollouts and support."
But optimism is--by no means--limited to the high-tech sector of the economy. Timothy Bloomfield, purchasing manager, Eagle Crusher Inc., Galion, Ohio, says, "Our market is geared toward recycling and demolition contractors and toward the aggregate industry. We've experienced a 45% growth rate in each of the past three years." In 1998, Bloomfield says, "We see a mandatory growth due to EPA regulations prohibiting construction materials from going into landfills."
Laurence Petfield, purchasing manager for Mack Trucks in Allentown, Pa., says, the heavy-truck market has been rising for the past three years and "our order backlog supports a good 1998." The purchasing agent for a Midwest seating manufacturer, says "Business continues to grow at an unprecedented rate and we expect exceptional growth for the next five years."
Tame inflation
Beyond strong sales prospects, buyers' great expectations for the 1998 economy rest on a strong conviction that the inflation tiger remains securely caged.
Indeed, fully 73% of buyers say current productivity growth is strong enough to offset any inflationary pressures that might arise. Says Bloomfield of Eagle Crusher: "Most U.S.-based companies are striving to lower their cost of doing business. Improving productivity is the single most effective way to add dollars to the bottom line." A Columbus, Ohio-based PM claims that, "Companies are doing a good job of keeping expenses flat."
Others suggest that data on productivity vastly underestimate reality. For example, a Cincinnati-based PM says statistics provided by news media and government have been inaccurate for years. "Anyone who has studied economics knows this. Americans are extremely creative. Many productivity gains are not even classified. Employees," he adds, "contribute in many unofficial ways." Likewise, one Virginia-based buyer says, "I believe the real productivity-to-inflation ratio has been better than reported for the past two years."
What is more, buyers say, technology will continue to yield ample opportunity for future productivity enhancements. For example, Mark Lowis, senior buyer, for Carver Boat Corp. in Pulaski, Wis., says "I don't think we've fully realized the benefits offered by inexpensive computer systems." A PM from Santa Ana, Calif., agrees: "There is new and better equipment being developed to make workers more productive." And Gregory Entremont, senior buyer, IMC-Agrico Company in Uncle Sam, Louisiana, expects continued gains in productivity as "companies rightsize and invest in technology."
Wages will rise
Many purchasing pros believe U.S. firms will be forced to grant larger wage increases this year. Indeed, 42% think employment cost inflation (wages+benefits) will accelerate in '98 and 52% say wages will increase at a rate similar to '97. Only 4% think companies will be able to grant smaller pay increases in '98.
As an offset, however, 42% of purchasing pros think productivity growth will accelerate in '98. And 44% expect--at very least--a repeat of the '97 productivity performance. Upshot: Only one in four purchasing pros believe inflation will accelerate in '98, according to the poll. Fifty-eight percent expect the inflation rate to remain stable this year. Eight percent say the rate will slow and 6% think it could slip into negative (deflationary) territory.
Speaking of deflation
There are some in the economic community who argue that, in fact, deflation presents a greater threat to the global economy than does inflation. (Most say deflation is equally, if not more, damaging to the economy over the long term.)
Dismissed initially, this theory began to gain a following after the Fed chairman referenced the threat in a speech at the very outset of '98 and then again last month. The idea that deflation could emerge in force this year has been bolstered by persistent financial and economic troubles in Asia and by the suggestion that these difficulties could undermine global prices for major manufacturing commodities and consumer goods.
So far, Purchasing's poll finds that only one in four purchasing pros have switched their danger radar from inflation to deflation. A PA in Wisconsin thinks "the world market is too dynamic," for deflation to do much damage. Another PM suggests that, "World markets are making some adjustments, but demand will continue to grow."
Still, purchasing pros working for companies that are exposed to global markets say the possibility and the danger of deflation should not be ruled out. The PM for an Iowa-based company notes that, already, "export product is being sold for less." Alexia Clary, purchasing manager for Amphenol Corp. in Danbury, Conn., thinks deflation could materialize, "if there is a flood of consumer goods with lower pricing structures." And Joseph Muro, senior buyer for Schein Pharmaceutical, also of Danbury, worries that a "surge of inexpensive goods" could be dumped onto the U.S. market.
Confidential to the Fed
Overall, it seems that quite a number of purchasing pros see the so-called Asian crisis or "Asian Flu" as a bonus for the U.S. economy. What fears they may have harbored about inflation have been offset by weakening effects from the troubles across the Pacific. And since the countries in question comprise a relatively small piece of the U.S. trade picture, few think the problems will significantly undermine demand for U.S.-made products in '98.
As such, 71% of the procurement pros polled think the Fed should sit tight, neither easing nor tightening the money supply in '98. Only 10% would like to see some tightening versus 17% who think the Fed could afford to ease up a bit.
Nonetheless, purchasing pros appear very sensitive to the tenuousness of the balance between a strong U.S. economy and weaknesses in Asia. A vast majority of poll participants cite Asia as their number one forecast risk factor. A too-rapid recovery, they say, could warrant a Fed tightening sometime in '98. A worse-than-expected fallout or spreading of the "flu" to other countries could spell trouble on the demand-deflation side.
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