Buyers still pessimistic despite slight October rebound

By Damon Francis -- Purchasing, 11/2/2000

Buyers-possibly reacting to uncertainty about energy prices, interest rates and the election-are not terribly optimistic about the business outlook for the coming six months.

A cautious group of buyers responding to Purchasing Magazine's monthly business survey places the diffusion index for month-to-month business conditions at 53.8, a slight rise from September, but still representing very little recent growth (if any) in the manufacturing economy. The index tracking business activity compared to a year ago now stands at 61.6, indicating there is still some growth on the annual basis. (Note: the diffusion indexes measure the percentage of buyers reporting business as better plus half the percentage reporting business levels as even).

Business conditions remain strongest in the Middle Atlantic States where 73.3% of buyers report better or stable business compared with a month ago, and 70% say business is up compared with last year. For a second straight month, business conditions are weakest in the Midwestern states where only 42.1% of buyers reported better business last month. In that region, the percentage of respondents experiencing better business conditions reached 70 in June and has been declining slowly ever since.

A purchasing agent from Fond Du Lac, Wis., notes that "Years following an election year are traditionally slow." A purchasing administrator echoes the sentiments of many respondents when he says, "Higher interest rates will inevitably slow the economy." As the weather gets colder many buyers also report rising anxiety about skyrocketing oil prices.

Certain industries, medical in particular, continue to boom, but only 51% of buyers say they are optimistic about the business outlook for the next six months. This represents a five-point decline from last month and a 23-point decline from February's mark. Thirty-seven percent of buyers say they are neutral about the business outlook for the coming six months-a four-point increase from last month. Percentage of pessimistic buyers rose to 13%-the highest so far this year.

The diffusion index tracking desired materials inventory relative to sales in October fell slightly (to 67.6) from a high point in September. But that's still very high by historical standards. The diffusion index measures the percentage of buyers reporting that materials inventory relative to sales is too high for the month, plus half reporting that inventories are just right compared to sales.

Many respondents say low import prices and the strong dollar are major contributors to high inventories. A metals purchasing agent from Toledo, Ohio, says, "Our industry is floundering. The combination of a high dollar and lower currencies is causing a flood of imported steel in this country. The oversupply of steel will lead to lower mill production schedules and still-lower prices. Layoffs are already occurring and by the time the government realizes this fact, several more steel mills will have filed for bankruptcy."

Here are the price trend details by major commodity grouping:

• Pulp. Diffusion index tracking pulp pricing trends stands at 65.4, indicating moderate upward pressure on pricing in October. October's mark, although still moderately high, is the lowest of the year thus far. Price pressures are strongest in the northeastern United States (where the October diffusion index registers at 87.5) and lowest in the South (50).

• Paper and corrugated. The diffusion index for paper pricing is 65.8 and corrugated is 61.3, indicating national upward price pressure for both commodity segments. Early indications, however, are that the latest price increases are not sticking in the Midwest and many have actually been rescinded. Recent economic slowing has contained the effects of increased pulp prices and pricing pressures remain strongest in the South.

• Industrial chemicals. As a general rule industrial chemical pricing follows the lead of refined petroleum products. The diffusion index for pricing in October climbed to 67.6 as a reaction to the jump in petroleum prices. Mid-Atlantic respondents reported that leadtimes were also a problem in October (diffusion index tracking national leadtime trends registers at 75 in October).

• Plastic resins. Diffusion index for resin pricing is 65.6 for October, the lowest mark so far this year. The index for resins came in at 90 in June, and has been plummeting ever since. The quality of resins dipped slightly in October and the diffusion index for leadtimes is 61.3.

• Refined petroleum products. Petroleum's diffusion index for prices is 93.8-highest among commodities this month and just shy of the 95 index reported in May-indicating extremely sharp upward pressure on pricing. Surcharges are still being reported across the country.

• Steel. The diffusion index for steel pricing (51.6) has dropped nearly 30 points since March. Buyers blame price declines on excessive inventories built earlier in the year to combat anticipated price hikes. They also cite soft demand and foreign competition.

• Aluminum. Supply of aluminum continues to run shy of demand. For some aluminum products, buyers report leadtimes in the six-week vicinity compared to two weeks as recently as September. The national diffusion index tracking the general trend in aluminum leadtimes is 60. The Northeast witnessed the most supply problems and reported an extremely high leadtime diffusion index of 75.

• Copper and brass. Copper pricing was a hot spot in October with a national price trends diffusion index of 77. Demand is expected to drop off in first quarter 2001 but, for now, remains very high. Buyers partly blame the U.S. and European governments for buying copper to make dollars.

• Semiconductors. Semiconductor pricing was another hot spot in October. While the quality of semiconductors dropped slightly, pricing and leadtimes were up across the board. There was also surprising disparity in the diffusion indexes for pricing among the different regions. Midwestern respondents reported the highest mark, 90, while their counterparts in the Pacific Northwest reported a comparatively low mark of 60. Leadtimes were the biggest story. With a national trend diffusion index of 85, the highest of all the commodities in October, buyers report that leadtimes for semiconductors are a major problem. Buyers partly blame difficulties in procuring integrated circuits (IC's) for the price hikes.

• Computers. National trend diffusion index tracking computer pricing showed its biggest point increase in months. But at 46.3, the index continues to indicate price erosion, on average, for this industry segment. For a second consecutive month respondents from the Middle Atlantic states actually report strong upward pressure on computer pricing (diffusion index for pricing is 75). Meantime, in the Midwest, the computer price diffusion index registers at a deeply negative 35.7. According to respondents, leadtimes were the stretching most significantly in the Pacific Northwest (83.3) and shrinking in the South (37.5).

• Machinery. For a third month in a row machinery prices have been rising, buyers report. In October, the national diffusion index for pricing stood at 62.5 indicating modest, but steady upward pressure on pricing. Largest increases were reported in the Northeast.

• MRO. MRO prices have seen consistent, albeit small, increases since March. Fairly strong upward pressure on MRO prices are reflected by a diffusion price index of 67.5. Leadtimes and quality witnessed no major changes from the prior month.

• Packaging. Packaging prices continue to lose steam as they have been doing since May. Latest diffusion index for prices is 66.7, about three-tenths of a point off September's mark. Price pressures were greatest in the South (diffusion price index of 80) and lowest in the Middle Atlantic states (50).

• Transportation. Transportation continues to present buyers with problems. Its October national price diffusion index was 84.1, the second highest among commodities tracked. Buyers continue to blame rising fuel costs, surcharges, and a tight labor market for the price hikes. At 40.6, the diffusion index tracking quality of transportation, although better than last month's dismal mark of 33.3, is still well off acceptable industry standards.