Buyers blame summer, election year for moderate slowdown

By Staff -- Purchasing, 10/5/2000

Buyers blame summer vacations and the uncertainty associated with an election year for a moderate summer slowdown.

The diffusion index for business conditions in September rose four points from August's mark of 49, but the numbers still represent little if any growth on a monthly basis. The diffusion index measures the percentage of buyers who report business as better in September vs. August, plus half of those who report business as the same in September as in August.

The data comes from this month's grassroots business survey. The diffusion index showing business conditions as compared to a year ago at this time continues to hover around 60, indicating that there is still some growth on an annual basis.

Business conditions are strongest in the Middle Atlantic States, where 73.1% of buyers report better business compared with a month ago, and 73.1% say business is up compared with last year. Business conditions are weakest in the Western states, where only 43.1% of buyers report better business this month. The percentage of respondents experiencing better business conditions was consistently in the upper 60s until it dipped to 55.5 and then reached 49.2 in August. The minor percent increase in September is promising but is still well off 2000's average.

A senior paper buyer from Santa Monica, Calif., who is feeling the effects of the economic slowdown, reports that "summer vacations and maintenance closures have slowed supplier response time." He notes that his biggest buying headache for the month is "people on vacation with no backup."

"Sales are not as strong and have been slowly decreasing," reports a purchasing agent from Manhattan, Kan. "Pricing in the bar market has been decreasing and is very unstable. Pricing is at or near the bottom."

Election years are closely linked to consumer confidence. Pre-election hype and post-election outlooks will be crucial for the overall strength of the economy. Fifty-six percent of respondents are still optimistic, however, about the business outlook for the next six months. Buyers report that interest-rate fluctuation is a major factor. The 7% increase from August's number could be linked to the Federal Reserve's decision to hold off on raising interest rates. While September's number is promising, it is still well off the 74% of respondents that were optimistic in February.

Materials inventories rising

Buyers are reporting that materials inventories are rising relative to sales. Buyers of steel, especially, had anticipated price hikes that never materialized so warehouses are now overstocked. A metals purchasing agent from Toledo, Ohio, says, "Prices are down, sales are down, and inventory is laying everywhere. The economy may not be in a recession but the metals business surely is."

An influx of foreign material is doing nothing to alleviate the excess-inventory problem. The purchasing agent goes on to say that the reason for the gigantic oversupply problem is "too many mills are unwilling to reduce production and too much foreign material continues to pour in."

Steel is not the only commodity where inventories are rising. The diffusion index for desired materials relative to sales in September rose to 70.4-the highest number so far this year. The diffusion index measures the percentage of buyers who report that materials inventory relative to sales is too high for the month of September, plus half of those who report inventories are relatively the same. A diffusion index of 50 would indicate that material inventories are just right.

Here's the report by specific products:

• Pulp. The diffusion index for prices is 75, indicating sharp upward pressure on pricing in September. The diffusion index includes all respondents who say prices are higher plus half of those who say prices have not changed. Price pressure was strongest in the northeastern United States and lowest in the Midwest.

• Paper and corrugated. The diffusion index for paper pricing is 62.5 and 65.5 for corrugated, indicating upward pressure on these two commodity prices. Recent economic slowing contained the effects of increased pulp prices.

• Industrial chemicals. Industrial chemicals will generally follow the lead of refined petroleum prices and this month proved to be no exception. The diffusion index for pricing in September was 64.7-the lowest mark in five months. Quality did not change from last month in any of the regions.

• Resins. The diffusion index for resin prices is 73.1 and although this indicates strong upward pressure on September prices, like industrial chemicals and petroleum, the index saw a major decrease from its August mark. The quality of resins remained the same.

• Petroleum. Refined petroleum product prices remain high and their price diffusion index was 77.9, second highest among commodities this month. The price diffusion index, although high at 77.9, is a far cry from the 95 it was in May. The rising cost of fuel continues to drive the cost of transportation higher.

• Steel. While the quality of steel remains the same as last month, prices are losing steam. The diffusion indexes for metal prices are declining across the board and steel prices are actually starting to erode. The diffusion index for steel pricing fell to 49.5, the lowest number so far this year. Foreign competition remains stiff, inventories remain high, and prices are expected to drop even further in the coming months.

• Nonferrous metals. The diffusion price index for aluminum was 58.2 while copper and brass were 65. Aluminum leadtimes went from two to six weeks.

• Semiconductors. Semiconductor pricing was a hot spot in September. The diffusion index for pricing had been hovering around the 60 mark for two months, but September witnessed a hike of more than 15 points. On Aug. 15, the Federal Reserve issued the statistical release for industrial production and capacity utilization. The percent of capacity, seasonally adjusted, reported in that release for semiconductors and related electrical components was 103.4. Manufacturers of semiconductors are stretched past the limit and prices are shooting up accordingly. Leadtimes were also a major problem this month for semiconductors. The diffusion index for semiconductor leadtimes is 88.1, the highest leadtime mark for commodities this month.

• Computers. Computer prices continued to plummet in September and bargains on PCs are abundant as suppliers compete for market share. With a diffusion index for pricing of 32.4, computers again registered the lowest mark among commodities in September. There was a surprising disparity between the regions in terms of pricing, leadtimes and quality. Respondents from the Middle Atlantic States actually reported fairly strong upward pressure on computer pricing while the Midwest saw the biggest decrease in prices (diffusion index of 19.2.) Respondents say leadtimes skyrocketed in the northeastern United States (diffusion index for leadtimes is 80) and were the lowest in the South and Midwest. Buyers report that the quality of computers remained fairly consistent in September. The exception was the Middle Atlantic respondents who reported a diffusion index for computer quality of 33.3.

• Machinery. Pricing for machinery was slightly higher, reflected by a diffusion index of 57.7. The largest increases were again reported in the western U.S.

• MRO. Buyers in the Middle Atlantic States again reported much higher prices for maintenance, repair and operating supplies. The diffusion index for prices is 64.2 (75 in the Mid-Atlantic States) indicating consistent price increases in September. Leadtimes and quality for MRO generally remained unchanged from last month.

• Packaging. The diffusion index for prices is 67, indicating fairly strong upward pressure on pricing in September. Prices have been losing steam since they peaked in May and are mirroring the economic slowdown.

• Transportation. With a daunting price diffusion index of 83.8, transportation is the worst problem buyers faced in September. Buyers report that elevated fuel costs and tight labor are driving forces behind price hikes.