Buyers continued to nudge their inflation expectations lower in July, as prices paid for manufacturing materials continued a seasonal slide started in June. "Most commodities we're buying are somewhat down in price," reports the materials director at an electronics assembly plant in North Carolina. "Many of our prices for fabrication are much lower than previous," adds the purchasing manager at an Ohio bulk packaging company. "Some of the parts we purchase have dropped considerably—as much as 75%," says the senior buyer of an automotive engineering supply company in Michigan.

Recent increases in customer orders have at least 36% of buyers believing that a return to improved business conditions is possible by fall. Indeed, 48% of industrial buyers surveyed by PURCHASING in July anticipate future increases in their overall buying volumes. But that hasn't stopped 77% of them from working to maintain or reduce purchase prices for supplies and materials. "We are continuing major cost reduction efforts through online auctions, " says the purchasing specialist for a manufacturer of control and communications products.

Excluding cyclical energy and lumber for construction, prices paid for manufacturing materials peaked in May. "Generally speaking, the higher commodity prices reflected tighter supplies, rather than a significant improvement in demand," suggests Craig Alexander, associate vice president and senior economist at TD Bank Financial Group. "It's true that inflation has declined recently and spare capacity and weak demand, this summer is preventing suppliers from exercising much pricing power," notes economist Matthew Martin at Economy.com.

Business isn't all that strong for metal castings and other fabricated metal products, and prices of are continuing to slip, buyers say. "General economic conditions at this point are about the same as they have been for a year and a half," says the purchasing agent at a Michigan foundry. "Our business is expecting an increase due to a competitor closing and our company picking up 50% of their work. Unrelated to that though, we expect flat demand from our existing customers." The purchasing agent at a California firm that makes precision machining, sheet metal and welding services for the aerospace industry says business is still depressed, so prices for fabrications "haven't been holding steady."

Energy prices have been the most explosive—with several energy indexes actually setting records in late May—and buyers say these costs have not moved down as quickly as some other production materials. "Natural gas prices actually trended lower over the course of June, as cool weather allowed inventories to build at a faster rate," says economist Alexander at TD Bank. "However, prices remain extremely high by historical standards, and are likely to remain so in the coming months." Cyclically high natural gas prices have affected costs of several manufacturing industries—with chemicals and plastic resins being mentioned most frequently in PURCHASING magazine's latest buyers' survey.

The materials manager for a plastic parts maker in Illinois says: "High natural gas costs made it hard for plastics to be price-competitive in a global economy when competing against imports out of China. Polyethylene markets have been particularly vulnerable in the current economic environment of weak sales prices and low demand," he adds. "Earlier, high natural gas prices affected many of the chemicals and packaging items we purchase," says the senior chemical buyer at a manufacturer of personal care and household products. The purchasing manager at a Utah microchip plant says, "Helium purchases have become a headache since the internal push is on for price reductions, but helium pricing increasingly is based on the increase of natural gas prices."

After eight months of small successive increases, nonferrous metals prices rose more than 3% in June. The spike, which took the nonferrous price index to its highest level in more than two years, was triggered by news of significant production cutbacks. However, prices slipped in July, reflecting difficult market conditions—that is, weak demand despite further reduced supply due to normal summer shutdowns. "I've been trying to get the real scoop on the metals industry's supply and pricing, and excuses are all I hear," says the purchasing agent at a manufacturer of environmental equipment in Michigan. "The metals suppliers are almost as bad as those in the petroleum market."

Remarks by Federal Reserve chairman Greenspan over the past two months have sparked discussions among economists and journalists about the possibility of deflation in the U.S. Whether or not deflation has damaging consequences depends on the surrounding circumstances. "For example, temporary deflation caused by a surge in productivity can be a very healthy result for an economy, since it leads to lower prices but higher incomes," says Martin at Economy.com. "If buyers expect prices to fall in the future, they will postpone purchases of some items in the belief that they can get better deals at a later date. If this sort of expectation becomes widespread, the threat of deflation becomes much more worrisome."

Steel prices have been changeable for months now even though demand has been gliding down. Reduced demand accelerated in July, owed to seasonal manufacturing industry downtime, and contributed to July spot-market price declines. "Steel prices are continuing to fall [and] we have been advised that our sheet steel prices will go down through the third quarter," says the purchasing manager for a Wisconsin manufacturer of heating, cooling and ventilating equipment. "This will return us to the price position we were at before the forced increase [supplier gouging] experienced when tariffs were put in place 15 months ago."

A great many more hot- and cold-rolled steel carbon, alloy and stainless sheet buyers reported reduced sales tags in July than reported increases.

Steel prices continue to slip, according to the metals buyer at a crane-making plant in the Midwest. Similar reports come from steel buyers at a building products firm in Tennessee, a centrifugal fan plant in Wisconsin, an industrial paint finishing system plant in Pennsylvania and many others.

Buyers say electronics prices are also continuing to fall. For example, the purchasing director for a producer of semiconductor manufacturing equipment says: "Suppliers are more willing to work prices down. It looks as if they are betting on volume increases to generate better cash flows." Various other reports suggest that market prices for electronic components have dropped as much as 10% for such items as printed circuit board assemblies, programmable logic devices, optics and semiconductors.

The buyer at a California maker of security devices says pricing is barely staying even. "What we produce remains in high demand from the government sector, but sales are losing steam in general industry due to cutbacks many companies are experiencing of late."

However, businesses tied to housing markets have seen prices continue to increase for construction materials especially lumber, according to construction firm buyers in Indiana, Texas and Oregon. Lumber producers have announced plant shutdowns and reduced supply, keeping prices higher—especially specialty products such as oriented strand board (OSB) panels. But, there may be an inflation slowdown in some wood grades and other building material in coming weeks. "Generally, spring, summer and autumn are the largest sales, purchasing and manufacturing months for contractors' products," says the vice president of finance at an Ohio manufacturer of brazing products. "Unfortunately, we have about twice as much inventory as we need at this time due to poor execution of purchasing and scheduling by our operations personnel, so we are in an inventory reduction mode at this time."