US NAPM'S ORE: PRICE PRESSURES BEYOND OIL; DEMAND-PULL STRONG
By Mark Pender
NEW YORK (MktNews) - A big jump in the prices paid index of the National Association of Purchasing Management report is not isolated to the prior spike in oil prices, but also reflects building demand for goods, according to Norbert Ore, survey chair of the NAPM's manufacturing report.
Ore warned that price increases are "broader based" than just energy. "We have seen lots of demand. We will get rid of the cost-push from oil, but demand-pull may stay," he said.
Prices paid jumped to 79.8 in March from 74.1 in February. Ore made his comments in interviews following the 10:00 a.m. ET release of the report.
Ore further warned there is "lots of pricing power in a lot of industries," particularly among technology companies. He pointed to a short supply of capacitors and the prospect that memory chips, which are up in price, may soon fall into short supply also. "Commodities of the new economy are very strong right now," he said.
Even for energy, Ore said it may take several months before a weakening of related cost-push pressures will be evident given the time necessary for price reductions to pass through.
Overall, he described growth in the manufacturing sector as steady, saying that the three-month moving average over the last seven months has shown a decline in the rate of growth. He said the sector is "doing well" but is "not out of control." The PMI came in at 55.8 in March, slightly below expectations and below February's reading of 56.9.
Ore said it is "premature to cast judgement" whether the series of Federal Reserve rate hikes have slowed demand, though he added that there is "some indication ... that this is taking place."
He noted that over-production in the auto industry, saddled with an abundance of Sport Utility gas hogs during the oil spike, likely played an important role in March's moderation.
He said a decline in the new order index to 56.9 in March from 60.5 in February "supports the theory" that manufacturing growth is on a "plateau". Ore downplayed the possibility that the current rise in prices will significantly curtail production, saying that manufacturers are adept at "switching" to less expensive materials and processes. But he did say that higher oil prices do "play a big role" in cutting the disposable income of the consumer and may help to ease the intensity of demand in the months ahead.
Lead time for capacity projects is at 108 days, the lowest since the NAPM began tracking this in 1988. Ore attributed the low reading to a hangover from the Asian crisis which at the time caught many industries with excessive capacity. He said that given the firm level of the PMI, lead time for capacity projects should be in the 130-140 day range. "We could see some related demand-pull pricing issues if the economy continues strong," he warned.
But Ore did concede the possibility that "Just-In-Time Expansion" may be allowing firms, especially in the new economy, to wait longer before extending capacity. "Those businesses in the new economy have an ability to bring on capacity much quicker than those in the old economy. Very simply you can bring on new capacity in the electronics industry where you're doing assembly vs. a steel mill or a paper mill where it's a three-year project."
Employment continued to grow but at a slightly slower pace, at 51.5 in March from 53.2 in February. Ore said manufacturers have been "very creative" at extending production without adding employees. "Employment continues to be strong but is not causing any major bottlenecks at this point," Ore said. |
