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U.S. Economy: Shortages May Occur Without Threat of Inflation
U.S. Economy: Shortages May Occur Without Threat of Inflation
Washington, Aug. 18 (Bloomberg) -- Auto dealers have run short of sports cars, truck builders have
slowed output because they can't get enough transmissions and some cellular phone makers may put
production on hold for a lack of parts.
The consumer-driven boom in the U.S. economy is making it difficult for automotive companies like
Navistar International Corp. and telecommunications companies like Qualcomm Inc. to find the supplies
they need to keep assembling and selling goods. Retailers notice. ''It's hard to get what you want,''
said Mike Pasqualetti, sales manager at Bud Brady Ford in Cleveland, complaining he can't find
enough Mustangs to sell. Even so, he's not charging more for the ones that are available.
And that's what may be different about the current economic climate. Typically, high demand for
finished goods and the raw materials used to produce them would accelerate inflation and threaten to
undermine growth. This time, consumers are more cost- conscious and suppliers are handling
inventories differently.
Inflation is ''so low now that businesses feel they can't push through any price increases regardless of
their economics,'' said Chris Rupkey, senior financial economist at Bank of Tokyo- Mitsubishi Ltd. in
New York. ''To a certain extent Americans have changed the way they purchase goods -- they only
want to buy what's on sale.''
What's more, heavy industry has yet to bump up against limits on their capacity to produce goods
cheaply and efficiently. Manufacturers were operating at 79.7 percent of capacity last month, below
the 81.1 percent average of 1967-1998. Analysts say the inflation threat kicks in when capacity use
reaches 82 percent to 83 percent.
Navistar and GM
Still, there's little doubt businesses are struggling to keep up. Navistar, the world's fourth-largest maker
of medium- and heavy-duty trucks, said last month it might fail to meet earnings expectations for the
current quarter because it can't get enough transmissions from its General Motors supplier. ''The
demand for our products increases almost as fast as we can satisfy them,'' said Patzetta Trice, a
spokeswoman for GM's Allison Transmission Division.
Allison has produced 12 percent more transmissions in each of the last two years and expects output
to rise another 10 percent this year from 157,000 in 1998. GM invested $100 million last year to
increase the division's capacity before the end of 1999.
The Federal Reserve's latest survey of regional economic conditions released last week also
highlighted shortages in manufacturing and construction. In Cleveland, for instance, there were strong
orders for heavy trucks and auto dealers said their inventories were low and certain models were sold
out. ''We were out of Mustangs for three weeks,'' said Pasqualetti, the Cleveland auto dealer. ''We
didn't speculate they were going to be this hot this year, and they were.''
Factory Incentives
Dealers can avoid raising prices for Mustangs and other popular cars because manufacturers keep
offering discounts and incentives to hold on to market share.
GM spent an average of $1,907 per vehicle on incentives last month, 27 percent more than the
industry average, said David Garrity, a Dresdner Kleinwort Benson analyst.
Auto sales were running at a 17.1 million-unit annual rate in July, just shy of the record 17.4 million pace
set in May.
Likewise, use of wireless-phones has more than quadrupled in the past five years, to 69.2 million
subscribers last year, according to the Cellular Telecommunications Industry Association.
That demand has led to shortages of certain cellular phone parts. ''The component suppliers, they're
having trouble,'' Qualcomm Chairman and Chief Executive Irwin Jacobs said after the company's
second-quarter earnings report. ''They didn't quite believe the potential for growth.''
Qualcomm, which developed the world's second-most popular cellular-phone technology, said parts
shortages could limit fourth-quarter results.
Warning Signs
No data currently exist to accurately measure supply shortages and whether they could contribute to
price inflation, said Dick Anderson, vice president and economist with the Federal Reserve Bank of St.
Louis.
All the same, economists point to danger signs. ''There are some price pressures'' emerging for some
raw and partially finished materials used in manufacturing, said Donald Ratajczak of Georgia State
University. Prices of copper, gypsum wallboard and chemicals have started to pick up with growth in
some sections of the world economy.
Last week's Labor Department report on producer prices showed the cost of partially finished goods
rose 0.4 percent in July. Core raw materials costs jumped 2.3 percent.
Consumer Prices Tame
So far, though, consumer price increases have been tame, with inflation on track for its third best
showing in more than a decade. ''There has been no correlation between core crude materials prices
and overall inflation since 1985,'' said Stan Shipley and Mary Dennis, economists at Merrill Lynch & Co.
in a report.
And for the most part, shortages in goods for retail products are stemming from low inventories. In June,
the inventory-to-sales ratio, which measures the time goods sit at businesses, fell to an all-time low of
1.34 months. ''You get these flare ups in demand and everybody is holding very low inventory,'' said
Ratajczak. ''There's no question we're cutting it very, very close on the inventories and that's why you
see periodic shortages kicking up.''
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