Manufacturers struggle to overcome rising prices

July 1, 2008 2:27:29 PM PDT
Each week, Ira Cooper opens a letter from another supplier with the same message as the last: We're raising our prices, effective immediately. We can't tell you how long the new prices will last. "We used to get quotes good for six months," said Cooper, president of QED Inc., a lighting company based in Lexington, Ky. "Now you're lucky if you can get a quote good for 15 days."

Manufacturers of everything from wallpaper to cereal are feeling the same hit. The Institute for Supply Management said Tuesday that its index of prices manufacturers pay for raw materials hit 91.5 in June, up from 87 in May and the highest reading since 1979.

Its overall index of manufacturing activity was 50.2, barely breaking a four month contraction streak. Any reading above 50 signals growth.

Manufacturers are "experiencing higher prices for their inputs while demand for their products is slowing," Norbert J. Ore, chairman of ISM's manufacturing business survey committee, said in a statement accompanying the report.

Some of the price increases are a game of catch-up.

Cooper and other manufacturers say they had been honoring the six-month price guarantees they gave customers before oil prices spiked 50 percent higher, hitting an intraday record of $143.67 a barrel earlier this week. When those price guarantees expired, manufacturers raced to recoup their increased costs.

Some manufacturers are struggling to keep pace. Myers Container, a Portland, Ore. manufacturer of steel drums, increased prices by almost 20 percent in March, did the same in May and announced a third increase at the end of that month.

Other manufacturers say they're unable to pass along all their higher costs, so they're trying to save money wherever they can.

FFC Paladin Light Construction Group, which makes plows, pallet forks and bale movers in Lee, Ill. is planning a lighting study to trim its electricity use, said Bob Steder, operations manager.

Similar inflation worries are playing out everywhere from convenience stores to the Federal Reserve.

Last week the Fed talked about increased risk of inflation as it ended one of its most aggressive rate-cutting campaigns, leaving its key rate unchanged at 2 percent as fears about inflation have mounted. The Fed is caught between two risky crosscurrents: plodding economic growth on the one hand and galloping energy and food prices that threaten to spread inflation on the other.

Stocks recovered in afternoon trading after an earlier slide. The Dow Jones industrial average rose 32.25 to close New York trading at 11,382.26. The Standard & Poor's 500 gained 4.91 to close at 1,284.91, while the Nasdaq Composite rose 11.99 to 2,304.97.

The stock market's June tumble resulted in paper losses of $1.4 trillion for the month and revived recession fears.

Construction spending underlined the weakness, falling in May for the 11th time in the past year, dropping 0.4 percent, according to the Commerce Department.

Higher energy prices are "going to end up pretty much destroying a lot of demand," said Steder at FFC Paladin.

A stark example of that: Ford Motor Co. on Tuesday said its U.S. sales tumbled 27.9 percent in June. The company blamed the decline on high gas prices and low consumer confidence.

Even Toyota, which was expected to fare better because it offers more high-mileage vehicles, stumbled last month. Toyota said its car sales dropped 9.4 percent for the month, while its truck sales slipped 38.9 percent. For the first half of the year, Toyota sales were down 6.8 percent.

Auto companies weren't alone in dealing with rising inventories. Manufacturers' stockpiles grew for the first time in two years and suppliers' inventories also rose in June, according to the institute's survey. New orders, however, were essentially flat. The combination of rising inventories and stagnant orders could lead to manufacturers filling stockrooms with goods they can't sell and laying off more of the workers who produce them.

"That may already be underway," said Princeton, N.J.-based economist Bernard Baumohl.

The unemployment rate rose to 5.5 percent in May, up from 5 percent in April. The increase was the largest in two decades. Economists surveyed by Thomson Financial/IFR expect the same rate when June's number is released Thursday.

Economists continue to worry that higher prices will stifle growth. Lehman Brothers economist Michele Meyer said she expects higher prices to push the manufacturing reading below its break-even level next month.


Load Comments