Demand down, but prices up

The end markets that purchase factory equipment and tools are slowing (or falling) noticeably now. For instance, in the 12-month period ending June 2001, end markets for welding apparatus (SIC 3548) fell 2.6%.

With demand slowing so sharply, one would expect to see price inflation for equipment and tools slowing as well. Not this time around. Among 19 industries that comprise our equipment and tools price index, only four reported a slowdown in inflation for their industries' product prices. Overall, the equipment and tools price index rose 0.5% in the second quarter of 2001, up from a 0.1% rate in the final quarter of 2000.

The rationale for price hikes varies from industry to industry, and factory buyers shouldn't accept every price increase without question. For example, consider process control instruments. This industry (SIC 3823) pushed through a 1.3% price increase in the 12-month period ending June 2001. Looking at just one month, buyers saw average industry prices edge down 0.1% between May and June.

And when we look at prices for specific product lines, we see plenty of inflation. In June, average prices for float and displacement instruments and associated elements increased 4.5%, while controllers for pressure measuring instruments logged a 2.3% price hike.

Inflation-adjusted margins in SIC 3823 remain almost exactly equal to their long-run norm and are above a year ago. That suggests buyers of process control instruments shouldn't be bashful about pressing for discounts. Indeed, tags in SIC 3823 would have to fall as much as 7.74% in order to duplicate the margin experience of six years ago.