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.
By Staff September 1, 2001

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.

Price/cost/demand roundup

Average Product Prices1Change, %, During 12-Mo Ending… Direct Mfg. Costs2and Margins Grade Growth in U.S. End Markets3Change, %, During 12-Mo Ending…
Industry SIC Mar 01 June 01 Costs are… Grade Mar 01 June 01
Other hand and edge tools 3423 0.98 0.99 Stable A 3.30 2.01
Hand saws and saw blades 3425 0.29 0.09 Stable C 2.37 1.00
Other hardware 3429 1.65 1.57 Stable B 0.25 -1.14
Other power transmission equipment 3568 1.03 1.35 Stable A 3.56 0.15
Conveyors and conveying equipment 3535 1.39 1.58 Stable A 6.08 3.88
Hoists, cranes and monorails 3536 1.93 1.96 Stable A+ 4.75 3.50
Industrial trucks and tractors 3537 1.53 1.83 Stable A+ 6.73 4.14
Metal-cutting machine tools 3541 0.75 0.85 Stable C 15.57 10.34
Machine tool accessories 3545 1.30 1.45 Stable B 8.38 4.03
Power driven hand tools 3546 0.71 1.35 Stable B 2.25 1.29
Welding apparatus 3548 2.09 2.11 Stable A -0.35 -2.56
Pumps and pumping equipment 3561 1.84 1.85 Stable A 2.26 0.63
Air and gas compressors 3563 1.17 1.61 Stable A+ 2.26 0.63
Speed changers, drives and gears 3566 2.25 2.25 Stable B 3.56 0.15
Transformers 3612 1.57 0.08 Stable D 30.02 22.68
Motors and generators 3621 0.30 0.46 Stable F 19.79 15.71
Process control instruments 3823 1.16 1.29 Stable C -3.58 -4.79
Fluid meters and counting devices 3824 2.63 3.11 Stable D -3.58 -4.79
Instruments to measure electricity 3825 1.31 1.10 Stable F 49.65 34.55
1 Average product price changes are calculated from the producer price index for each 4-digit SIC (standard industrial classification) industry from the U.S. Bureau of Labor Statistics.
2 Analyses of each industry’s direct manufacturing cost changes are from Thinking Cap Solutions, Inc.’s proprietary Industry Cost Escalation (ICE) model. The “grade” indicates that recent price/cost changes have produced record high (A+) margins to average margins (C) to record low (F-) margins for the average producer in an industry. Grades of A to A+ mean plant engineers may be able to strike a better bargain with suppliers and better control plant costs.
3 Growth in U.S. end markets data are from the ICE model and are estimates of output for the domestic end markets which purchase a given industry’s products.
All data prepared and presented by Thinking Cap Solutions, Inc., Port Angeles, WA (telephone: 360-452-6159; e-mail: ebaatz@ice-alert.com).