Some Firms May Be Stockpiling as Insurance

For want of a nail, a shoe was lost

For want of a shoe, a horse was lost

For want of a horse, a rider was lost

For want of a rider, a battle was lost

For want of a battle, a kingdom was lost.

--Poet George Herbert

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The famous George Herbert poem about small events having big consequences sounds like the year-2000 scenario that worries Deutsche Bank economist Edward Yardeni most.

Yardeni, who believes there is a 70% chance of a Y2K-induced global recession next year, says the very efficiencies that the world’s leading manufacturers have achieved so painstakingly in recent years may prove to be their undoing when Jan. 1, 2000, rolls around.

Methods such as “just in time” manufacturing, in which firms reduce inventory costs by having suppliers deliver materials and parts only at the moment they are needed, could make the manufacturing sector especially vulnerable to disruption if computers don’t work, Yardeni says.

Transportation and communication snafus stemming from the year 2000 rollover probably will disrupt the movement of supplies to at least some factories, causing production shutdowns that could ripple through the global economy, Yardeni says.

Among economists, Yardeni is probably the leading Y2K pessimist. Others say that manufacturers are devoting plenty of attention to the issue and can minimize disruptions. But one effort that companies may be making to avoid trouble--stockpiling inventory of certain commodities or parts--could cause other problems.

Harvey Katz, chief economist at Value Line Inc., doesn’t believe there will be many Y2K-related distribution snafus, but he believes stockpiling by some companies has become an “insurance policy” just in case.

Hoarding is difficult to quantify because few companies are willing to openly admit to it, noted Joe Sweeney, head of research at GartnerGroup Asia, in a recent Bloomberg Forum report. But he believes that Asia’s economy recovered faster than expected this year in part because of stockpiling-related demand.

In the U.S., manufacturing inventories overall rose 0.5% in July after declining in three of the four previous months, the Commerce Department reported last week.

And some analysts have pointed to recent steep gains in certain commodity prices, especially for metals such as copper, aluminum, zinc and others, as evidence of stockpiling.

Gordon Richards, chief economist for the National Assn. of Manufacturers, foresees that Y2K-related inventory buildups will add a full percentage point to annualized U.S. gross domestic product growth in the fourth quarter.

But because purchases are merely being pushed forward rather than increased in the aggregate, there probably will be an equivalent “giveback” in the first quarter of the new year, he said.

There may be a hint of that phenomenon in the most recent survey of local manufacturers by the Federal Reserve Bank of Philadelphia, released Thursday. For the first time in 11 months, more firms said they expected to be reducing production six months from now than expanding.

Likewise, some international economists worry that a reversal of stockpiling could plunge Asia back into recession next year.

Yardeni has written that inventories may not rise as much as many of his colleagues expect. If, as many predict, Y2K is a nonevent, there is no reason to incur the costs, he reasons, and if it causes a recession, demand will fall to the point that the extra supplies won’t be needed.

But some experts say many companies may be confident enough about their supply lines to forgo stockpiling.

An NAM survey earlier this summer showed that manufacturers were generally confident that they would escape serious Y2K problems.

Richards said that response partly reflects the measures that companies have taken to satisfy themselves that their suppliers are Y2K-compliant--and that if there are kinks in the supply chain, alternative sources are available.

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Y2K Bull Market for Metals?

Prices of basic industrial metals such as aluminum, copper and nickel have surged this year. Monthly closes and latest for the Bloomberg base-metals price index:

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Friday: 81.9

Source: Bloomberg News