Pricier Raw Materials Stir Inflation Fear
Prices that Orange County manufacturers paid for their raw materials rose sharply in the first three months this year to their highest level in five years, stirring worries about inflation and an economic slowdown, according to a Chapman University survey released Thursday.
The higher prices raised the likelihood that everything from computers to aircraft would cost more and that the expense would be paid from consumers’ pocketbooks.
Meanwhile, the county’s manufacturing sector, which had roared back to life in the last half of 1999, slowed in the first quarter this year, according to the survey by Chapman’s Center for Economic Research. The survey attributed the slowdown largely to higher interest rates.
The index measuring the overall cost of raw materials, from silicon to nails, jumped more than 13% in the first three months this year over the previous quarter, the survey found. Producers of furniture, computer equipment and paper goods were hit particularly hard.
The survey’s index for measuring prices of commodities stood at 72.6 for the quarter, higher than any period since it hit 88.2 for the first three months of 1995.
Coming on the heels of last week’s federal report showing the core rate of inflation rising to its highest level in five years, the survey of 118 purchasing agents at local manufacturers contains some ominous signs.
“When commodity prices increase, that could lead to higher wholesale, and eventually consumer, prices. That means inflation,” said Raymond Sfeir, the Chapman economist who directs the quarterly survey.
Indeed, Sync Research Inc., an Irvine computer component manufacturer, has had to grapple with rising costs. In the past four months, the cost of integrated circuitry has more than doubled, said Rafael Ignacio, Sync’s director of operations.
“We have so far been able to cope with [price hikes] but are thinking of raising our prices,” Ignacio said.
Similarly, Adams Rite Aerospace Inc. has had to pay more for metals and plastic resins used in the production of aircraft parts, said Susan Rao, materials manager at the Fullerton firm. The price hikes so far have been nominal, she said.
Despite the gloomy news on prices, Sfeir said the county’s manufacturing sector should still have a good year, although not as strong as last year.
Chapman’s composite manufacturing index, which tracks production, new orders, employment and other measures, fell to 57.9 in the first three months this year compared with 62.3 in the last three months of 1999.
Any reading above 50 shows growth, while a reading below that shows a contraction.
Production and new orders have continued to grow at a steady but slower pace. The paper, electronics and plastics industries performed better than other industries, and every sector reported that new orders were growing, according to the survey.
Growth of new orders is a sign of increased production and hiring ahead; the latest survey shows employment also is growing at a slower pace. About 230,000 people in Orange County work in manufacturing, accounting for nearly one-fifth of the county’s employment.
The slower growth, Sfeir said, is consistent with projections made by Chapman economists last December at the university’s annual economic forecast. The academics predicted then that the county would add 40,000 workers to local payrolls this year, a 3% hike in jobs. That increase would be the smallest since 1996, when the county climbed out of a long recession and the bankruptcy of county government.
The jump in local commodity prices is another example of growing inflationary pressures nationally, Sfeir said.
A government report released last week showed the core inflation rate, which excludes energy and food prices, rose 0.4% in March, double the rate expected by economists. That, coupled with a 0.7% increase in the Consumer Price Index, spooked investors and sparked a massive stock sell-off last Friday.
The Federal Reserve, which has increased interest rates by 1.25 percentage points since June, will consider raising rates again at its May meeting.
“You have the possibility of an inflationary spiral if the Fed doesn’t act decisively,” UC Irvine economist Dennis Aigner said.
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Manufacturing Slows
After roaring back to life in the last have of 1999, Orange County’s manufacturing industry is growing at a slower pace.
Composite Index
The Orange County index, measuring factory employment, inventories, deliveries and other production activity, still remains ahead of the national pace.
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2000 O.C. 1Q 57.9 U.S. 1Q 56.3
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O.C. Factories at Work
Commodity Prices Rise (seasonally adjusted index)
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1998 1Q: 55.5 2Q: 48.8 3Q: 45.3 4Q: 44.7 1999 1Q: 48.1 2Q: 54.1 3Q: 60.1 4Q: 64.1 2000 1Q: 72.6
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Employment Slows (seasonally adjusted index)
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2000 1Q: 53.3
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