Fall Business Climate Survey: Prices Rise

Tightness in the credit markets sparked by the US subprime mortgage crisis, rising oil prices and the falling US dollar have increased fears of economic instability in recent months. Higher than normal levels of uncertainty are evident in recent surveys of major corporations. However, such uncertainty has not dampened all enthusiasm.

The Business Roundtable’s third quarter CEO Economic Outlook Index, which measures CEOs’ economic forecasts for the next six months, dipped to 77.4 from 81.9 in the second quarter (a score above 50 indicates expansion and a score below 50 indicates contraction). Sixty-eight percent of CEOs surveyed expect their companies’ sales to increase, 20% expect no change and 12% expect a decrease. Fifty percent expect their companies’ US capital spending to be unchanged in the next six months, 35% expect it to increase and 15% expect it to decrease. The surveyed CEOs forecast US GDP to grow 2.4% this year.

Participants in IBO’s annual Fall Business Survey are just as optimistic. The six-question survey of 25 executives representing instrument and laboratory product companies and suppliers with more than $1.5 billion in annual revenues was conducted by e-mail, fax and telephone in late October.

Asked about the prospects for sales over the next six months, 56% of the instrument industry executives surveyed said that they expect their companies’ sales to increase moderately. Slightly less than a third expect sales to stay the same. This is quite an increase from the spring survey (see IBO 5/15/07), when only 33% of respondents expected sales to increase moderately. However, the traditionally strong fourth quarter may partly account for this view. In last year’s Fall Business Climate Survey (see IBO 10/15/06), the same percentage of respondents expected sales to increase moderately.

Companies were also asked about pricing, specifically, whether they have raised or plan to raise prices this year. Fifty-seven percent of respondents have raised or plan to raise product prices in 2007. However, 36% of those surveyed indicated they will not increase prices this year, while others indicated price increases only for new products. Of those firms raising prices, 54% have already done so. Companies raising prices were asked why such increases occurred and given a choice of four answers with multiple answers possible: inflation, labor costs, raw material costs and “other.” In recent conference calls, several instrument companies have commented on the impact of rising prices of metals, such as steel and cooper, and resins. Thus, it was not surprising that increases in material costs were cited most often as a reason for price increases, followed by increased labor costs and inflation. Nearly a third of respondents cited two of more of the three choices for price increases. Two respondents cited the weak US dollar as a reason for increasing prices overseas.

Overseas manufacturing of analytical instruments remains a hot topic as more companies open new manufacturing operations in lower-cost locations. IBO asked executives about the their companies’ plans to expand manufacturing in low-cost regions. Interestingly, 29%, the highest percentage, of surveyed companies do not currently have such plans. Among the reasons cited were intellectual property protection, “strategy,” economics, the use of joint ventures and partnerships, and “too many uncertainties.” For the 25% of respondents who “have never planned to” set up manufacturing in low-cost regions,” reasons cited included rapid product development, the company’s size and mostly US customer base, and the presence of such operations already. Twenty-five percent of those surveyed said such plans were under consideration, and 21% stated that they were definitely pursuing such plans.

Survey participants were also asked about the six-month sales prospects for seven countries. As the graph below shows, China had the highest average rating and was the only country to score above a 4 on a scale of 1 to 5 (1 indicates worsening sales, 3 indicates stable sales and 5 indicates improving sales). However, every other country also scored higher than 3, indicating strength among many major markets. Notably, the average ratings for the US and Japan, two of the three largest analytical instrument markets, were among the lowest rated.

Respondents were also asked about the six-month prospects for 10 major end-user markets. Biotechnology regained its top position in the survey after falling to third place this spring. In fact, biotechnology’s average rating of 4.0 was even higher than its 3.8 rating a year ago. Food maintained its strong rating of 3.8, the same as this spring. Agriculture, which in previous surveys had been included in the food category, also showed good prospects. In fact, it was one of five markets to have an average rating above 3.6. Environmental and pharmaceutical markets also had an average rating higher than 3.5, topping the expectations for these markets in this spring’s survey. Academia, government and electronics/semiconductors remained the three markets with the lowest average ratings.

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