Latest economic data indicates rapidly worsening situation – implications for procurement

We hope you had a good weekend wherever you are, and in the UK (the London area at least), we celebrated as only the British know how – with some good, solid, cold, persistent rain.

Today is another holiday in the UK, but I’m afraid we’re going to continue the gloomy mood this morning. There were a number of economic data announcements late last week that you may have missed but are important if we’re trying to predict the direction of the global economy. That of course is important to anyone in procurement who is interested in commodity or raw material prices, currency movements, inflation outlooks and so on.

And for a change, we’re not focusing on Greece and the Eurozone crisis – there are three other countries to report on today.  Let’s start with the US jobs figures, which were dreadful and well below expectations. Here’s the Telegraph:

Companies hired 69,000 people in May, the lowest tally since the same month last year, and less than half what economists had forecast. The unemployment rate, meanwhile, climbed from 8.1pc to 8.2pc in its first rise since last June.

Not only that, but the numbers for April were revised downwards, and the numbers of long-term unemployed increased.

But the decline in the UK’s Manufacturing PMI was more dramatic still and perhaps even more concerning. After some months of slow but steady expansion, the index “fell off a cliff”, crashing from a downwardly revised 50.2 in April to 45.9 in May, the second-steepest fall in the survey’s 20-year history.  that was way below the market’s expectations of a reading in the 49.5 to 50 range.

 "Perhaps of greatest concern is that this month's drop is not simply linked to the ongoing crisis of the euro zone, but to increasing weakness of the UK domestic market," said Markit economist Rob Dobson.

Now taking the theme to China, we find an apparent similar slowdown in the manufacturing sector – which of course is far more important there than in the UK. Here’s Business Week.

The state-affiliated China Federation of Logistics and Purchasing said that its purchasing managers index, or PMI, fell 2.9 percentage points to 50.4 percent in May, just above the 50 level that signifies expansion. The index was at 53.3 in April and 53.1 in March. HSBC's index, which is adjusted for seasonal conditions and is more weighted toward export manufacturers, fell to 48.4 in May from 49.3 in April. The index has remained below 50 since October.

Factory output was the weakest in three months, and new orders, both domestic and export, fell.

So, apart from making us feel like going back to bed and pulling the covers over our head, what does this tell us? Well, paradoxically, some procurement people will be celebrating. It’s a lot easier to look good in the function if prices are falling, and certainly if the world economy is heading downhill, price pressures on commodities, from oil to metals, cotton to coca, are likely to moderate.

Indeed, the oil price responded to the data last week by falling below the $100 a barrel mark for the first time in 16 months. Those “procurement savings” numbers, presented to the CFO and used to calculate the CPO’s bonus, may look a lot better for 2012 now!

But on a more fundamental note, commodity / raw material buyers need to consider what sort of cover they need and hedging strategies if we’re moving into an even more worrying period from an economic perspective. The chances of Governments “printing money” to save struggling banks and boost economies must have gone up – which may lead to higher inflation in the medium term. And planning and managing appropriate stock levels for raw materials is a challenge in the context of the sort of production variations indicated by the UK PMI rate of change.

Even in services procurement, where we’ve seen a firming up of rates in areas such as consulting and contingent labour over the last few months, the outlook must be less positive if the world does sink back into recession or even depression.

So, probably the most useful general advice we can give is to be cautious (in planning assumptions, contracting, stockholding, etc.) Keep a close eye on the data, and think about what further economic weakness would mean for your organisation, and how procurement and supply chain functions can best respond.

First Voice

  1. James:

    I used to sell consulting to banks and large business. Used to love dealing with Purchasing Agents. They were all about being able to fill in monthly reports showing that they had beat me down on price and how much they had saved their companies. Me, I had an amount in mind, including margin, and I new exactly how much I could sell something for, any attempt to cut price more, inevitably hit quality and/or scope. My belief, that good purchasing people negotiated better products and had the authority to call in staff to commit their company to working closely with us. But their focus on the pennies inevitably cost their companies in terms of getting money saving products on line quickly. Silly people and measured on the wrong thing.

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