As we approach the upcoming US industrial sector recession that we are projecting to take hold in the coming months and persist into late 2024, many companies will find it to their advantage to be free from pricing contracts for their inputs over the next several quarters:
- Prices of commodities such as steel and copper continue to decline (on three-month moving average bases), and we expect those trends will persist – into the end of this year for steel and generally into at least the middle of next year for copper.
- US Processed Goods for Intermediate Demand Producer Prices, which include prices of components and parts that are between the raw materials and finished goods stages, are also declining. Deflation in this category of goods is currently more severe than at any point in the last seven years.
- Due in part to the aforementioned deflation trends, we expect overall US Producer Prices, the producer-side benchmark pricing metric for finished goods, to decline into mid to late 2024.
Fixed price contracts are not advantageous for buyers today because there is more price decline ahead; they could end up paying more than market value. However, such commitments will be advantageous for buyers once prices are near their lowest point in the cycle and cyclical rise will be ongoing.
Good Timing
This business cycle, the timing of that inflection point so far looks serendipitous. For overall Producer Prices, we think it will occur as the overall US industrial sector is nearing the end of Phase D, Recession. Phase D is the “worst” phase of the business cycle, when activity is below year-ago levels and decline is accelerating.
- At this time – around the middle of 2024 or a little later – companies with inputs to sell will likely welcome the commitment of a contract price or bulk order, as it will guarantee them a measure of business activity during an insecure and difficult period.
- You the buyer, meanwhile, who has followed along with us at ITR Economics, will know that both rising prices and a rising economy are just around the corner. A pricing contract or – if you have the capacity to hold inventory and a reliable forecast for imminent rise in the market(s) you are selling into – bulk purchase will help you hit the ground running when the recovery takes hold.
Specificity Matters
The US Producer Price Index is a general gauge. Pricing trends and their timing will vary across inputs, so ensure that you are tracking your own needs effectively. ITR Economics would be happy to help you with this.
In the meantime, continue to follow along with us. The Trends Report™ includes a monthly review of various pricing metrics and our forecasts for those metrics. It also covers risks to those forecasts, i.e., factors that could impact the timing of the lows. The Trends Report includes not only forecasts for pricing and other financial metrics, but also our macroeconomic forecasts and a wide array of market-specific outlooks in the manufacturing and construction industries.
