Running Full Tilt!Kathleen Madigan
It sounds like every executive's dream: Customers clamor for so much of your product that you can't meet demand. Look at Nike Inc., scrambling to supply retailers with enough Air Madas and Air Max2s. Or Ford Motor Co., adding extra shifts to make its Bronco. Meanwhile, Intel Corp. is shelling out $2.4 billion to add computer-chip-making capacity.
This is a slowing economy? Sure, the Federal Reserve has hiked short-term interest rates five times since February to brake demand. But operating rates for some industries are heading higher, as stronger export demand augments domestic orders. The steel, lumber, and auto industries are all using 90% or more of their available capacity. And service companies are adding workers at a rate of 250,000 a month (charts). Even if the economy grows at a 3% annual rate in the second half, down from 3.5% in the first, that's still a healthy pace.
The surprise: Even in busy industries, cost pressures have yet to gel, production bottlenecks are few, and most businesses are not raising prices. Such favorable economic conditions are created by the new business climate. Most companies face intense competition from both domestic and foreign rivals, and some executives would rather capture market share than lift margins. Costs, fortunately, are hardly growing: Isolated labor shortages in low-unemployment states and high-skill professions notwithstanding, hourly pay for nonfarm workers is rising at only a 2.8% annual rate. So businesses can make a profit without breeding inflation economywide.
Of course, robust demand can sometimes cause quite a scramble. Take Nike's dilemma. With back-to-school buying surging past its expectations, the sneaker and clothing maker is boosting orders to Asian suppliers in a rush to answer retailers' urgent pleas for hot products, such as the Air Mada, a rugged outdoor sneaker. Says Nike Chief Financial Officer Robert S. Falcone: "Our product is blowing off the shelves. Retailers are realizing they should have ordered more six months ago." So inventories are down to five-year lows, and some retail deliveries have been delayed. Yet, with competition from Reebok International Ltd. and others, Nike has not raised its wholesale prices in the past year.
Prices of high-tech products drop all the time, as computer chips keep shrinking in size and cost. But over at superbusy Intel they're plunging even faster than usual. In the second quarter, sales of its chips, including the Pentium and 486 microprocessors, were up 30% from a year ago, to $2.8 billion. Good time for some cushy pricing, right? Wrong. To fend off competition, Intel has chopped the price of its low-end Pentium by 38% since April.
WATCHING WAGES. The key to ramping up output without also touching off a firestorm of wage growth and bottlenecks: productivity gains. Nomura Securities International Inc. chief economist David H. Resler argues that increased efficiency enables American industry to expand production even without adding factories or equipment. To keep mills busy in the steel industry, for instance, companies are importing unfinished slabs, which are then rolled into finished products here.
And on Aug. 22, Ford announced plans to add a third crew to its Michigan Truck Plant in Wayne, Mich., to meet demand for its popular F-series pickup trucks and Ford Broncos. By running the plant round-the-clock, Ford will increase output to 240,000 vehicles, from 208,000. Robert H. Transou, group vice-president for manufacturing at Ford Automotive Operations, says: "We're aggressively looking to increase our market share and sales volume." To that end, Ford is on average not raising the sticker price of its 1995 truck models.
But productivity gains go only so far. The booming consulting business proves that. Strategic consulting firm Monitor Co. and the consulting arm of accounting firm Coopers & Lybrand, both clogged with new foreign clients, say they are having to turn away some new assignments. And many manufacturers are anteing up big bucks to add capacity. Intel, for instance, is planning to spend $700 million to double the output of its Santa Clara (Calif.) factory, on top of building a $1.3 billion plant in Hillsboro, Ore. Two other plants, in Albuquerque and in Folsom, Calif., will come on line in 1995.
To meet demand, companies are also hiring. Typically, though, the impact on wages is relatively modest. In line with its national union contract, negotiated last year, Ford initially will pay its new workers $16.20 an hour. While very attractive, the wage is only 70% of base union pay for existing workers. For its part, Compaq Computer Corp. says it can't find good talent fast enough to meet its growth plans--but the computer maker hasn't raised wage rates yet.
MATURE EXPANSION. That's not to say that some companies haven't been pulled into the wage-price cycle. In North Carolina, restaurant chain Bojangles' Inc. has run smack dab into the state's 3% jobless rate. The briskly expanding company has had to hike its entry-level pay, add bonuses for managers, and share workers among restaurants. Even then, jobs go begging. "One supervisor was so desperate he hired his wife to pour drinks one weekend," says Sue Finley, Bojangles' senior vice-president for concept development.
Moreover, some hyperactive industries have marked up prices a good bit. At Medusa Corp., which supplies 4% of the U.S. cement market, President George E. Uding says: "We've been producing virtually flat-out for the last several years." And with cement supplies tight across its Midwest and Southeast markets, Medusa has been able to raise prices by 11% during the year ended in the second quarter. In the Southeast, where shortages are greatest, the company recently announced an increase of up to $5 per ton. Another maker of building supplies, USG Corp., the largest producer of gypsum wallboard, is also running all out this year. And in the first week of August, the company announced a price hike of 10% on its wallboard.
When will this best of both worlds--fast growth and slow inflation--end for these lucky companies? Given the Fed's new hawkish bent, speedy growth may be the first to go. Lynn O. Michaelis, chief economist at Weyerhaeuser Co., estimates that it takes 12 months for rate swings to affect the real economy. This year's tightening, he says, "is an issue for 1995." Even so, by early 1995, the expansion will be four years old, and it's usually at that mature age when tighter labor markets and capacity constraints start to push up wages and prices. Nike, Intel, and others should revel in the happy mix of warp-speed growth and low costs while it lasts.